Yield management – untapped potential

You’re on the plane from Zurich to New York. Like you, the person in the next seat is trying to make themselves as comfortable as possible while munching on an identical breakfast roll. But his ticket cost considerably more than yours. An urgent meeting, a flight booked at short notice, no alternative – that’s when many airlines ring the cash register.

The reason for this is ‘yield management’, also known as dynamic pricing or revenue management.

What is yield management?

Yield management is a management approach to pricing that arose as a result of US airline deregulation in the 1970s. It is based on the use of a target pricing strategy to control demand according to available capacity and thus maximise sales.

Dynamic pricing in the transport and tourism sector

Yield management is often used by service companies in the transport and tourism sector, a highly competitive market environment with many operators and few opportunities to differentiate. Every penny of revenue counts, since airlines, rail companies, hotels, car hire firms and other industry players must meet very high fixed costs of infrastructure and personnel and face constantly fluctuating demand.

It therefore makes sense to offer spare seats, beds or cars to customers at big discounts. After all, any spaces that are not sold today will be wasted tomorrow; unlike tangible goods, this sales potential cannot be stored.

Discounts are therefore an attractive way to fill spare capacity, but they also carry the risk of large revenue losses. In highly competitive markets, they can even lead to price wars with competitors, with the familiar consequences of lower capacity utilisation and revenues. It may therefore be more lucrative to offer 20% of the remaining seats to stressed business travellers at inflated prices rather than to give half away at rock-bottom rates and potentially reduce the willingness of the customer to pay a higher price in the future.

Yield management uses dynamic pricing to attempt to keep the revenue as high as possible for each available sales unit, in order to exploit the maximum amount that each customer segment is willing to pay.

The main aspects of yield management

For dynamic pricing to be successful, it is important to understand the main aspects. In its 1997 report ‘Yield management in SMEs in the tourism industry’, the European Commission defined the functional aspects of yield management as follows:

  1. Market segmentation: Identify consumer groups that differ in terms of their (buying) behaviour and which play a key role in the company’s pricing and business decisions. For example, a family may be more responsive to special offers than a business traveller.
  2. Price management: Develop different price categories for different target groups to deal with changes in demand. For example, business travellers are usually willing to pay more for short-notice flights than leisure travellers who book well in advance. The more volatile the demand, the more sense it makes to use tools that enable a (semi-) automated price adjustment to be made on the basis of predefined rules.
  3. Demand forecasts: Include historical sales data and known future events in your analysis. This will make it easier to quantify the individual market segments and determine acceptable prices for each target group. In the case of a hotel, for example, it would not make sense to offer early-bird rates if the hotel is expected to be fully booked anyway due to a trade show.
  4. Availability and/or capacity management: Draw conclusions from the demand forecast and adjust the capacities where feasible. For a flight with few bookings, it may be possible to use a smaller plane to cushion the excess capacity and increase the margins.
  5. Cross-selling and up-selling: Adjust the sales and reservation process to cross-sell or up-sell expensive or alternative products where availability and pricing permit. Bundled services for different customer groups, such as combining hotels with flights, can increase the overall margin considerably and contribute towards a positive customer experience.

Adjust prices? But that’s what we've always done!

In many large companies, dynamic pricing is already an established part of their strategy portfolio. Optimisation potential can be exploited in particular in the automation of processes and reduces the potential for errors. But as tempting as it is to rely on technology, one should remember to review the underlying assumptions about customer segments and buying behaviour on a regular basis.

Small and medium-sized companies (SMEs) in the transport and tourism sector have used the principle of yield management for some time now, but in a more intuitive way and with no predefined strategy or control. These companies usually limit themselves to seasonal price categories, higher prices for events and public holidays, and ad-hoc discounts to fill spare capacity. As a result, they often fail to exploit the maximum amount that the customer is willing to pay and thus miss out on potential revenue.

SMEs usually lack the time or appropriately qualified staff to be able to introduce and operate systematic yield management. Nevertheless, dynamic pricing is still feasible for smaller hotels and B&Bs, ski lifts, golf courses, theatres, museums and tourist attractions. An impressive example of this is provided by the Weisse Arena Group, which introduced yield management together with Unic at a winter sports destination.

Case: yield management in the snow?!

Dynamic pricing for lift tickets is still relatively rare. Holiday and winter sports destinations are a part of the transport and tourism sector where systematic yield management has not made much impression. The pioneer in this field is the Weisse Arena Group, which launched the LAAX+ project together with Unic in 2012. The objective was to increase demand in the winter sports destination of Laax on days with low visitor numbers, in order to make better use of the region’s capacities.

Selecting the right yield management approach

The first challenge was to identify the factors that influence demand. This is usually a combination of many different elements, the most important being the weather, capacity utilisation, reservations, seasonal fluctuations, holidays, the day of the week and snow depth. Another key task was to decide on appropriate ticket types for each customer segment, ranging from children, adult and OAP tickets through to half-day, one-day and multi-day tickets. In addition, the entire sales process was scrutinised.

The aim was to find a solution that would provide valuable dynamic pricing experience and continuously improve yield management in the Laax region. At the same time, the buying process had to be made pleasant and easy for the customer.

Integrated systems for an optimum buying experience

This groundwork gave rise to the LAAX+ platform, which coordinates all the components of the booking system in the background. Customers can now search for the required details, view the weather forecast and choose between different ticket categories. Those who do not want to spend a long time looking for a parking space or waiting for the lift can select the Blueline ticket, for example. Anyone who needs to hire equipment can enjoy attractive discounts with the Eco+ ticket.

In addition, the Datatrans credit card solution makes payment simple. For each customer, the details of the keycard (storage medium for the turnstiles on site) are saved in their personal profile and thus in the CRM system of the Weisse Arena Group. The booking and payment is recorded directly in the reservation system, which then opens the lift turnstiles for each keycard. As a result of these networked systems, customers can use their keycard to start their ski day directly at the lifts, without having to queue at the ticket desk.

Thanks to Laax+, the Weisse Arena Group has been able to use the capacity of its facilities much more efficiently, a benefit that it passes on directly to the customer: Skiers in Laax now benefit from special offers depending on the date and the weather.

Remember: communications policy and control

After deciding on the yield management concept, the next step is to make the customer segments aware of the offer. So, quickly publish the highest priced offer in business networks and the cheapest one in online parent communities. But what happens if they discover the difference in price? Then they will soon realise that the pricing policy is unfair. A transparent communication policy prevents undesired effects and supports customer acceptance of the new approach.

You should also remember that the success of yield management is sometimes difficult to measure. This is particularly true if companies have not collected or analysed much data in the past or if the market has undergone significant changes that make a comparison more difficult. Very specific changes can be detected only over the course of time and with a reliable pool of data, as in the case of the Weisse Arena Group and Laax+.

Conclusion

Yield management has proved itself to be a highly effective approach in the transport and tourism sector. However, the relatively low rate of adoption in certain sub-segments, such as smaller hotels, ski lifts, golf courses, theatres, museums, tourist attractions and theme parks, shows that the potential of dynamic pricing is still there to be exploited. In the past, expensive or inadequate systems have deterred SMEs from entry into yield management. These days, however, solutions can be implemented much more cost-effectively and initial destinations such as Laax illustrate the success and feasibility in the SME sector. Yield management is not a universal remedy, but it can contribute significantly towards an increase in margins and revenues.

2017 – Trends, business cases and strategic steps

Customer expectations are higher than ever before: In the course of purchase decisions, the experience factor is becoming more important than the price or specific product characteristics (Customer 2020, Walker). Therefore, we are convinced that in 2017, in order to increase commitment to their brand, companies will have to take a closer look at how they inspire their customers in the digital world.