History of Revenue Management
If we don’t invent a way to deal with (yield management), we’re history!
Donald Burr, Former CEO of People’s Express
History is a great teacher, especially to understand why some ideas were developed. Revenue Management, or in this era called yield management, started in the airline industry. Before we had dynamic pricing and mathematical models for forecasting, air ticket prices were rather simple. All tickets were fungible, meaning that one ticket is the same as all the other; think about it: a Tuesday flight is worth the same as a Saturday flight, which is very different today.
This transferability meant that customers could change their tickets like cash, and the only way airlines could optimize inventory was overbooking, a taboo topic at the time. However, deregulation in the 1970’s was quickly going to change how the industry worked forever.
The deregulation enabled airline carriers to have a lot of power they did not have before, like fares, routes, and even the number of flights! The spawn of new so-called “low-cost carriers” that undercut the big carriers like American Airlines. One of these low-cost carriers was People Express, which had a price much lower than American Airlines and was taking up consumers from crucial American, something must be done…
American Airlines made some assumptions that were the building blocks of Revenue Management. They sat down at a conference table and said (this is my language, not what they said):
“I mean… full or not full; the plane will departure, the plane has fuel, and employees are paid, so the marginal cost of another guy on the plane is cheap”
“When you think about it, I only have one chance to sell a seat on a flight, once the flight leaves, the seat is gone, I mean, we cannot store seats, right?”
“What if we match People Express and still sell some of the seats to our people who pay the full price, I mean, those guys are still out there”
And just like that, the three building blocks of yield management were created: low marginal cost, perishable inventory, and yield.
American Airlines created the SUPER SAVERS that matched the fare of People Express and another of full paying price; the goal was to have a perfect balance between those super savers and those who paid full price. American Airlines would call Leisure to those who paid less and business to those who paid in full.
Short than a year later, this strategy proved to be excellent, and People Express was out of the market. Soon, yield-management was spreading around as something that must be implemented, and the rest is history.
