30 October 2021
Yield pricing (or yield management) is a variable pricing strategy applied to managing goods or services that have a fixed maximum capacity and relatively fixed cost.
Common examples are Airlines, Accommodation, Advertising Inventory, Rental Car Hire, Equipment Hire, and Live Performances.
The operating cost of flying an aircraft route (lets say Sydney to Melbourne for example) is largely fixed regardless if the aircraft is empty or full of passengers.
There may be more fuel burnt on take off because the plane is heavier, but not significantly. However, the airline lease cost, maintenance, crew cost, and fuel are all fixed.
Flight schedules are planned around reasonably predictable passenger demand, so the aircraft is very unlikely to fly empty, however if close to the departure date and time there are still empty seats, it makes sense to discount because even selling a seat for $1.00 is better than an empty seat (in practice, government taxes, and airport fees are included in the ticket price, so the minimum ticket price will always be at least enough to cover these variable costs).
Every seat on the flight is sold at a different price (price discrimination) because each seat is sold at a different time, through various channels, and to different customer segments...
- First Class and Business Class seats are premium priced.
- Seats are sold to the travel industry months in advance to be bundled into travel packages.
- Seats are sold to travel groups (bulk bookings) at a discount
- Sold to international airlines as part of the final leg of the journey.
- Seats are allocated to casual booking systems, accessed by travel agents and direct online booking where pricing is frequently updated based on supply and demand.
- Online bookings provide a range of booking types: heavily discounted seats that are non-transferable and non-refundable, and higher priced seats that allow transferring the cost to another flight if last minute changes are needed (fully flexible fares).
- Some seats are allocated to frequent flyer programs.
- Some seats are allocated to flight booking portals (for example WebJet).
- Popular routes may be initially higher priced weeks out from the flight to cater for people who wish to book well in advance (price skimmed) and closer to the flight prices may be further increased if demand looks strong or lowered if a high number of seats are still available.
The airline monitors the Yield from each flight which is the Average Revenue Per seat X Number of Seats booked.
In an ideal world, every aircraft would be fitted with First Class Seats and sold at their maximum price, in reality there simply aren't enough passengers willing to pay first class ticket prices, so configuring the aircraft with different classes of seating is the first step toward price differentiation and yield management is the second.
Commonly, airlines are competing for passengers on the same routes and many consumers routinely compare prices online before booking. Airlines use Frequent Flyer Programs (loyalty programs) to combat this, and also use algorithms to tailor pricing offered through online booking systems based on individual profiles. Knowing that a loyalty card holder is less likely to switch to the opposition airline, the pricing offered at that immediate moment may be slightly higher.
To manage this highly complex and dynamic situation, airlines assign a Yield Manager to each airline route to constantly review forward bookings for each flight, continuously monitor forecast yields, and making seat allocations to different market segments, distribution channels, and adjusting pricing.
I suspect Artificial Intelligence systems are either being used now, or soon will be, to either assist the Yield Manager or fully automate yield management decisions.
Yield Management and price positioning
While the aim of yield management is to maximise the revenue for each flight on the route, the yield manager must also consider the longer term effects of continuously discounting seats to maximise yields and how the airline is positioned against its competitors. Overtime regular flyers will adjust their buying strategies if they can discern a pattern to the pricing. Sometimes yields can be maximised through maintaining higher average seat prices even if some seats remain un-sold.
However, the airlines have one considerable advantage over yield management in other industries which is the ability to fill seats from frequent flyer programs. These seats are selectively released for frequent flyer bookings using a secondary pricing system - varying the number of points needed to book a seat. It is much harder for customers to convert points to dollars particularly when the relationship between the two is dynamic.
Similarly, airlines can also sell seats through channels (travel operators, booking portals, etc.) which helps prevent online comparison.
Where an airline has a higher quality reputation against competitors (more leg room, higher in-cabin service, faster check in times, better customer service) customers will discern a worthwhile difference and pay on-average higher prices. The Yield Manager must not interfere with this positioning through over discounting.
Other pricing strategies:
Pricing strategy overview: