What is to yield?

Revenue Management is sometimes thought of as prices: online prices, price sensitivity, dynamic pricing, etc.… While it is true that it has to do with prices, what if I told you it was born with an aversion to moving prices? If we examine the genesis of revenue management, also first called YIELD management, we will see that it was all about allocation and trying to reduce fare battleships in the airline industry. (Look at my blog about the History of Revenue Management)

Yield management, much like the traffic sign we see every day in traffic, is about to “yield” or to give up. Sure, yield means production, income, and all of that, but I think of it more in the traffic sense: let the other go first. For American Airlines, it was all about the balance of Super Savers (discounted fare) and full-paying customers. They understood that discounted demand arrived before full-paying customers, but the quandary was: how many discounted customers should I “let go first”?

For instance, think about a child who gets a 100-dollar gift from his mother for Christmas and they are traveling to Disney. He goes with his mother to his local mall and finds a Lego that he likes and is willing to buy, should he buy it right now or wait until he is on Disney to find something even better? It is possible that he does not find something better and is left with nothing or buys that Lego and finds an even better Lego at Disney and is left with regret. Our little Revenue Manager.

This is no different than a Revenue Manager finding the balance between spoilage and dilution (displacement). Although Revenue Management oversees prices, it is all about balance and one very important concept: cost of opportunity.