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Yield management: How to maximize your profit and minimize your customer's satisfaction rate

Yield what?

The concept

Yield management
Let's use an airplane as an example. On a plane, there are 100 seats. A company will start selling tickets 3 months before the actual flight date for $200. 2 days before the flight, there are still 15 seats available. Statistically, they will have sold 85 seats in 88 days, so they won't be able to sell the 15 seats in 2 days. The solution is to reduce the price at, for example $100.

The yield management core concept is to update the price all the time, depending on the number of seats still available vs the number of seats sold. The calculation is based on statistics of previous sales during the same time period (high season, holidays, etc.) and on the number of days before the plane's departure. If the plane leaves with empty seats, that's a profit loss for them: the seat costs about the same full or empty (the price of food, drinks, luggage transportation, gas, etc. for the non-sold tickets are very low in cost next to the other fees the airlines have).

If I buy a ticket and you buy one for the same exact plane 5 minutes after, there is no guarantee you'll have the same price as me. It might increase if their system considers that they sold more seats than average at that exact moment or decrease if they did not make enough sales.

You can find a more detailed explanation on Wikipedia.

Profit maximization

You already understood that the goal of Yield Management is to maximize sales. Maximizing sales maximizes profits.
A good way to see the results of Yield Management is to look at Load factors (amount of utilization of the total available capacity. In case of the airline, the rate of seats sold).

Average load factor for domestic and international flights U.S. Airlines:
Year Load factor Yearly evolution Global evolution since 2003
2003 72.75% - -
2004 75.4% + 3,64% + 3,64%
2005 77.6% + 2,92% + 6,67%
2006 79.2% + 2,06% + 8,87%
2007 79.9% + 0,88% + 9,83%
2008 80.4% + 0,63% + 10,52%
2009 80.4% + 0,00% + 10,52%
2010 82.0% + 1,99% + 12,71%
2011 82.2% + 0,24% + 12,99%
2012 83.1% + 1,09% + 14,23%
Source: http://www.bts.gov/press_releases/airline_traffic_data.html.

Customer satisfaction minimization

Airline companies' customer service (I will use Air France as an example below) would probably find a way to explain to you that the customer should be happy about not being able to predict the price of his/her trip. However, the core concept of Yield management (which is very frustrating for customers) is to take as much money as they can out of your (or my) pocket. How does a company explain to their customers that the plane ticket they bought 6 month ago was 263,01 € and that you now need to pay 689,42 € for the same exact service (if your seat is not broken)?

Is it a good long term strategy?

Unfortunately, we will have to wait (long term) to get that answer. Yield management is helping prices to increase dramatically (the concept being to try to get as much money as possible from each customers while selling all the products available). It's also helping cheaper companies with fixed rates (or rates with reasonable variations). We see a lot of low cost airlines / cheaper hotels chains or car rental companies getting more and more market shares, part of the reason being probable yield management prices policy.

A few points

Yield management is not the only cause of prices and load factor evolution. Here are a few of them:
  1. During the last 10 years, prices of gas has greatly increased and airline companies had to reflect this evolution in their prices policies
  2. The middle class has grown and can afford to take air planes
  3. Airports need more and more security and the airlines charge this cost in taxes that are included in the price of our tickets

Who uses yield management?

More and more businesses use yield management. The main ones are airlines, hotels and car rentals.
They all have a limited number of product (planes seats, beds & cars) for a certain date at a certain place and their costs are about the same if they sold/rented or not their product.

Example: Me, Myself & I(rene)

I take very often (24 times between october 2010 and january 2013) the Air France flight Paris => Miami or Miami => Paris.
I always buy my ticket about 2 month in advance, I always travel coach and never buy anything extra (special meal, emergency exit seat...). But the price for the same exact trip is very different for every ticket. Here is a fact: the cheapest ticket costed 219.03 € and the most expensive one was 689.42 €, that's 315% more!
You probably think they are screwing me. You are right.

Here is the price of all my tickets on this line :

Here is a yearly average of the tickets prices :
Year Average price Yearly evolution Global evolution since 2010 Note
2010 365,08 € - - -
2011 346,40 € - 5,12% - 5,12% Bought only one ticket in 2010 during a cheap period; the summer is more expensive
2012 435,99 € + 25,86% + 19,42% -
2013 469,30 € + 7,64% + 28,55% -
Last update of this page: March 27, 2017
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