What is Yield Management Pricing? A Complete Guide With Examples & Strategies

Previously, we discussed a whole array of complex pricing strategies that are used in different industries. But if your major task is to increase revenue without hiring new sales managers or racking your brain over sophisticated formulas, opt for yield management pricing. This approach was initially introduced in the hospitality industry, but it can also be used in online retail. How? This article explains everything you need to know: the formula, the benefits, and ways to implement it in your business.

To put it simply, yield management pricing boils down to selling to the right customers, at the best moment, and at the right price. This approach allows you to maximize your income because when you come up with the most optimal prices and address your target audience, you stand a higher chance of successfully selling your products.

Yield management goes hand-in-hand with revenue management – these are quite similar concepts. However, it is crucial to remember that yield management has a more constrained focus (on the selling price and the number of sales) in order to maximize revenue.

The fundamental idea underlying yield management is that some fixed, finite resources, like hotel rooms, may be sold for a variety of prices depending on the season, the degree of demand, the number of rooms that have already been sold, and a host of other external circumstances.

Due to the numerous factors in play, two different consumers may be charged completely different sums for the same product (a hotel room). Utilizing data-driven techniques, yield management tactics make sure pricing is adjusted to maximize business outcomes.

In the retail niche, yield management pricing makes it possible to set the conditions so that an offline or online store does not lose money when operating at a limited capacity. Here is how yield management is practiced in the industry:

• Seasonal goods. Prices of goods fluctuate based on seasonality. In the retail sector, demand for various products may rise depending on the season or in light of certain seasonal events. Think about Christmas or the New Year: gifts are in much higher demand around this period, therefore costs will inevitably go up.
• Unexpected events. The industry may see a significant shift as a result of some unexpected news, accidents, or stories. This is where yield management comes in handy. For instance, if shops produce certain merchandise prior to some event, they can get ready for it beforehand. Also, demand may decline when an unexpected incident occurs. A store can also lower the price in this situation to make its offers more enticing.
• Rise in costs. Consider a scenario in which a significant event — say, a football match — is to take place in a certain area. Naturally, businesses that sell thematic products (like T-shirts, fan scarves, or face paints) have the potential to charge significantly more for event-related goods than retailers that are not connected to the event.

The primary benefit of yield management is efficient control over demand. It guarantees that brands are getting the greatest profit out of their assets. Every business has certain fixed expenses, and yield management pricing ensures that they generate as much money as they can. To be as cost-effective as possible with certain distribution and marketing costs, companies should also reap the greatest amount of money from the current demand.

The control of yields is another essential component of profitability. Increased sales has a huge influence on profitability since it is almost all profit if expenditures remain constant. On the other hand, a decline in profit results if income falls but costs remain the same. Sudden drops in demand can swiftly throw brands into crisis. By skillfully controlling current demand, yield management helps companies to maintain optimal profits.

The final benefit is the fact that yield management is a narrowly focused practice that doesn’t take a whole department to employ. Yield management is simpler than other methods of maximizing revenue, such as working with operations to save costs or with revenue management, marketing, and sales improvements.

The easiest way to calculate yield is to find out exactly how much revenue you leave on the table. The following formula can be applied for that:

Profit Achieved / Maximum Potential Profit

For example, say a brand has produced 500 cell phones and planned to sell them at $200 each. That means their total potential revenue is $100,000 (500 * $200). During a projected period, 320 cell phones at an average price of $180 were sold, grossing $57,600. The yield is divided by $100,000, making 57.6%. This might seem like a bad metric, but it doesn’t show the whole picture.

Each yield needs to be weighed against the overall picture, such as the general performance of your business in the same period. Additionally, yield management is typically done in advance, allowing prices to be changed in real time to reflect market trends. This is often done as a part of seasonal pricing, for example: brands can charge the maximum prices during periods of demand spikes.

You'll need a comprehensive understanding of the variables that affect demand if you want to achieve the greatest amount of sales at the best prices.

Some of the variables that may affect yield management are:

• Demand and price sensitivity;
• Market dynamics;
• Competitiveness;
• Perceived value of products;
• Macroeconomic factors.

Here is how yield management is practiced in different niches:

• A rise in hotel prices during a festival season. Imagine that a large festival is about to occur. The prices of rooms at the hotels close to the festival site are significantly higher than those at hotels farther away.
• A restaurant's special coupons for discounts. A restaurant may provide special promotions to entice customers. For example, it may offer a 30% discount on Wednesday nights when traffic is scarce.
• A rise in airline prices during the peak of the tourism season. During the summer months, when demand is at its highest, airlines charge more for tickets, while wintertime flights are much cheaper.

A yield management strategy can be very useful not only for hotels – you can apply it in online retail and other industries. This approach helps you develop your business by increasing profit, decreasing errors, understanding demand shifts, and improving value perception. Let’s discuss its biggest advantages.

Yield management has progressed as a result of machine learning and sophisticated analytics development. Yield management assists businesses in increasing their income even if they are not located in a residential region, as revenue is their primary concern.

The projected demand may be used to the advantage of brand owners and revenue managers, who can increase average revenue per product or service. When demand is a variable, yield management makes it possible to increase the cost of products or services so as to reap maximum profit.

Due to the dependence of these parameters on supply and demand, the greater the demand, the greater the willingness of consumers to bear higher prices.

The way customers see a product’s worth is called perceived value. They are prepared to pay more for scarce commodities when they believe that the prices are fair. The hotel sector is similar in that customers are willing to pay more at the busiest times of year because they expect the rooms to be worth more.

By utilizing various marketing techniques and a flexible pricing structure, and by making offers for customers to purchase goods in advance, a company can boost the perceived value of its goods. Thus, yield management strategies boost revenue through the right positioning.

Businesses can eliminate the risk of human error since expenses are determined based on market predictions by implementing an innovative yield management system. By using technologies to automate business tasks, this kind of pricing management boosts efficiency and sharpens a company’s competitive edge.

Market segmentation is a crucial component of a business strategy, so a well-thought-through analysis can assist businesses in determining the specifics of customers’ demand. Yield management will be even more efficient when it takes into consideration customers’ buying habits and market trends.

Yield management is used not just to increase sales; it serves to forecast revenue by analyzing demand, which is influenced by a number of important factors. This concept is very similar to revenue management, but has been around for longer. However, yield management has a narrower focus and is concerned with selling price and sales volume so as to reach the best revenue yield.

Hence, yield management can be viewed as a tactic rather than a whole strategy. You can apply it to analyzing separate goods or services, not your whole business, because it disregards some aspects. Revenue management is a more complex approach because it takes into consideration many more variables: metrics, market peculiarities, and so on.

In the context of the hotel industry, revenue management should not be confused with reservation management. The latter is a part of a service strategy, which includes distributing rooms into categories, interacting with clients, working with VIP guests, converting calls into bookings, and so on.

Yield management pricing helps companies boost revenue by predicting demand and adjusting costs accordingly. This approach is based on analyzing a few external factors as well. It can become an essential part of your flexible pricing strategy because it takes into consideration customer behavior and shifting demand. When properly prepared, businesses can forecast their revenue and take measures to maximize it.

If you want to implement yield management pricing, you don’t have to hire experts and waste tons of time on analysis. Simplify the task by using Priceva’s price intelligence tool: it will track customer behavior and suggest optimal pricing solutions – all on autopilot. Now you can focus on developing your business while Priceva’s revenue management software does the routine repricing work for you.

Yield management strategies are not dynamic pricing. Instead, dynamic pricing is a method of setting a product's price in accordance with certain guidelines. It is used in accordance with the more general revenue management formula. A strong revenue management plan can be built on fixed pricing, though revenue management can also incorporate dynamic pricing of inventory.

Although yield management strategies are not pure price discrimination, they are oriented towards it. Essentially, the idea is to give customers access to identical products or services at different prices. This makes it possible to capture high-yield buyers in many different industries, including retail, and many of them don’t mind paying extra during periods of high demand.

These are similar approaches, but they’re not one and the same thing. Revenue management takes into consideration a broader set of factors, while yield management pricing can be a part of a seasonal pricing strategy.