Yield management
Also known as: revenue management
Yield management is a strategy that seeks to maximize returns. To achieve this, price and available supply are adjusted on an interim basis. Last minute offers in the travel and hotel industry are an example of yield management.
Available supply is matched to expected demand. For example, an airline will match the number of flights to the number of tickets they expect to sell during a period. A factory will produce less prior to a quiet period to avoid unnecessarily large inventories.
The challenge of yield management is then to price the available supply in such a way that it can be sold within an acceptable time. Often low prices are used initially to stimulate sales. As soon as scarcity occurs, prices can go up. However, if there is a threat of supply remaining, prices are lowered again. Thus, passengers on the same flight may have paid widely different prices for their tickets.
This principle is called price elasticity. If a product or market lends itself to this, we call it yieldable. With elastic prices, what matters most is the total profit of a given product or service. The fact that some of the products are sold with a lower margin (or even at a loss) is less relevant, as long as there is a higher total revenue in return.
