Yieldable Versus Priceable - What Does It Mean and Who Cares?
By Bill Kotrba VP of Industry Strategy, Leisure, Travel & Hospitality, JDA Software | November 20, 2011
In my role as head of industry strategy for Leisure, Travel & Hospitality industries at JDA Software's Pricing & Revenue Management business unit, I often have the opportunity to talk with revenue management leaders about the tools they use. Two words I have heard frequently of late are "yieldable" and "priceable" when referring to alternative approaches to revenue management, and I am often asked to clarify the origin of the two methods and define their differences.
For anyone who has spent significant time in the travel industry, especially in the hospitality or airline businesses, the term "yield management" is often used broadly to refer to the practice of revenue management (RM) in general. However, the two should not be confused. For people who do revenue management for a living – and those who create and deliver revenue management software solutions – the word "yield" now carries a distinct meaning and refers to a specific revenue-maximizing approach that is differentiated from newer approaches (i.e. priceable) that have emerged in recent years. All of which falls under the umbrella of RM.
Yield management (YM) originated in the newly deregulated airline industry in the early 1980s. Since then, YM has permeated the airline industry DNA that the language and technique of YM affects the customer experience in ways the carriers probably never intended. For example, recently when I called an airline to change my travel plans I was calmly told, "In addition to the change fee, the new ticket is priced $121 dollars higher because your original ticket was booked in K class and now K class is closed. Your new ticket will be in Q class." Q class? The only reason I know what that means is because I worked in airline revenue management for 13 years.
YM systems attempt to maximize revenue by yielding-out, or closing out, lower-value demand as flights or hotels fill with bookings in the weeks or days leading up to a departure or check-in date. To do this effectively, airlines and hotels needed to do two things: 1) save a specific number of rooms or seats for customers who book at the last minute and are willing to pay more and, 2) offer prices to specific customer segments who are willing to pay more and can actually made to pay more, using a combination of restrictions and incentives. The various segments are said to be "fenced" where customers in each segment are typically unwilling to change either their travel or purchasing behavior to access the prices available to other segments.
In today's revenue management science, demand that can be segmented in this fashion is typically referred to as "yieldable" demand. The technique of opening and closing which price points are available for sale-to match demand and supply to maximize revenue-is known as a yieldable approach to revenue management. Demand is considered yieldable if it is made up of independent, fenced segments which can be forecasted and priced to separately, and turned on and off using inventory controls according to optimization algorithms based on remaining seat or room inventory.
In practice, yield management systems require complex, tiered rate structure that anyone who travels has come to know well. With lower rates come more restrictions and less flexibility. For example, staying over a Saturday night in exchange for a discounted airfare, or having to show a AAA membership and reserve a minimum number of nights for discounted room rate. These types of restrictions are very effective at keeping higher-paying customers fenced off from the lower rates. In a YM system, rates and rate ranges are assigned to inventory classes (also called rate classes or buckets) YM software then forecasts demand for each inventory class – which ideally corresponds to fenced segments at increasing price points – and optimizes the number of seats or room to hold out or protect demand that is more valuable. Automated inventory controls can be set in advance to open and close specific pre-existing prices in anticipation of strong or weak demand in each segment according to a demand forecast-and then adjusted daily in response to demand that materializes better or worse than forecast in each segment.
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