A number of articles have recently appeared discussing the expansion of Yield Management, but also criticising this way of setting prices, which makes it harder to understand prices and ‘misleads’ consumers into paying more.
Yield Management (also known as Revenue Management) is a pricing technique that involves varying prices according to supply (the number of airline seats or rooms still for sale) and demand (prices rise if there is more demand than supply).
So, for the same trip, prices can vary by a factor of ten, leading to a perfectly legitimate lack of understanding on the part of the consumer, who wonders whether he or she is being taken for a ride…
So is Yield Management a cunning technique?
Of course not!
Yield is making headway in industry, and that's good news
Initially used in the airline and hotel industries, Yield Management has now spread to the entire tourism industry, including holiday clubs, theme parks and cruises. It has also spread to the transport sector, advertising and telephony.
In fact, any industry with the following characteristics is eligible for Yield Management:
- The offer is fixed and perishable: fixed, in the sense that the capacity is difficult to modulate, like a plane or a hotel for example; perishable, because of a strong temporal dimension: a plane seat or a hotel room not sold on a given day is lost forever.
- The price can vary: there is no law setting the price, as in the taxi industry, for example.
- Demand is seasonal: it varies over time with a certain predictable recurrence.
So there are a multitude of sectors in which Yield Management can be an effective tool.
And yes, it’s good news, because sales increases of around 5% have been observed in industries that apply Yield Management. These gains are even greater when the implementation of Yield Management is combined with an overhaul of the company’s pricing. What’s more, these gains are achieved at virtually constant cost (modulating variable costs).
In these times of low margins, Yield Management is a highly effective solution for improving margins at a lower cost.
Yield isn't at the consumer's expense
Yield Management is responsible for the rise in TGV prices. That’s true. Yield Management is also responsible for prem’s tickets and promotional prices that sometimes put Première at the same price as Seconde (or even cheaper…) It is Yield Management that allows Low Cost to offer a whole range of seats at unbeatable prices.
Yield management is responsible for multiplying prices for the same stay. That’s true. It also offers the possibility of cancelling and changing travel dates and holidays free of charge. But in this case the ticket is more expensive because this flexibility is a service that has a cost for the company (linked to the risk of cancellation).
Yield Management is responsible for overbooking. This is true. But it is also thanks to this overbooking that consumers can get on the plane they want. In fact, without overbooking, most planes would be departing with a large number of seats left empty by last-minute cancellations (thanks in particular to the possibility of cancelling free of charge. See point above).
For traditional airlines, for every 10,000 passengers carried :
- 1,000 passengers were able to do so thanks to overbooking
- only 10 passengers were ‘deplaned’ (unable to board the plane)
- 7 passengers were disembarked against their will (3 volunteered for incentives)
So 140 times as many passengers benefit from overbooking as suffer from it: they just don’t know it.
Yield means greater gains in sales
The biggest gains in sales linked to yield are achieved by lowering prices.
This is because the gain from an additional sale during an off-peak period is greater than the gain from a slightly more expensive sale during a peak period (and less risky!). The company will therefore try to attract customers during these ‘off-peak’ periods, in particular by offering low prices.
For example:
A company has 10 tickets to sell at €100.
During a restricted period when all the seats are generally sold out, Yield will recommend increasing prices. This increase will be measured (+10% for example) so as not to run the risk of scaring off demand.
So by increasing its prices by 10% its income will be €1,100 (10 x €110). The risk for her is that she will only sell 9 or even less (some customers will find it too expensive). Her income would therefore be lower than if she had done nothing (9 x 110€ = 990€ compared with 1000€ or even 8 x 110€ = 880€).
On the other hand, during an off-peak period when only 3 seats are generally sold, the Yield will recommend a price repositioning, for example by 30%. When properly communicated, this repositioning generally meets with a very positive response from the market, significantly increasing sales. If the company increases its sales by 2 places, it goes from €300 (3 x €100) to €350 (5 x €70). That’s a 16% increase in revenue.
As with all games, the rules must be clear and announced at the start.
And that’s surely where the problem lies…
Consumers understand the rules of Yield. The principle of supply and demand is one of the oldest economic principles in existence.
The problem is that too many companies complicate their pricing strategies in an attempt to segment customers finely, too many companies try unsuccessfully to forecast demand at too fine a level, too many companies want to pass on very large price increases, thinking that demand will follow, too many companies want to ‘match’ the prices of their main competitors without any other strategy.
By trying to take everything into account, they end up applying totally incoherent pricing strategies, causing prices to vary in ways that are totally illogical for the consumer. Not only does this damage the company’s image, it also costs them money. How many times have we seen the following results?
Let’s take the example of our 10 tickets for sale.
During the restricted periods, the companies wanted to increase their prices by 20%. A few weeks before the departure date, realising that only 3 places had been sold, these companies will make offers (-40% for example) to absolutely fill them.
Consumers therefore saw the price rise from €100 to €120 and then drop to €72. What’s the logic in that?
And for the company, the consequences are serious. Instead of earning €1,000, it only earned €864 (3 x €120 + 7 x €72)…
Why keep it simple when you can keep it complicated?
Just to make money!
Simple, pragmatic Yield, based on a stable strategy and clear pricing that is communicated to the consumer, is the recipe for making money. The criticisms levelled at Yield are not intrinsically linked to the technique, but unfortunately often to its poor application.
Dear Yield colleagues, we can make things simpler, clearer and more legible for the customer, while continuing to protect our companies’ revenues. It’s up to us!
Keywords: Yield Management, Revenue Management, tourism, transport, overbooking
