 Contribution
of Operational Research: Practitioners Viewpoints |
| A.
Khandelwal |
Yield Management is the science of micromanaging product
supply to match the product demand at the same level to generate
incremental revenues. Originally started in the airline industry,
it is a practice which has found uses in industries ranging
from car rentals, hotels, cruise, railroads, shipping to
the entertainment industry.
"Yield Management has been so successful financially
that it has become an article of faith in the airline
industry, and is being copied by other marketers of perishable
goods
and services ranging from car rental concerns to utilities
to broadcasters.
...it is the single most important technological improvement
in airline management in the last decade." - The New
York Times, April 22, 1991.
Since early 1994, a lot of companies in the aforementioned
industries have started combining their pricing and yield
management functions into Revenue Management (the terms Yield
Management and Revenue Management are being used interchangeably
since). As opposed to yield management being a reactive tactic
to segment pricing, revenue management utilises demand forecasts
to feed pricing as well as yield management strategies. Revenue
Management is the art of selling the right product to the
right customer at the right time for the right price. Or
more technically stated: Revenue Management is the art and
science of predicting real-time customer demand at micromarket-level
and optimising the price and availability of the product.
The Wall Street Journal recently described Revenue Management
as a business strategy "poised to explode".
Revenue Management begins with forecasting demand for a
product at a micro segment level. Users of Revenue Management
segment their products based on the peculiarity of the customer
demands. For example the airline industry segments travellers
into business and leisure categories. Car-rentals and hotel
chains segment into weekday/weekends or length-of-stay or
standard versus deluxe products. Based on the demand forecast
for each of these segments, a certain number of units of
the product (for example seats on a flight) are made available
to each of these segments that maximises overall revenue
and product utilization. The perishable nature of the goods
involved precludes having clearance sales after the fact.
In a lot of these industries the most valuable "business" customers
tend to demand the product at the last minute and saving
the right quantity of the product for them is one of the
key concepts of revenue management. Another aspect of yield
management is overbooking to account for expected wastage
of the product.
Through offering numerous fare classes with varying travel
restrictions for the same flight, the airline industry generates
upward of $1B. in incremental revenue from revenue management
strategies. Car rentals, hotel chains and opera houses offer
different prices for different days of the week or different
seasons or different times of the day and limit the availability
within each price-segment to generate additional revenues
estimated in the range of 1-10% using revenue management
tactics.
A. Khandelwal
United Airlines, USA
December 1997
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