Q 710. Can yield management or variable pricing strategy be effectively applied across all industries to optimize revenue, or are there specific conditions required for its successful implementation? Provide examples of industries where yield management works well and discuss any limitations in applying this strategy universally.

 

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Yield management and variable pricing strategies can be effective in industries like e-commerce, transportation and hotel industries. In these industries the demand is dynamic and inventory is liable to rot/perish, offer limited capacity and high competitiveness with dynamic market conditions. The demand should be predictable based on seasonality. 

 

Example, during festival season, thanksgiving season, the demand for supermarket, hotel and transportation would be high where there would be need for  demand and supply models with recommendation engines and varying price models based on customer profiles. At the same time price can be reduced to attract more customers in off seasons to improve occupancy. 

 

Various limitations like negative publicity for price increase, high competition, unpredictable market conditions, natural calamities (ex covid, floods) and high competitiveness can affect its applicability and effectiveness depending on type of industry. 

 

Key consideration would be, alignment of yield management with long term vision and strategic goals would be key factors before planning to implement yield management in respective organisations.

Variable pricing strategies, sometimes referred to as yield management, is the practice of changing rates depending on consumer demand to optimize income. Although it can be rather successful in some sectors, its success depends on particular requirements being satisfied. Here are some main elements and illustrations:

 

Requirements for Effective Yield Management:

Perishable Inventory: The good or service loses value after its limited time for sale. For instance, hotel rooms and airline seats are perishable since, once the flight leaves or the night passes, the chance for sale disappears.

Variable Demand: Prices can be changed based on expected or tracked variations in demand.

Differentiated pricing tactics are made possible by the capacity to segment consumers depending on willingness to pay.

High fixed expenses with rather low marginal costs for extra units sold help yield management to be more favorable.

Advanced bookings let companies change their prices depending on expected demand.

Fields Where Yield Management Shows Promise:

Airlines: By varying ticket pricing depending on demand projections, booking trends, and remaining seat inventory, yield management is used somewhat extensively.

Hotels change hotel rates depending on predicted occupancy rates, events, seasonality.

Demand, location, and booking time all affect price for car rentals.

Concerts, theaters, and athletic events apply dynamic pricing—that is, ticket cost adjusted depending on demand and seat availability.

 

Restraints and Difficulties:

Frequent pricing adjustments might cause customer discontent or a sense of unfairness, particularly if not handled open-mindedly.

Implementing yield management calls for advanced data analytics and forecasting—which can be resource-intensive.

Not all markets have the required demand variation or customer segmentation to enable yield management.

Legal or regulatory restrictions on how pricing might be changed could affect some sectors.

Yield management may be less successful in sectors where goods are highly commoditized and competition is mostly driven by price.

 

Sectors of Limited Use:

Retail: Although some elements of yield management—such as markdown optimization—may be used, the less perishable nature of items and strong price rivalry can restrict their efficacy.

Manufacturing: Product with more predictable demand patterns and longer shelf life lose as much value from yield control.

In essence, yield management is not generally relevant across all sectors even if it can be a great instrument for maximizing income. Its success depends on particular criteria; so, companies have to carefully evaluate whether these criteria are satisfied in their sector before applying such a plan.

Yield Management is a variable pricing strategy that is used to optimize the profit. This is a marketing strategy to sell the same products to consumers at different prices based on market factors such as demand or competition. This is mainly used in industries such as airlines, hotels, car rentals, and entertainment.  

Airline: Airlines use yield management by constantly modifying rates according to demand, booking time, and ticket availability. 

Hotels: Hotels use it to manage room pricing based on factors like seasonality, holidays, and local events. 

Car Rentals: It uses yield management to optimize fleet usage by adjusting pricing based on rental length, location, and local demand patterns. 

Entertainments: Parks have implemented yield management strategies by using differentiated ticket prices based on peak and non-peak days. 

 

Yield management is not always applicable for all industries and below conditions required for its successful implementation, 

1. Fluctuating demand 

The demand must be fluctuating and predictable. If the organization can predict the periods of high and low demands based on external factors such as seasonality, day of the week, time of the day, etc then the prices can be adjusted based on that. 

Eg: Airlines experience high demand on holidays and weekends and they adjust the prices based on this. 

  

2. Perishable inventory 

The product or service should have a limited shelf life. If the product/service is not sold within a specific period then it loses its value.  

Eg: An empty seat on a flight cannot generate revenue after the plane has taken off. To mitigate this, they are adjusting the prices by offering special discounts for early booking, and last-minute deals. 

 

3. Fixed or limited capacity 

A product or service should have a fixed amount of resources or inventory. If the amount of the resources or inventory cannot be expanded to meet the increasing demand then the goal is to maximize the revenue from the limited resources by adjusting the prices. 

Eg: An airline cannot add more seats to a flight once the plane is in service, so it uses yield management to sell seats at varying prices based on booking time and demand. 

4. High fixed cost and low marginal cost 

Product/service should have high fixed costs (infrastructure, equipment, etc) and low marginal cost for additional units. Once the fixed cost is covered the additional sales significantly contribute to the profit hence the price can be adjusted to attract more customers.  

Eg:  The airline industry has a high fixed cost and includes the costs such as aircraft purchasing, cost of crew, maintenance, insurance, etc. The marginal costs are relatively low once a flight is scheduled and include fuel, food and beverage, baggage handling, airport, and security fees. Therefore, an airline might sell some seats at a lower fare to fill the flight and increase prices as the departure date nears to capture higher-paying customers to make higher revenue.  

 

 

Limitations of applying this strategy universally 

1. This is not applicable to every industry 

 This strategy is mainly applicable for the industry that has fixed resources and perishable inventory. The industry where the product can be produced or stored on demand can use this strategy but it is less effective. 

 

2. Depend on the customer behaviors of the industries 

Customers are expecting stable prices in some industries such as grocery, pharmaceutical, healthcare, utilities, education, etc. Therefore, applying this strategy in these kinds of industries will lead to customer dissatisfaction.  

 

3. Leads ethical dilemma 

This could take place when applying this strategy, especially in essential services. Prioritizing higher-paying customers could be seen as unfair. 

 

4. Required higher investments 

To implement the strategy successfully, it is required the relevant infrastructure and trained personnel. 

 

 

5. Highly depend on external factors 

External factors such as natural disasters, pandemics, and economic downturns can disrupt demand patterns. Due to this, the previous pricing models can be ineffective. 

Yield management is a pricing strategy that is used for maximizing the sales and revenue of a company by adjusting the prices of their goods and services based on multiple factors. These factors includes, demand, capacity, time-sensitive / perishable inventory, market segmentation, etc., Let us see one by one about each of these factors and it’s conditions for successful implementation:

Demand: Yield management is ideal when there is a fluctuating Customer demand for a product or service. Demands for Hotel rooms, flights and transportation services fluctuates / changes based on the season, time of the day and market conditions. Differential pricing works well there

Capacity: Yield management works well if a business has fixed capacity that cannot be easily expanded based on the requirement. Business like airlines, theatres and hotel rooms will always have limited capacity and it is ideal to optimise sales for each available slot

Time sensitive inventory: Yield management gives good results when applied on time sensitive products. Time sensitive products like, airline seats and hotel rooms lose value after the booking date. Yield management ensures the sales of unsold time sensitive products before they lose the value and maximises revenue

Market Segmentation: Yield management plays an important role in segmented market. Some customers must be willing to pay more for flexibility and some customers will look for low costs. Such businesses who have the leverage to segmentize their customers will do well in Yield management

 

Yield management works well in, 

Airline industry: The airline industry is one of the classic examples of yield management. The price is adjusted based on multiple factors like when you make the booking, seat availability and the demand. This helps them optimise their revenue by offering different prices to different customers based on their booking patterns and preferences

Hotels: Hotels use variable pricing based on occupancy rates, seasonal trends and local events. The room rates are adjusted to maximise occupancy and also the revenue for the unsold rooms

Event Management: Yield management provide excellent results in Concert events, theatres, sport venues and other entertainment related businesses. The price is adjusted based on Popularity, time of event and also the seat location

Public Transport & car rentals: Public transport companies use variable pricing based on travel time, class, bookings made in advance, etc., and car rental companies adjust prices based on location, demand, season, etc.,

 

Conclusion:

Yield management is effective in industries with time sensitive inventories, fluctuating demands and the capacity is fixed. Which means, it is not applicable for all kind of industries. Industries that doesn’t meet these criteria and industries that are extremely time sensitive may have challenge in implementing this strategy successfully.  

Very insightful answers from all respondents. The best answer has been provided by Mohammad Riyadh Al Kamal. Very well articulated and a complete answer. Well done!

 

P.S. - recently I noticed that even cinema halls have started implementing dynamic pricing