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Th ought Lea de rshipYieldable Versus Priceable –What Does It Mean and Who Cares?By Bill Kotrba, Vice President of Industr...
Th ought Lea de rshiprevenue-maximizing approach that is differentiated from          for each inventory class — which ide...
Th ought Lea de rship         Yieldable RM              Priceable RMshort. The hotel rooms pricing model has been dramatic...
Th ought Lea de rshipIs price optimization better than yield management?                  About JDA Software Group, Inc.No...
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Yieldable versus Priceable: What Does it Mean and Who Cares

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Is price optimization better than yield management? Not necessarily. Price optimization is arguably the most significant innovation in revenue management in the past decade, building on yield management and driving revenue upside during times when YM falls short. YM will always be a very effective lever to improve revenue for industries in situations where the “Three Fs” are generally present. Moreover, existing yieldable solutions can be enhanced by adding priceable capabilities to improve revenue during times when capacity exceeds demand, or to help determine the optimal price structure for yield management controls. Bill Kotrba, VP of Industry Strategy for JDA Software explains how businesses can leverage both approaches as their selling environment dictates.

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Yieldable versus Priceable: What Does it Mean and Who Cares

  1. 1. Th ought Lea de rshipYieldable Versus Priceable –What Does It Mean and Who Cares?By Bill Kotrba, Vice President of Industry Strategy at JDA Software I n the old days yield management systems worked best when paired with complex and arcane pricing structures such as the ones used at airlines and hotels. These and a small number of other service industries with perishable capacity cared a lot about yield management and the way it helped generate more revenue from expensive networks of airplanes and hotels. For other industries, though, the complex techniques and price structures from airlines and hotels weren’t really applicable. Fast forward to 2011. The emergence of state-of-the- art pricing and revenue management systems has introduced a shift from a “yield” approach to “pricing” approach. Whereas “inventory classes” and “yield management” were things that a few industries like airlines and hotels cared about, “pricing” is something that impacts every industry. Industries that have previously assumed revenue management was not for them should take another look. In my role as head of industry strategy for Leisure, Travel & Hospitality industries at JDA Software’s Pricing & Revenue Management Group, I often have the opportunity to talk with revenue management leaders about the tools they use. Two words I have heard frequently of late are “yieldable” and “priceable” when referring to alternative approaches to revenue management, and I am often asked to clarify the origin of the two methods and define their differences. For anyone who has spent significant time in the travel industry, especially in the hospitality or airline businesses, the term “yield management” is often used broadly to refer to the practice of revenue management (RM) in general. However, the two should not be confused. For people who do revenue management for a living — and those who create and deliver revenue management software solutions — the word “yield” now carries a distinct meaning and refers to a specific
  2. 2. Th ought Lea de rshiprevenue-maximizing approach that is differentiated from for each inventory class — which ideally correspondsnewer approaches (i.e., priceable) that have emerged in to fenced segments at increasing price points — andrecent years. All of which falls under the umbrella of RM. optimizes the number of seats or rooms to hold out or protect for demand that is more valuable. AutomatedYield management (YM) originated in the newly inventory controls can be set in advance to open andderegulated airline industry in the early 1980s. Since then, close specific pre-existing prices in anticipation of strongYM has permeated the airline industry DNA such that or weak demand in each segment according to a demandthe language and technique of YM affects the customer forecast — and then adjusted daily in response to demandexperience in ways the carriers probably never intended. that materializes better or worse than the forecast in eachFor example, recently when I called an airline to change my segment.travel plans, I was calmly told, “In addition to the changefee, the new ticket is priced $121 higher because your The Three Fs of Yield Management:original ticket was booked in K class and now K class isclosed. Your new ticket will be in Q class.” Q class? The only Fixed, Fenced and Fullreason I know what that means is because I worked in In order for YM — a yieldable approach — to truly be anairline revenue management for 13 years. effective lever to improve revenue, these three “F”s need to be present:YM systems attempt to maximize revenue by yielding-out,or closing out, lower-value demand as flights or hotels 1) Fixed (a.k.a. perishable) capacity – such that rooms orfill with bookings in the weeks or days leading up to a seats that aren’t used will be spoiled when they godeparture or check-in date. To do this effectively, airlines empty, a lost opportunity to generate more revenue.and hotels need to do two things: 1) save a specific numberof rooms or seats for customers who book at the last 2) Fenced – the demand must be yieldable! In otherminute and are willing to pay more and, 2) offer prices to words, a business needs true segmentation withspecific customer segments who are willing to pay more restrictions or incentives that ensure various types ofand can actually be made to pay more, using a combination demand (e.g., business and leisure) cannot or will notof restrictions and incentives. The various segments are easily buy at each other’s price levels.said to be “fenced” where customers in each segmentare typically unwilling to change either their travel or 3) Full – total demand that frequently exceeds availablepurchasing behavior to access the prices available to other capacity. Without this condition there would never besegments. a reason to close out lower price levels.In today’s revenue management science, demand that How do YM systems work when these Three Fs arecan be segmented in this fashion is typically referred to not present? Not very well. A good way to test youras “yieldable” demand. The technique of opening and understanding of these concepts is to imagine scenariosclosing which price points are available for sale — to match where one or more of these elements is not present. Fordemand and supply to maximize revenue — is known as example, a fast food restaurant that’s selling cheeseburgers.a yieldable approach to revenue management. Demand Imagine your reaction if you were told, “I’m sorry, we’re soldis considered yieldable if it is made up of independent, out of K-class, we only have Q-class cheeseburgers availablefenced segments which can be forecasted and priced to tonight.” Cheeseburgers are more or less replenishableseparately, and turned on and off using inventory controls (capacity is not fixed and therefore never full), and theaccording to optimization algorithms based on remaining demand walking in the door would be difficult to fence inseat or room inventory. any meaningful way.In practice, YM systems require a complex, tiered ratestructure that anyone who travels has come to know well. Priceable: Like YM Turned Upside DownWith lower rates come more restrictions and less flexibility. The priceable approach to revenue management (alsoFor example, staying over a Saturday night in exchange commonly known as price optimization) has emerged infor a discounted airfare, or having to show an AAA the last decade as a new lever to help improve revenuemembership and reserve a minimum number of nights in situations where a yieldable model falls short. Recentfor a discounted room rate. These types of restrictions are developments in the hotel industry are a good example.very effective at keeping higher-paying customers fencedoff from the lower rates. In a YM system, rates and rateranges are assigned to inventory classes (also called rate Unlike YM, which emerged initially in the airline industry,classes or buckets). YM software then forecasts demand price optimization originated in the hospitality industry in an environment where yieldable models were falling
  3. 3. Th ought Lea de rship Yieldable RM Priceable RMshort. The hotel rooms pricing model has been dramatically and fences, or cannot be segmented easily, by definitiondisrupted by the growth of online distribution and instant it is said to be only priceable. In other words, withoutprice transparency on the web. Hoteliers have struggled segmentation and fencing, price is the only lever availableto preserve meaningful segmentation over the last to increase revenue. The difference can be neatlydecade, while at the same time the supply of hotel rooms summarized as follows: Yieldable RM matches demandhas consistently outpaced demand. According to Smith with supply by changing which prices are available for sale;Travel Research, average hotel occupancy in the U.S. has priceable RM matches demand with supply by changingbarely averaged above 60 percent in the past 10 years. As the prices.such, the yieldable approach has become less effective atimproving hotel revenue — because a yieldable approach Yieldable RM asks: What’s the most money I can make atworks best when hotels are consistently full. In response these prices?to this trend, several large chains have transitioned fromtraditional yieldable revenue management to price Priceable RM asks: At what prices can I make the mostoptimization solutions — in some cases completely money?replacing YM inventory controls with new systems thatrecommend optimal prices instead. Because optimal pricing is not dependent on capacity constraints, priceable revenue management presents anPrice optimization evolved from the science of price opportunity for businesses that don’t have perishableelasticity estimation — the ability to measure and quantify capacity. Yield management has always appealed narrowlycustomers’ willingness to pay for a product or service. to industries with perishable capacity such as hospitality,Price optimization algorithms take into account historical airlines, car rental, etc., but identifying optimal prices isdemand and historical prices, and in some cases, historical something that should appeal to every business. Industriesand real-time competitor prices using data aggregated that have always assumed revenue management wasfrom Internet shop-set providers. Instead of controlling not for them should take another look, and even hotelsinventory available at existing prices, price optimization and airlines should consider price optimization for non-solutions recommend prices directly, attempting to traditional revenue streams such as baggage fees or retailquantify the price (or prices) that generate maximum items in a hotel.revenue. When demand lacks intelligent segmentation
  4. 4. Th ought Lea de rshipIs price optimization better than yield management? About JDA Software Group, Inc.Not necessarily. Price optimization is arguably the mostsignificant innovation in revenue management in the JDA® Software Group, Inc. (NASDAQ: JDAS), The Supplypast decade, building on yield management and driving Chain Company®, is a leading provider of innovative supplyrevenue upside during times when YM falls short. YM will chain management, merchandising and pricing excellencealways be a very effective lever to improve revenue for solutions. JDA empowers more than 6,000 companies of allindustries in situations where the “Three Fs” are generally sizes to make optimal decisions that improve profitabilitypresent. Moreover, existing yieldable solutions can be and achieve real results in the discrete and processenhanced by adding priceable capabilities to improve manufacturing, wholesale distribution, transportation,revenue during times when capacity exceeds demand, retail and services industries. With an integrated solutionsor to help determine the optimal price structure for yield offering that spans the entire supply chain from materialsmanagement controls. Businesses can leverage both to the consumer, JDA leverages the powerful heritageapproaches as their selling environment dictates. and knowledge capital of acquired market leaders including i2 Technologies®, Manugistics®, E3®, Intactix® and Arthur®. JDA’s multiple service options, delivered viaAbout JDA Pricing and Revenue the JDA® Private Cloud, provide customers with flexibleManagement Group configurations, rapid time-to-value, lower total cost of ownership and 24/7 functional and technical support andJDA Pricing and Revenue Management Group, a global expertise.business unit within JDA Software, is a leading providerof Price Sensitive Revenue Management™ solutions thathelp companies improve profits by balancing supplyand demand through innovative forecasting, pricing andrevenue management. For more than 25 years, companiesin the travel, transportation, hospitality and mediaindustries have benefited from the ongoing innovation Bill Kotrba serves as vice president ofand deep domain expertise from JDA. To learn more about industry strategy in JDA Software’sJDA Pricing and Revenue Management, please visit Pricing and Revenue Managementwww.jda.com/revenuemanagement. Group. He is responsible for overseeing strategic business initiatives for the leisure travel and hospitality industries. www.jda.com | info@jda.com | +1 800 479 7382

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