Yield Management
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Rachi Agarwal Prakash Mathai Harshita Singh Uma Madurey V YIELD MANAGEMENT
Transcript of Yield Management
Rachi AgarwalPrakash MathaiHarshita Singh
Uma Madurey V
YIELD MANAGEMENT
“Selling the right capacity to the right customer at the right price”
DEFINITION
• Set of revenue maximization strategies and tactics meant to improve the profitability of businesses
• Involves several aspects of management control
• Describes techniques to allocate limited resources, such as airplane seats or hotel rooms, among a variety of customers
• Used by firms with extremely perishable goods, or by firms with services that cannot be stored at all, these concepts and tools are often called perishable asset revenue management
WHERE & WHY FIRMS PRACTICE YIELD MGMT.
1. It is expensive or impossible to store excess resource2. Commitments need to be made when future demand is
uncertain3. The firm can discriminate among customer segments, and
each segment has different demand curves4. The same unit of capacity can be used to deliver many
different products or services5. Producers are profit-oriented and have broad freedom of
action
HISTORY
• On January 17, 1985, American Airlines launched Ultimate Super Saver fares in an effort to compete with low cost carrier PEOPLExpress
• Yield management spread to other travel and transportation companies in the early 1990s
• In 2002 GMAC launched an early implementation of web based revenue management in the financial services industry.
• There have also been high profile failures and faux pas. – Amazon.com was criticized for irrational price changes that resulted
from a Revenue management software bug. – Coca-Cola’s plans for a dynamic pricing vending machine were put on
hold as a result of negative consumer reactions.
FEW EXAMPLES
EXAMPLE 1:Hyatt Regency hotel,
125 East Main Street in Rochester, NY.
DECISION TO BE MADE
• Hotel has 210 King/Queen rooms used by both business and leisure travellers.
• Hotel has established two fare classes : full price and discount price
• The hotel must decide whether to• sell rooms well in advance at a relatively low price (i.e. to leisure
travellers say at $105) • or ‘hold out’ and wait for a sale at a higher price to late-booking
business travellers(say at $159)• If too many rooms are protected, then there may be empty
rooms and if too few are protected, then the hotel forgoes the extra revenue it may have received from business customers.
SOLUTION
• Assuming that leisure demand occurs first and then business demand occurs.
booking limit = 210 – the protection level• Let the hotel considers protection level ‘Q’ instead of
current protection level Q+1 and that 210-Q-1 rooms have already been sold.
• Now a prospective customer calls and wishes to reserve the first ‘protected’ room at the discount price.
• Should the hotel lower the protection level from Q+1 to Q and therefore allow the booking of the (Q+1)th room at the discount price?
SOLUTION(cont.)
• Let D represents the anticipated demand for rooms at the full price.
• P(D<= Q) = F(Q)• (Q+1)th will be sold only if demand D at full fare is greater than or equal to (Q+1), and this event has probability 1-F(Q).
SOLUTION (contd.)
• Protecting Q+1 rooms has an expected value equal to (1 – F(Q))($159) +F(Q)($0) = (1 – F(Q)) ($159)• Therefore, we should lower the booking limit to Q as long as: (1 - F(Q))($159) <= $105 or F(Q) >= ($159 - $105) / $159 = 0.339
• From the table, optimal protection level, Q* = 79 with a cumulative value of 0.341
GENERAL FORMULA
• Let rh = Higher Price (= $159 here)
• Let rl = Lower Price (= $105 here)• If we protect too many rooms, i.e., D<Q, then we
end up earning nothing on Q-D rooms. So the overage penalty is rl per unsold room.
• If we protect too few rooms, i.e., D>Q, then we forgo rh - rl in potential revenue on each of the D-Q rooms that could have been sold at the higher fare so the underage penalty is rh - rl
GENERAL FORMULA(contd.)
• The critical ratio is :
Revenue Management
• Revenue Management– Originally called yield management in the airline
industry, was devised to exploit the power of differential seat pricing
– Philosophy: a service firm should extract all willingness to pay from customers through differential pricing and product differentiation
American Airlines
Critical to an airline's operation is the effective use of its reservations inventory. In the early 1960's American Airlines began research on managing revenue from its reservations inventory. Because of the project's size and difficulty, over the next few decades, American Airlines Decision Technologies developed a series of operations research models that effectively reduce the one large problem to three much smaller and far more manageable sub-problems: overbooking, discount allocation, and traffic management. The solutions to the sub-problems are combined to determine the final inventory levels. American Airlines estimates the quantifiable benefit at $1.4 billion over a three-year evaluation period and expects an annual revenue contribution of over $500 million to continue into the future.
The Power of Differential Pricing
– Customers are statistically distinguished from one another according to their propensity/ability to pay
– Pricing is by customer class or even by individual as well as by service class
– Pricing is dynamic– Computer-automated and applicable to large transaction
volumes– The new frontier: strategic pricing, wherein the price
response of competitors is explicitly considered
Discount Allocation
MAMA PUPU DLDL
Y ClassY Class
M ClassM Class
B ClassB Class
Q ClassQ Class
7070
1515
00
00
Y ClassY Class
M ClassM Class
B ClassB Class
Q ClassQ Class
100100
5050
2020
00
available Classavailable Class
Might be lossMight be loss
• M class can be open to customers but B class cannot be.• How to handle the surplus for B class seats from MA to
PU?• How to allocate seats for each class?
ETHICAL ISSUES
Price discrimination1. Access to socio economic information such as age and home
address.
2. Charge higher prices to consumers who are between 30 and 65 years of , or live in neighborhoods with higher average wealth.
3. Prices are not set based on characteristics of the purchaser.
EFFECTIVENESS
• Varying prices over time to reflect demand
• The goal of this level of yield management is essentially trying to get demand to equal supply.
OTHER APPLICATIONS
• Hotels• Rental cars• Inter city buses• Multifamily Housing• Airlines
THANK YOU
