Yield Management Systems
Yield management systems enable organizations to adapt pricing in real-time based on various factors impacting demand.
LEARNING OBJECTIVES
Understand the purpose of projecting demand changes, and varying prices to capture opportunities
KEY TAKEAWAYS
Key Points
- Yield management systems are predicated on the idea that demand is not consistent over time for certain types of products and services. Predicting shifts in demand will therefore provide potential value to the organization.
- By accurately predicting changes in demand over time or over consumer groups, organizations can produce a profit -maximizing pricing strategy through varying price points with demand.
- Yield management is a multidisciplinary field, which requires buy in from financiers, accountants, marketers, strategists and often technical specialists in big data.
- Knowing when to use yield management and when not to is an important strategic decision. Goods that are perishable, scarce, and which have a high fluctuation in willingness to pay are ideal for this model.
- There are ethical concerns revolving around yield management however, as charging individuals based on their ability to pay and overall demand could be as exploitation.
Key Terms
- yield management: The marketing strategy of identifying variance in demand, and aligning pricing strategies to maximizing profits.
Estimating Demand
When an organization begins determining the price of a given product or service, the objective is to optimize profit through maximizing revenues and minimizing cost. To do so, projections of demand and fulfilling that projected demand with the appropriate supply to maintain the optimal price point is a central strategic endeavor for a marketer. Forecasting demand and understanding the elasticity of the demand for various types of goods is greatly empowered by systems built to manage yield.
Demand Shifts: Understanding fluctuations in demand is a critical component of yield management systems.
Yield Management Systems
A yield management system is based on pricing models which are variable, which is to say that the price of a given product or service will change consistently over time. A good example of this, just as a frame of reference, would be a flight ticket. The prices for a flight from city A to city B will be different per day, per time, per airline and even per website in which you are finding that ticket. This variable pricing model is designed to maximize revenue through identifying supply, demand and optimal yield.
When To Manage Yield
Yield management is quite a complex endeavor, as it takes into account multidisciplinary considerations such as marketing, operations, financial management, statistics, and strategy to build an optimized approach to pricing which iterates and evolves over time. As a result, it is only worth building into practice when it will generate significant returns.
Yield management functions best when the following conditions are met:
- There are a fixed amount of a given resource available (i.e. scarcity)
- The resources are perishable, or time-sensitive in some way
- There is a relatively high amount of fluctuation in regards to what consumers are willing to pay
Combining these three factors, we have scarce products which will likely expire and which are valued differently by different consumers. In these situations, managing yield through pricing properly based on timing and user can optimize profits.
Big Data
Effective yield management, like most intensive research projects, are best left to computers. Machine learning and the capacity to process large data streams (i.e. big data) can create highly reliable statistical models and segmentation of markets to enable an organization to target the appropriate consumer groups with the appropriate price at the appropriate time. This is generally accomplished through building forecasts utilizing huge data streams of past user behaviors.
For example, the price of a flight on a given day can take into account he day of the week, time of year, inflation, market conditions, competitive current pricing, and a wide variety of other data points in order to create a statistical spread of what the price should be set at.
Ethical Concerns
Yield management systems are very useful in specific industries, but are also somewhat controversial. The criticism of yield management is fairly intuitive. If companies can set prices based upon what type of consumer you are, and can identify demand with great accuracy, it is fairly easy for organizations to exploit consumers in specific situations.
For example, say you are stranded in a foreign country after flight cancellations, and need to get home to your two young children. You are there on business, and have an upper-middle class salary. A machine with all of that information can accurately predict that you are willing to pay a great deal more than someone else due to your dire situation. It would not be inaccurate to point out that this is somewhat predatory, and therefore potentially unethical behavior. You may pay thousands for the seat, while the person next to you paid less than 10% of what you paid.