This document discusses the differences between yieldable and priceable approaches to revenue management. [1] Yieldable revenue management originated in the airline industry and focuses on controlling inventory levels and pricing tiers to maximize revenue. [2] Priceable revenue management emerged more recently and focuses on analyzing price elasticity and recommending optimal prices. [3] Both approaches can be used together, as yieldable works best when capacity is constrained while priceable is useful when demand is less segmented.
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Yieldable versus Priceable: What Does it Mean and Who Cares
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Yieldable 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
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revenue-maximizing approach that is differentiated from for each inventory class — which ideally corresponds
newer approaches (i.e., priceable) that have emerged in to fenced segments at increasing price points — and
recent 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. Automated
Yield management (YM) originated in the newly inventory controls can be set in advance to open and
deregulated airline industry in the early 1980s. Since then, close specific pre-existing prices in anticipation of strong
YM has permeated the airline industry DNA such that or weak demand in each segment according to a demand
the language and technique of YM affects the customer forecast — and then adjusted daily in response to demand
experience in ways the carriers probably never intended. that materializes better or worse than the forecast in each
For example, recently when I called an airline to change my segment.
travel plans, I was calmly told, “In addition to the change
fee, 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 is
closed. Your new ticket will be in Q class.” Q class? The only Fixed, Fenced and Full
reason I know what that means is because I worked in
In order for YM — a yieldable approach — to truly be an
airline 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 or
fill with bookings in the weeks or days leading up to a
seats that aren’t used will be spoiled when they go
departure 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 number
of rooms or seats for customers who book at the last
2) Fenced – the demand must be yieldable! In other
minute and are willing to pay more and, 2) offer prices to
words, a business needs true segmentation with
specific customer segments who are willing to pay more
restrictions or incentives that ensure various types of
and can actually be made to pay more, using a combination
demand (e.g., business and leisure) cannot or will not
of restrictions and incentives. The various segments are
easily buy at each other’s price levels.
said to be “fenced” where customers in each segment
are typically unwilling to change either their travel or
3) Full – total demand that frequently exceeds available
purchasing behavior to access the prices available to other
capacity. Without this condition there would never be
segments.
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 are
can be segmented in this fashion is typically referred to
not present? Not very well. A good way to test your
as “yieldable” demand. The technique of opening and
understanding of these concepts is to imagine scenarios
closing which price points are available for sale — to match
where one or more of these elements is not present. For
demand 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 sold
is considered yieldable if it is made up of independent,
out of K-class, we only have Q-class cheeseburgers available
fenced segments which can be forecasted and priced to
tonight.” Cheeseburgers are more or less replenishable
separately, and turned on and off using inventory controls
(capacity is not fixed and therefore never full), and the
according to optimization algorithms based on remaining
demand walking in the door would be difficult to fence in
seat or room inventory.
any meaningful way.
In practice, YM systems require a complex, tiered rate
structure that anyone who travels has come to know well. Priceable: Like YM Turned Upside Down
With lower rates come more restrictions and less flexibility.
The priceable approach to revenue management (also
For example, staying over a Saturday night in exchange
commonly known as price optimization) has emerged in
for a discounted airfare, or having to show an AAA
the last decade as a new lever to help improve revenue
membership and reserve a minimum number of nights
in situations where a yieldable model falls short. Recent
for 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 fenced
off from the lower rates. In a YM system, rates and rate
ranges 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
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Yieldable RM
Priceable RM
short. The hotel rooms pricing model has been dramatically and fences, or cannot be segmented easily, by definition
disrupted by the growth of online distribution and instant it is said to be only priceable. In other words, without
price transparency on the web. Hoteliers have struggled segmentation and fencing, price is the only lever available
to preserve meaningful segmentation over the last to increase revenue. The difference can be neatly
decade, while at the same time the supply of hotel rooms summarized as follows: Yieldable RM matches demand
has 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 changing
barely averaged above 60 percent in the past 10 years. As the prices.
such, the yieldable approach has become less effective at
improving hotel revenue — because a yieldable approach Yieldable RM asks: What’s the most money I can make at
works best when hotels are consistently full. In response these prices?
to this trend, several large chains have transitioned from
traditional yieldable revenue management to price Priceable RM asks: At what prices can I make the most
optimization solutions — in some cases completely money?
replacing YM inventory controls with new systems that
recommend optimal prices instead. Because optimal pricing is not dependent on capacity
constraints, priceable revenue management presents an
Price optimization evolved from the science of price opportunity for businesses that don’t have perishable
elasticity estimation — the ability to measure and quantify capacity. Yield management has always appealed narrowly
customers’ 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 is
demand and historical prices, and in some cases, historical something that should appeal to every business. Industries
and real-time competitor prices using data aggregated that have always assumed revenue management was
from Internet shop-set providers. Instead of controlling not for them should take another look, and even hotels
inventory 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 retail
quantify the price (or prices) that generate maximum items in a hotel.
revenue. When demand lacks intelligent segmentation
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Is price optimization better than yield management? About JDA Software Group, Inc.
Not necessarily. Price optimization is arguably the most
significant innovation in revenue management in the JDA® Software Group, Inc. (NASDAQ: JDAS), The Supply
past decade, building on yield management and driving Chain Company®, is a leading provider of innovative supply
revenue upside during times when YM falls short. YM will chain management, merchandising and pricing excellence
always be a very effective lever to improve revenue for solutions. JDA empowers more than 6,000 companies of all
industries in situations where the “Three Fs” are generally sizes to make optimal decisions that improve profitability
present. Moreover, existing yieldable solutions can be and achieve real results in the discrete and process
enhanced by adding priceable capabilities to improve manufacturing, wholesale distribution, transportation,
revenue during times when capacity exceeds demand, retail and services industries. With an integrated solutions
or to help determine the optimal price structure for yield offering that spans the entire supply chain from materials
management controls. Businesses can leverage both to the consumer, JDA leverages the powerful heritage
approaches 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 via
About JDA Pricing and Revenue the JDA® Private Cloud, provide customers with flexible
Management Group configurations, rapid time-to-value, lower total cost of
ownership and 24/7 functional and technical support and
JDA Pricing and Revenue Management Group, a global expertise.
business unit within JDA Software, is a leading provider
of Price Sensitive Revenue Management™ solutions that
help companies improve profits by balancing supply
and demand through innovative forecasting, pricing and
revenue management. For more than 25 years, companies
in the travel, transportation, hospitality and media
industries have benefited from the ongoing innovation Bill Kotrba serves as vice president of
and deep domain expertise from JDA. To learn more about industry strategy in JDA Software’s
JDA Pricing and Revenue Management, please visit Pricing and Revenue Management
www.jda.com/revenuemanagement. Group. He is responsible for
overseeing strategic business
initiatives for the leisure travel and
hospitality industries.
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