For more than 20 years, yield management has been an indispensable tool for increasing profits within the highly competitive airline industry. The technique has steadily gained acceptance in other industries that have similar business processes. Although golf operations resemble airline operations in many respects, yield management is rarely practiced in the golf industry. In recent years, new revenue management technologies have emerged that are specifically designed for golf properties. These technologies could have a positive financial impact on the golf industry during the current economic downturn, and potentially represent a new trend in golf course management.
Definition of Yield Management
Yield management is a business term that refers to several methods of maximizing the financial yield on inventory. These methods bring together diverse business practices such as dynamic pricing, market segmentation, and forecasting, with the goal of maximizing revenue through control of inventory levels and pricing.
Yield management is most commonly implemented as a pricing model that optimizes revenue by charging buyers different prices according to the value they place on the purchase. For example, business travelers have a less elastic demand for airline tickets than leisure travelers, and so will pay higher prices for the same ticket. Yield management is also understood as an automated, technologically detailed solution to the age-old problems of what price to ask and which offers to accept. The practice employs technology to sell the right product, to the right customer, at the right time, at the right price.
Other names are roughly synonymous with yield management, including revenue management, pricing and revenue optimization, revenue process optimization, etc. These terms all have slightly different meanings depending on their business application. The term yield management is typically used in the airline industry, and has been adopted by other industries with similar business processes.
Yield Management Components
The elements of yield management differ based on how the concept is applied in different industries. In its primary application within the airline industry, yield management includes the following components:
• Overbooking. This is the practice of accepting more reservations than can actually be accommodated. This is done to balance the increased revenue from full booking against the cost of dropping excess reservations.
• Discount allocation. This is the practice of determining the number of reservations that can be allocated at a reduced rate without the loss of opportunities to sell at a smaller discount or at full price. The ratio of full price to discount varies and is dynamically adjusted based on time to departure, forecasting, past experience, and special events.
• Traffic management. This is the practice of balancing discount allocation with the complications of multiple routes and connecting flights.
Yield management began as a response to deregulation of the airline industry in the early
1980s. Major airlines had to contend with a highly competitive environment that resulted from electronic distribution of inventory, and from the entry of low-cost carriers into the market. Electronic distribution, in the form of GDS (Global Distribution Systems) applications such as Sabre and Apollo, was the main driving force. GDS revolutionized the speed at which inventory could be distributed to buyers, mandating a countervailing force that would enable the seller to organize and control price and availability.
For many airlines during the 1980s, successful implementation of yield management meant the difference between success and failure. By implementing yield management techniques, American Airlines saved $1.4 billion in the period from 1989 to 1992, or about 50% more than its net profit of $892 million during that period. Other airlines, which were not as committed to the new practice, were out of business by this time or soon afterward.
Yield management resulted in benefits not only for sellers, but for buyers as well. While the more innovative airline companies gained increases in turnover and revenue, the traveling public found better access to service through lower prices.