Revenue Management: An Overview on Past, Present and Future
By Trevor Stuart-Hill President & Founder, Revenue Matters | September 16, 2012
The airlines are credited for developing the foundational science behind revenue management. Almost since the beginning of commercial flight, airlines had attempted to maximize their revenues by focusing on filling as many seats as possible on every flight. This meant predicting how many booked passengers would show up for a flight and how many wouldn't. Overbooking by that predicted amount was the technique that was deployed to meet their objective.
In the early 1970's, airlines began experimenting with "fenced" pricing such as offering a discount to passengers who booked more than 21 days in advance. This meant that airlines now had the opportunity to sell additional seats that may otherwise have gone empty. It also meant that the need for tracking and quantitative analysis grew exponentially since customer response to these fare alternatives varied based on season, day of week, time of day, city pair (origin and destination), reason for travel (business or pleasure) and many other variables.
In 1972, Ken Littlewood of British Overseas Airways Company (BOAC) now known as British Airways proposed a rule that discounted fares be accepted if their revenue value exceeded the expected revenue of future full fare bookings. Littlewood's Rule marked the start of what became yield management and later, revenue management.
In October 1978, President Jimmy Carter signed the airline deregulation act which marked the shift from US airlines being a regulated public utility to being part of a free market system. It was then that the practice of yield management was truly put to the test. It passed. Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it "the single most important technical development in transportation management since we entered deregulation."
A decade later fledgling yield management practices began within the hospitality industry. In fact, it wasn't until 1988 that the first yield management-related article appeared in Cornell Quarterly and some of the larger hospitality brands began to experiment by utilizing yield management principles. Unlike the airlines with scores of specialists skilled at quantitative analysis, yield management responsibilities in the hospitality sector fell into the lap of those in other roles - mainly reservation sales managers.
Today the term yield management is outdated and has been replaced with the term revenue management which reflects a broader perspective. Yield management generally refers to an inventory-centric approach to selling the right product to the right customer at the right time at the right price. The term revenue management refers to a business practice designed to optimize the revenue potential of an asset through all market conditions. It is important to note that yield management principles remain as a fundamental component of revenue management and several conditions must exist for it to apply.