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The Age of Yield Management

22 Apr

Yield Management (or Revenue Management) is what happens when we are about to book a flight or a hotel room.

Yield Management

Nearly all of larger airlines or hotel chains use such a (computer based) system for their price policy and the main rule is easy: Demand determines price. Once an airplane takes off, a lot of costs have to be paid by the airline (airport fees, gas, crew etc.). The overhead is huge. That is why it needs an intelligent price policy to sell as many seats as possible. After all, cost for the airline are the same regardless of the number of empty seats. However, a yield management system has a huge impact on the success of an airline (or a hotel chain). And here is how it works:

 

An airline has an airplane with 350 seats that goes from New York to Frankfurt in twelve months from now (April). As a huge fan of my favourite band, Joe just read an article of the world tour next year and the concert in April 2012 in Frankfurt – as a huge fan, he HAS to be there and will immediately book his flight. From the view of the airline, Joe is probable among the first passengers in that airplane. In addition to that, there are no ‘seasonal price impact’ predictions for New York or Frankfurt in April 2012. Ergo: Joe is happy because he spent a ridiculously low price on his ticket.

In November, it occurs that Dominiks responsibilities in his company increase – and so does his salary. He surprises his family with an announcement of vacations in Germany during April 2012 and immediately starts searching for flights and accomodiation. The flight tickets are still at a good price but nowhere near as cheap as Joe’s ticket. The yield management system has realized that seats are more and more filling up and increased the ticket price.

In February, Marcus celebrates the entry of his favorite soccer club ‘Eintracht Frankfurt’ into the European soccer competition ‘UEFA Champions League’ (granted, but a little far-fetched). As he is a huge fan and always wanted to travel to Frankfurt, he is immetiately checking airfares from New York to Frankfurt. Since the amount of available seats has decreased significantly since Dominik’s booking back in November, Marcus is confronted with very expensive prices. After some hours of price comparison on the internet and some ‘inner negotiation’, he finally books his flight to Frankfurt.

March 2012 – almost all seats are taken and prices increased to ridiculously hights. ‘Nobody would book a flight at this price’, Chris says to his girlfriend. Both study at the University of New York and want to travel to Germany – but if the fares stay that expensive, they could not afford the price.

In April – two weeks prior to takeoff – US business man Kevin gets to know this new company producing interesting stuff in Frankfurt, Germany. After some research, he found out that his former classmate Juergen works for this company. Juergen invites Kevin to take a facility tour and afterwards they want to talk business. Since this is a huge opportunity for Kevin and his company, he accepts the invitation and his secretary starts looking for flights. She books a flight for Kevin at the ridiculously high price that Chris commented with the words: ‘Nobody would book a flight at that price’. Apparently, there is…

Finally, two days prior to takeoff, the yield management system realizes that there are two separate seats left in economy class and lowers the price. Since Chris did not want to give up on the trip to Germany with his girlfriend, he kept checking prices every day – and every night – and now, two days prior to takeoff, he got the tickets at a barely affordable price. ‘I’m a lucky man’, he thinks.

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