What Is Yield Management and Why Is it So Important?

A service remains useful for as long as it is in use

In business, most pertinent is to sell off goods and effectively market services as quickly as they are available on the market.

Some services and businesses offer perishable goods that can expire on the shelves. However, it’s different for the hospitality industry. While it is almost as though the services that hospitality businesses offer can never expire, this simply isn’t true.

There are periods where the usefulness of a service runs out as long as it remains unused. In the hospitality industry, services and products are only useful when utilized and, of course, paid for. Plane tickets, train tickets, hotel rooms, etc., are only useful if people pay for and use them.
However, these services’ market demand is not fixed and can go for long periods with minimal requests. The fixed prices of these services do not allow the business to make up for the losses incurred on days where demand is deficient.

To remedy this situation in the hospitality industry, a new pricing strategy was developed; the Yield Management strategy.

What is yield management?

What is yield management and how does it affect your business?

A simple answer will be that Yield Management is a pricing strategy developed for the hospitality, air travel, tourism, and related industries that helps to produce maximum returns from their services. However, that may be an answer that barely scratches the surface.

So, really, what is yield management?

Yield management runs mostly on the tilt of the supply and demand of the market. When the demand exceeds supply, the prices increase, and when the supply exceeds the demand, it drops. It first began from the air travel industry.

Have you ever tried to book a flight at the last minute and found that the price of the ticket is now jaw-droppingly higher than it was a few days ago when you procrastinated on concluding your booking? You most likely have been affected by yield management.

Many passengers aboard the same plane are most likely not paying the exact fare for the flight. Many took advantage of some unique early-bird discounts and other special pricing plans offered to passengers for booking early.

Unfortunately, a few people would still have to pay higher than those who booked early flights.
Yield management involves strategically editing prices of goods and services in the hospitality industry to match with the right customer in varying instances of demand and supply.

This works in such a way that businesses can balance their lost revenue by tweaking their prices when demand is less than supply and vice versa.

Factors that may help to influence yield management

Numerous factors are responsible for the change in demand and supply in business
Services in this industry that have benefitted from yield management include car rental services, railroad services, tourist services, cruise lines, hotels, and airlines. Many factors can influence the need to change prices in business.

One factor that influences yield management is the weather. For example, you would find that Uber prices get spiked when it’s raining because everybody is looking to be dry and safe in a vehicle and still get to their destinations.

Paying a little bit extra for this service that would ease their inconvenience at that moment would seem insignificant. The time of the year is also another critical decision-influencer when it comes to the prices of many services in the hospitality industry.

During Christmas, passengers are willing to pay exorbitant prices as long as it guarantees that they would get home to celebrate festivities with their families. Another one is the level of demand.
Tell people that only two available planes are willing to take them out of a virus-ridden town and watch flight tickets get sold out in minutes, no matter the price cap.

Competitors can also create a distortion in the level of demand for a product or service. Is there a new company on the block offering similar services like yours? Depending on the glitz and affordability attached to that new company, yours might suffer a drop.

With yield management, you can rectify the situation and show the new kid on the block who’s the boss. In a nutshell, yield management offers different clients different prices for the same product at different times based on varying factors to maximize business returns.

How do you implement yield management in hospitality businesses?

Find an equilibrium price zone where you can maximize your revenue
Yield Management has a very streamlined focus and approach to profit-making in business. It ensures that you get the best possible revenue or returns by critically analyzing your volume of sales and selling price.

In the hospitality industry, businesses use this demand-forecasting technique to determine how to offer prices to their customers and still make the highest profit possible. Many companies offer the highest prices to customers and examine how many clients are still able to book for their services despite that high price.

If they find that the demand for the service drops below the supply, they modify the price again to accommodate more customers who can afford the new, reduced price.
To be a great yield manager, finding an equilibrium price zone where you can maximize your revenue is key. Once you’re able to get this equilibrium price, your business is already working at its max capacity.

The best way to do demand-forecasting is not by guesstimating but doing thorough research from existing data and trends gathered from customer behavior and purchase patterns. Using historical data to calculate how much price should vary to accommodate fluctuating demand should be your go-to strategy.
It helps to effectively predict and make demand-forecasts so that you can strike a balance between the availability of your product/service and the price.

Why is yield management so important?

Yield management boosts revenue significantly

For hotel managers, cab hire services, tourist agencies, etc., being able to manage your yield effectively can not be overemphasized. It has so many benefits for your business that boosts revenue significantly.

Let’s examine a few of them below:

1. Flexibility of pricing

Yield management boasts of a flexible nature, and this affects both customers and the business positively. Suppose there’s a drop in demand for any product or service, with accurate yield management, the company can modify its rates to an equilibrium price to accommodate more bookings or orders.

This way, you can serve more clients and bring in revenue at the same time. Offering discounted rates or double-service in one package at a slightly reduced price can be an effective way to entice your customers back.

While you may not make as much as you would during a busy period, you’re able to make some revenue, unlike when there are no bookings at all. You also manage to satisfy your clients who may feel like they got a great package at lesser rates. It’s a win for both ends.

2. Improved seasonal pricing

This is also an offshoot of the flexibility of this concept.

Because customers are willing to do anything for some particular services in some peculiar seasons, a hike in price during these periods will not affect demand, such as high costs of flight tickets and hotel rates during the rush-hour Christmas season.

In this period, where the business is in high demand, you can make more revenue than when there was lesser demand for the service. Customers can also receive the services they need, howbeit that they have to pay slightly higher for it.

3. Enhanced forecasting skills

WIth accurate historical data analysis and customer purchasing patterns, your business is able to accurately demand-forecast. This way, you learn to know how to better prepare for times where business may not function at a high.

By using automatic forecasting strategies and techniques to keep track of the different parameters or factors that affect demand, you are able to make more accurate predictions. Tracking these parameters by hand may lead to errors or inaccurate data.

You would find useful cloud solution software like Bedvine.com to help you monitor a wide range of these factors simultaneously for the best results.

4. Enhanced coordination among sales channels and the customer relations team

With accurate yield management, there becomes uniformity across board, from the front desk to the prices on the different sales channels. There’s no case of one price from the customer relations team and a different one at the website or on the travel advisory.

You’re also able to make planned and coordinated responses about prices when guests or clients call to place reservations or inquire about bookings. It helps to plan ahead to determine when there will be discounted prices or not and how much discounts to take off the prices.

Conclusion

It’s easy to make losses in the hospitality industry, and it’s also easy to make gains. When you realize that it’s impossible to run at the same demand level throughout the year, the need for a middle ground becomes essential.

Yield management serves as an in-between for customers and businesses where you try to create a balance between demand and supply.

The goal is to make a maximum profit in business while also satisfying your customers by offering a reasonable price in exchange for your services as the market demands.