If you have a perishable product, your number one priority is going to be selling that product before it passes its expiration date. Many businesses do not focus on this particular situation, because their product doesn’t have an expiration. Furniture distributors won’t push their products in the same way as farmers, because couches don’t expire the way that tomatoes do. While furniture businesses might discount products if they sit on the showroom floor to make room for newer, trendy inventory, plenty of businesses aren’t thinking about selling products in time before their “usefulness” runs out, because many products don’t have a built-in expiration date.
The hospitality industry offers unique products and services that only make money when they’re being used. For instance, hotel rooms, seats on a train, and facials at the spa are all lost revenue to a business if no one books those seats or services. A plane can fly hundreds of passengers around in a day, but if they don’t fill the plane every day, money is lost on those seats that don’t get filled. You can’t go back in time and earn back the revenue for that day. And because of the fixed nature of things like plane tickets, hotel rooms, and tables at a restaurant, a business usually can’t make up that lost revenue later, except through price increases. Enter yield management.
Yield management is a pricing strategy and a function of the supply and demand economy. It’s particularly important and useful in the hospitality industry. Essentially, by strategically editing prices on hospitality goods, like hotel rooms, rental cars, plane tickets, and more, businesses can find the right price to reach the customer during that period in time. This reduces the likelihood of lost revenue and can help hospitality businesses manage their product and revenue streams, even when demand varies.
The importance of yield management really lies in its flexible nature. This helps to serve both customers and businesses. If a hotel notices a drop in registrations, they can use yield management pricing techniques to help bring in more people at a discounted rate. With that strategy, a hotel earns some revenue on the room (though perhaps less than what they’d earn during a busier season or on average) and a customer feels like they’ve snagged a great deal, making them even happier with their choice, which could potentially translate to additional bookings with that business down the road.
Its flexibility works in reverse as well. During Christmas, for instance, when more people are traveling, airlines and hotels will raise their rates, because they know that they will have a greater likelihood of filling their vacancies due to demand. This can serve businesses by helping to create more revenue, and customers still have access to something even though it’s in greater demand – they just need to pay a premium during those times.
Yield management, then, has several advantages, including the ability to create pricing that works for the circumstances of a particular situation. One of the disadvantages, of course, is that it can create price sensitivity in the market, leading to delayed decisions based on customers waiting for discounting. This can lead to a business missing out on a sale because customers wait too long waiting for a lower price or find a better deal with a competitor.
What is the yield management formula for success?
Many businesses, such as hotels and airlines, use a specific formula to calculate their potential revenue per room or seat – this allows them to understand how much revenue would be lost if those rooms and seats go unoccupied and help to calculate how much price can and should vary to accommodate fluctuating demand.
While yield management practices to help businesses manage unexpected demand issues, it’s also important for companies to use historical data and research the trends in their business. Using data in a pricing strategy is the key to successful forecasting and ultimately to helping hospitality businesses manage a good balance between product availability and price.
Yield management is an important tool for managers and business owners, as it helps to maximize revenue and create a market incentive for continued business.
