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Yield Management Essay

1255 words - 6 pages


One of the most vital techniques which are so widely adopted by the servicing or hospitality to maximize profit is known as Yield Management. Industries such as airline industry or hotel industry tend to adopt this technique to allocate limited resources. Sometimes it is known as perishable asset revenue management or simply revenue management because it is also adopted by companies which deal with highly perishable goods or “services which cannot be stored at all” (Netessine, 2002). Kimes and Wirtz (2003) defined revenue management as “the application of information systems and pricing strategies to allocate the right capacity to the right customer at the right price at the ...view middle of the document...

The factor which determines what rate to charge the customers is judge by the sensitivity of customers towards price. Hotels utilize regulations which are acceptable to customers in order to identify guest who do not mind pay higher than others and those who are willing to change their actions to get a room at a lower rate. The most common example which we can witness is price sensitive consumers whom always try to get their room at a lower rate by complying with certain rules. These rules may include early booking (3 to 12 months earlier), accepting the fact that deposit will not be refund under the cancellation of the booking and limited room options.

On the other hand, guest who are willing to pay at the highest rate have the flexibility of booking their rooms at any time, with any choices available.

Dynamic Pricing Strategy

The method of adopting to differentiate price sensitive customers for profit maximisation purpose does not always serve its purpose. Often the prices are relatively stagnant in the early phase of the development of Yield Management. This is because yield management system can really be effective only when a hotel has a certain level of market demand, and when it has a range of rates available.

When hoteliers start to recognize the potential benefits which can be yielded from price discrimination method, they started to practice Dynamic Pricing approach. This approach aid the firm to maximise their profit and overcome the problem of inconsistent profitability. The approach is usually done by delaying its pricing selections until after market conditions are revealed so that the firm will be able to alter the price accordingly, for instance, when demand is high, set a high price, and when demand is low, set a low price (Cachon & Feldman, 2010).


Figure 2: Basic Supply demand model (Jayaraman and Baker, 2009)

The figure 2 shows both demand and supply curve are constant. Also, the sales price and volume sold will be at the intersection of the supply and demand curve, ceteris paribus. Nevertheless, airline seating and hotel rooms are not ceteris paribus. There is a lead-time involved for increasing supply over a certain amount and the product cannot be kept for future use. Subsequently supply is rather fixed (Figure 3). But, seasonal variable or specific events will change the demand rapidly. When the demand increases, the equilibrium price increases and the price should increase. Opposite effect of equilibrium and price happen when demand is declines. The Sabre system (airlines) and central reservation systems (hotels) track changes in demand permits dynamic pricing. Each unit of the product will be sold at the highest price given by a buyer under the perfect circumstances of dynamic pricing. The following products will be sold at the next highest price until all products are sold (Figure 4).


Figure 3: Model of supply and demand with short-term

supply fixed (Jayaraman and Baker,...

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