Management Lite & Ezy 35 – Yield Management

Yield management is the planning process of allocating resources to customers at multiple prices in order to maximize yield, or revenue.

Yield management is practiced in aviation industry. An airline company alters ticket prices, in real time and on any route, based on demand information. If it looks like demand for expensive seats is low, more discounted seats are offered. If demand for full-fare seats is high, the number of discounted seats is reduced.

Yield management works if demand is elastic, i.e. sales respond to price changes.

Example

A hotel with 100 rooms has historically charged one set price for all its rooms: $150 per night. Sales average 60 rooms per night.

Average revenue per night = $150 x 60 = $9000

Now, this hotel decides to set two price levels. It estimates that 40 rooms can be sold at $100, and another 40 rooms at $200. Average revenue per night is worked out as follow:

Average revenue per night (for two price levels)

= ($100 x 40) + ($200 x 40)

= $4000 + $8000

= $12000

References:

Jay Heizer & Barry Render, “Operations Management”, 8^th edition