Yield Management

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Otto-Friedrich Universität Bamberg

Seminar Paper

Ismail Akar
Faculty of Economics

Price Management
Prof. Dr. Björn Sven Ivens
July 30, 2013

Table of Contents

Yield management is an important form of price variation for revenue maximization, especially in airline and hotel businesses. When 'yield management' is researched, mostly American Airlines is shown up due to the origin of yield management. The starting point for yield management was the deregulation of the US airline industry in the late 1970s. A new airlines company called People's Express entered the market with low ticket prices. Major airlines, such as American and United, started to offer lower fares for a few seats to compete with People's Express but they kept higher fares on the remainder seats. In this way, they attracted People's Express passengers who wish to pay less for tickets while still keeping their other higher-paying customers (Ingold, McMahon-Beattie, and Yeoman, 2000). As a result of this strategy, People's Express started to lose their passengers. Eventually People's Express founder and former CEO Donald Burr declared bankruptcy, “We were a vibrant, profitable company from 1981 to 1985, and then we tipped right over into losing $50 millions a month. We were still the same company. What changed was American's ability to do widespread yield management … There was nothing left to defend us” (Peterson, 2005). Robert Crandall, former Chairman and CEO of American Airlines, famously said that "yield management is the single most important technical development in transportation management since we entered the era of airline deregulation...'' (Smith, Leimkuhler, and Darrow, 1992). Since then, yield management has become an inevitable method of airlines to preserve market share and profitability, and spread to other travel and transformation companies. A. Defining Yield and Yield Management

Before explaining yield management, it is important to understand the meaning of the term 'yield'. According to Wood (1985) yield can be defined as ''the quantity of good pieces resulting from a process expressed in proportion to the quantity of good pieces entering that process''. Yield is calculated by taking revenue realized and dividing it by revenue potential (Jones and Val, 1993). Therefore, it can be said that yield is a way of calculating the effectiveness of a firm to increase revenue.

Yield management has many different definitions. Optism (2002) defines yield management as ''an economic technique to calculate the best pricing policy for optimizing profits generated by the sale of a product or service, based on real-time modeling and forecasting of demand behavior.'' Nagle and Holden (1995) define it as ''a discriminatory pricing procedure which involves setting different prices for different segments of the market so as to maximize revenue gained.'' It is also defined by Jaucey, Mitchell and Slamet (1995) as ''an integrated, continuous and systematic approach to maximizing revenue through the manipulation of a product's price in response to forecasted patterns of demand". However, the most common and widely accepted definition of yield management is given by Kimes (2002) as "a method that can help a firm to sell the right inventory to the right customer at the right time and for the right price." B. Required Conditions for Yield Management

Although yield management was first developed in the airline industry, it can be used in many different areas of the industry such as hotels, rental cars, restaurants, cruise lines, convention centers, stadiums, arenas, movie and other theatres, internet service providers and golf courses (Smet, 2003). Companies applying yield management can be from different industries, but they must meet several conditions to apply. Those conditions are as follows: 1. relatively fixed capacity

2. predictable demand
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