Understanding Yield Management – Everything You Need to Know

A popular misconception is that yield management is a practice exclusively applied in the airline industry. In fact, any business – from an e-commerce site to a hotel chain to a manufacturing operation, can take advantage of yield management concepts, applications, and tools.

All businesses face similar challenges in managing their capacity; they seek to maximize revenue, minimize costs, and avoid overbooking. Yield management is the process of managing the business’s revenue, costs, and overbooking, with the goal being to maximize profits.

In this article, we will explore the basics of yield management and models, strategies, and applications.

How Do Businesses Maximize Revenues?

The basis is simple: sell more goods or services than you have available. In other words, overbook! In doing so, the business increases its probability of selling out all its inventory, maximizing revenue from that resource. The most common example of this is booking a hotel room for an upcoming vacation. The goal of the travel agent (and the hotel) is to maximize occupancy and revenue by selling as many rooms as possible, even if that means occasionally overbooking.

Yield management takes this same philosophy but applies it to an entire operation or business segments – such as airlines, manufacturing operations, or even the fast-food restaurant down the street.

Yield management is the application of overbooking to an entire business. It is a process that provides overall direction for maximizing profit while at the same time attempting to ensure adequate demand, utilization, and profitability of products and services. It’s about optimizing every resource by identifying its potential profit contribution for each operation or segment to maximize profit while meeting customer demands. Yield management is an integral part of any business or operation; it can be utilized by all businesses, regardless of the industry.