Definition and history of Yield Management

Definition of Yield Management

Based on  real-time demand forecasting by market micro-segment and an optimization model, Yield Management (also known as  "Revenue Management" or  "Real-time pricing") is an economic technique to  calculate the best pricing policy for optimizing profits generated by the sale of a product or service, based on real-time modeling and forecasting of demand behavior per market micro-segment. This scientific method for calculating prices revolutionized the airline industry in the early 1980s. It offers an excellent solution to the problem of comparing supply and demand thanks to differentiated pricing and systematic control of the inventory for sale in each price category. All players benefit from  using this concept: the producer gains in increased turnover and revenue; the end-user enjoys lower prices for the same quality of service. The American airlines  pioneered Yield Management  in the 1980s. Yield Management originated in the United States at the beginning of the 1980s with the deregulation of the airline industry. Major American airlines had to contend with a  highly competitive, new environment created by  the distribution possibilities offered by electronic distribution systems: GDS (Global Distribution Systems) and by the number of low-cost airlines entering the market, such as PeopleExpress, whose operating costs were half those of the major airlines (American, Delta, United, TWA, etc.). The success of Yield Management goes hand in hand with the development ofelectronic distribution.  In order to understand the true significance of Yield Management, it is important to note that it developed in the airline sector concomitantly with the implementation of electronic distribution in the form of the first GDS - Global Distribution Systems - (Sabre, Apollo, System One). GDS makes it possible to display airline company products over an extensive network of travel agencies (GDS today serve 500,000 travel agencies). Development of electronic distribution succeeded in a period when an agency had to telephone or send a telex to the airline company in order to reserve a client's trip. It represented an important revolution since regulations concerning pricing and access to availability had to be formalized before any product could be distributed. If not, the airline company would have lost all control over its inventory. It is easy to understand the analogy with the Internet, which already gives information on product price and availability not to just several thousand travel agencies but to millions of cyber-consumers (B2C) and to thousands of company intranets (B2B). If not for the guarantees offered by Yield Management, companies partaking in e-commerce would, at worst, run the risk of losing control of their inventory and, at best,  be unable to take full advantage of the possibilities inherent in these new distribution channels. Yield Management  is indispensable as a tactical tool. Given the context of deregulation and the development of electronic distribution, the major companies used Yield Management as their main tactical weapon in their struggle to preserve  market share while maintaining profitability. Those who implemented the most effective Yield Management systems (especially American Airlines and Delta Airlines) were in fact the companies who adapted best to this new competitive environment. The companies that did not invest or  waited too long to invest in these tools have disappeared  (People Express, PanAm). American Airlines calculated that systematic use of Yield Management enabled the company to generate 1.4 billion dollars in additional revenue between 1989 et 1991, whereas profits from the AMR holding represented 892 million dollars over the same period.Donald Burr, former CEO of People Express, summarized the reasons behind the company's 1996 bankruptcy  as follows : "We were a vibrant, profitable company from 1981 to 1985, and then we tipped right over into losing $50 millions a month. We were still the same company. What changed was American’s ability to do widespread Yield Management in everyone of our markets. We had been profitable from the day we started until American came at us with Ultimate Super Savers. That was the end of our run because they were able to underprice us at will and surreptitiously. There was nothing left to defend us." Yield Management is thus a necessary tactical weapon that ensures the  profitability, if not the viability, of any business operating in a highly competitive environment.  In the 1990s, many sectors of business began to practice Yield Management .  Following its consecration in the airline industry, Yield Management began in the early 1990s to penetrate other sectors of activity, first in the United States and then in Europe