What Is Yield Management Pricing? A Guide to Smart Inventory Utilization
Price is determined by supply and demand. Something in high demand but with low supply shoots up in terms of price. On the flip side, lowering the price can entice a few customers to your business if there’s low demand.
The secret to successfully managing both ends of the spectrum is yield management. New to the term? Not to worry, as this guide will cover everything you need to know about yield management pricing and how to use it for smart inventory utilization.
What is yield management pricing?
Yield management strategy works in two main ways. The first is by adjusting pricing to accommodate high/low demand. The second is to take advantage of unexpected opportunities. The first half can be predicted with data modeling.
Then, if there’s an unexpected opportunity, your teams need to be able to hop on a conference call on Android quickly to start working on your pricing strategies to accommodate these new demand fluctuations.
Additionally, these adjustments help improve your ranking on Google, enhancing online visibility and attracting more customers
Yield management is predominately used by the hospitality industry. The hotel industry, the experience industry, and even the food industry can all benefit from yield management pricing strategies. This is because each of these niches deals with demand fluctuations.
You can adjust your pricing based on customer demand in a few ways:
- Offer high/low prices depending on customer demand
- Offer discount sales or deals during the low season
- Offer discounts on select items to bring in more foot traffic
Examples of yield management principles in action
Yield management means selling to the right customers in your sales funnel, at the right moment, at the highest acceptable amount. The goal is to find the sweet spot between price and sale volume so you get the highest potential revenue. Here are a few examples of it put into action:
- Hotel room prices increase during the high season and decrease during the low season
- Retail stores put a discount on an item to move their inflated stock
- Flights cost more during peak hours and days than off-peak periods
To succeed with yield management strategies, you need to use demand forecasting to predict demand fluctuations and know when to drop prices to move stock or increase bookings. This can be done by collecting sales data over previous seasons or even looking into industry reports to understand general demand.
You can then use AI and analytics to predict demand periods and adjust your pricing strategies accordingly.
Why yield management is critical for your business
Yield management is a very effective way to achieve optimal pricing. While it’s traditionally used for hospitality and other stock-limited industries like travel tours, it can be used everywhere, including retail.
Just some of the benefits of yield management include:
- Higher revenue
- Improved value perception
- Lower risk of pricing errors
- Better customer segmentation
Considerations before you adopt yield management practices
It is critical that you adopt yield revenue management practices carefully and only when they make sense according to market demand. Otherwise, you risk turning away your customer base, especially if your competition is offering fairer prices or terms and conditions.
In a Civic Science study, 68% of polled adults agreed somewhat or strongly that dynamic pricing is equivalent to price gouging.
The secret to maintaining good public perception and customer loyalty is always to use competitor pricing and market position to inform your selling price. For example, the optimal cost of a budget hotel room must always be less than what your mid-range or luxury competition offers.
Variables that impact yield management
Several variables are going to impact your pricing strategy:
- Demand: Demand fluctuations, particularly between peak and off-peak times, are a key variable that impacts pricing.
- Price sensitivity: This is the perceived value of your stock. If customers don’t feel your prices reflect the value of what you’re offering, they’ll go to your competition.
- Customer segmentation: Hotels, in particular, attract customers at different price points by offering different prices through partner sites vs. direct bookings.
- Macroeconomic factors: the average disposable income of your target audience will impact how much revenue per booking you can make.
- Inventory management: Lowering prices can help you increase revenue if you have too much of a product and it’s not being moved fast enough.
- Competition: How your competitors price their products or services will determine what customers will pay, even in high season.
Yield management’s role in smart inventory utilization
Yield management is designed to help you fetch a higher selling price when there are too many potential customers for your stock. Take the airline industry, for example, which regularly raises its summer ticket prices higher than during the low season.
Lowering prices is also a part of yield management. Dropping prices on perishable inventory that only has a day left is an easy way to recoup the base cost of an item you would otherwise have taken a loss on.
Yield management can also help you provide different levels of service or products to different customers. Many businesses offer this with a tiered pricing strategy. Even hotels do this through their membership programs.
In short, yield management helps you maximize profit when you are customer-rich, move stock when you’re not, and offer custom pricing based on customer segments.
Getting started: your step-by-step guide to adopting yield management tactics
Knowing what is yield management pricing and implementing it effectively in your business are two different things. You need a data-driven approach to take advantage of high-demand periods like public holidays for maximum revenue. Similarly, you need to be aware of your low-demand periods so that you can prepare for discount deals to drive up sales volume.
It takes time to build an effective yield management pricing strategy, so start today with these steps:
Collect and track data
The first step is to start collecting data. You’ll need to track key metrics such as:
- Occupancy rates
- Average daily rate
- Revenue per available room
- Customer segmentation profiles
- Historical data
- Market analysis
- Competitor analysis
With this information, you can then use AI analytical tools to help you identify your peak and off-peak periods and the pricing range you can adopt to maximize profits without losing customers.
Use demand forecasting
Analytics and historical data can be very useful for predicting future on-peak and off-peak seasons. To go further, however, you’ll want to use demand forecasting. There are several methods available:
- Statistical method: Uses historical data to find demand patterns in your business.
- Delphi method: Rely on industry expert insights to help with long-term forecasting.
- Market research: Interview or survey customers directly to determine when they use your business and the prices they’d be willing to pay for it.
- Sales force composite method: Gather demand estimates from your sales team
- Barometric method: looks at economic indicators (like the cost-of-living crisis) to predict demand
- A/B experimentation: Offer different prices on different platforms to see how pricing differences impact overall revenue.
Try all of them to see which one works best with your business.
Stay fluid and adaptable
You need your team to be fully mobilized so that your marketing, sales, and supply chain teams can quickly pivot if there’s an unexpected opportunity or drop. For example, a store selling merchandise can ramp up prices for souvenirs while the artist is playing but will want to drop those prices if the gig gets canceled.
To be fluid and quick like this, particularly if your business operates in multiple branches or even several countries, you will need a fully digitized team. You can use UCaaS, VoIP, or any other cloud-based communication system to easily strategize, communicate, and adapt your pricing strategy.
Of course, in the UCaaS vs. VoIP debate, UCaaS may offer a deeper level of communication and collaboration, which is essential for on-the-fly pricing adjustments.
Segment your customers
Customers in different segments will have different needs and budgets. You can maximize revenue during peak and off-peak periods by segmenting your customers. To do this, you’ll need to:
- Identify customer segments: Categorize customers based on demographics, booking behavior, and spending habits.
- Understand customer value: Determine how much each customer segment brings to your business in the short and long terms, and note what they’re willing to pay and for what value of service.
- Tailor pricing and offerings: Create pricing strategies and consider making product bundles specific to each segment.
Monitor efforts and adapt
Price monitoring is an essential element of any pricing strategy. You need to truly understand how competitive your prices are and how they stack up to competitors. By monitoring your prices and analyzing the results, you’ll be able to keep on improving your yield management pricing efforts to find that sweet spot where you’re:
- Making the most of your available stock
- Making the maximum amount of bookings every night
- Are competitive in your market
- Are approved of by your customer base
Final thoughts
Yield management pricing can be a very smart, effective way to increase your profit margin, but you need to be careful. The customer must always feel like the price you offer is good value to them, otherwise, they’ll think you are just price gouging.
By lowering prices to keep stock moving just as much as increasing prices during peak periods, you can balance out your customer’s needs and your own.
