Preface: Optimizing sales before product or service opportunities evaporate in the marketplace can lead to a higher contribution margin for your business. Read further to appreciate the importance of systematizing yield management.
The Concept of Yield Management Pricing Simplified
Yield management pricing is a strategy concept designed for the consumer services sector that accounts for two sales pricing variables– i) evaporation of the product/service opportunity ii) varying levels of demand for the product/service from different customer segments. Yield management originally applied to the hotel rooms and airline seats, but the concept has far greater, and farther reaching applications. Yield management strives to optimize harvest profit yields on products or services every month of the year.
The precis of yield management systems is that it works to predict, understand, and react to consumer behaviors to optimize business revenues and profitability. Software models and predictive analytics as well as historic analysis unite to provide pricing options for marketing strategies on consumer products and services. Inputs include historic sales analysis trends and patterns for products or services already supplied projected to future demands, and future event analysis such as holidays or yearly seasons, not to mention market outliers such as unforeseen events, i.e. flash floods. The model then formulates a forecast of total demand for the product or service being analyzed per market segment and variable price points.
Whether you have a software model or decide with discretionary or intuitive inputs, yield management seeks the best answer for this question: In our business, how can we optimize revenues during the period (current or future?) Sometimes, simply asking the right question(s) leads to more market capitalization for a business.
Yield Management Pricing Examples
Consider a retail business that sells scarves, or maybe let’s say winter coats. Let’s assume the garment maker produces all year long. The first opportunity to apply yield management pricing is the pre-season sale. How do you optimize inventory levels during the fall, pricing into the winter climax, and liquidate the entire stock before spring arrives to keep inventory turnover high, and make room for summer attire? Or let’s say you market locally raised produce in your store, how do you keep inventory stocked, and simultaneously minimize spoilage, while constantly optimizing price? Often key personnel in small businesses have intuitive expertise in applying discretionary yield management techniques that lead to optimal profit levels. These techniques should be synthesized to documents the decision that can help you develop a system for applying more systematic yield management decision making — improving capitalization on potential sales before the product or service opportunity and demand evaporates.
Another practical example of yield management would be a market stand with baked goods. Early in the morning when the pies or pastries are right out of the oven, a premium price could be charged. Maybe certain times during the day your staff cannot keep up with customer demand, and you think you should hire additional staff when maybe you’re at capacity. How much would profits increase if you raised or varied certain prices during peak hours? What about certain baked goods, what can you produce for the least cost with the highest contribution margin? Maybe you’re losing money on Oreo pies, and should sell more chocolate chip cookies (less work, more contribution margin per employee.)
Yield management is a concept that encourages you to develop systems in your business to optimize revenues. Yield management gives you an edge in increasing profits without increasing capacity or overhead.
Summary: Yield management pricing is a strategy concept designed for the consumer services sector that accounts for two pricing variables– i) evaporation of the product/service opportunity ii) varying levels of demand for the product/service from different customer segments. You probably already intuitively apply yield management heuristics to your business, but systematizing the strategy can lead to more profitability.