Yield management is one of the most significant transformations in the travel and tourism industry in the last 50 years. The practice – which has become known as Revenue Management — is a pricing strategy based on understanding, anticipating, and influencing consumer behavior to maximize revenue or profits. It strategically manages inventory to sell the product to the right customer at the right time for the right price.
Revenue Management: Good for Operators and Consumers
Revenue management is as transformational for the travel industry as recent technological advancements like global distribution systems, online booking, and mobile devices and will only continue to become more intelligent and personalized. The capabilities are continuously expanded by technological innovation, which has taken the practice far beyond what would have ever been possible with teams manually anticipating and responding to demand. The sophistication of revenue management serves operators as well as consumers in the long run.
A dynamic pricing strategy specifically, prices each day according to real-time customer demand, with prices rising over time as demand increases for the day. This strategy incentivizes customers to buy now—appealing to their emotional desire for an incredible experience and based on the assumption that prices will increase as the date of the trip or visit approaches. Dynamic pricing is synonymous with yield management in most segments of the travel industry from hotels to tour operators. Most companies today are using this pricing strategy practice to optimize their revenue and make informed decisions around pricing.
Dynamic Pricing Benefits
- Improved, data-driven operations planning
- Increased advance purchase sales and financial predictability
- Increased return on marketing spend
- Opportunities to bundle and upsell beyond admission
- Increased in-park spend
- Improved customer experience
- Overall revenue growth
To understand where revenue management is going in the future, and how it will continue to transform travel and tourism businesses, it's important to understand how and why it came about in the first place.
A Short History of Revenue Management
Revenue management originated in the aviation industry to help airlines maximize revenue.
The first instance of yield management occurred in 1972 when British Airways executives proposed a rule that discount fares could be offered if their total revenue value exceeded the expected revenue of full-fare tickets due to higher sales volume. However, former American Airlines CEO and Chairman Robert Crandall is formally credited with pioneering the practice of increasing revenues through analytics-driven inventory control.
Under his guidance, aviation leadership invested heavily in forecasting, inventory control, and overbooking capabilities. This strategy was confined to the aviation industry for nearly a decade until car rental company Hertz entered the market in the early 1980s.
This new interest in forecasting and inventory control coincided with the aviation industry’s biggest change in its existence: the 1978 Airline Deregulation Act which removed federal control over areas such as fares, routes, and market entry of new airlines. This marked a major shift from U.S. airlines being regulated as a public utility to being part of a free market system.
As a consequence of deregulation, low-fare, low-cost airlines grew rapidly and charged even less than America Airlines' lowest fares. Major carriers faced challenges from this new competition and a mild recession. American Airlines responded by investing millions in next-gen capabilities, which they named ‘Dynamic Inventory Optimization and Maintenance Optimizer’ (DINAMO). American Airlines then announced its Ultimate Super Saver fares in 1985, which were priced even lower than those of discount airlines like People Express. Chicago Tribune’s 1985 article on the news.
American Airlines Ultimate Super Saver fares had to be purchased at least 30 days in advance and were available for only around one-third of American Airlines seats on most flights at that time. Once purchased, 25% of the price became non-refundable. American Airlines used these rates in situations where they had a surplus of empty seats. Analysts, as well as the yield management system, continuously reevaluated the placement of the lower-priced inventory to maximize their use.
In the coming years, American Airlines' profits grew 40% using revenue management strategies such as this to combat market competition. Crandall had given yield management its name and called it ‘the most important technical development in transportation management since we entered deregulation.’
Crandall is also responsible for sharing the technique with operators outside of aviation. He discussed his success with yield management with Marriott International founder and then-CEO Bill Marriott which would subsequently revolutionize pricing strategy within the hospitality industry.
The first yield management-related article connecting this aviation practice to the hotel industry appeared in the 1988 edition of the Cornell Hospitality Quarterly. With its new application, a new name also arose – the term ‘yield management’ transformed into ‘revenue management.’
Marriott had many of the same issues as airlines: perishable inventory, consumers not booking in advance, lower cost competition, and wide swings regarding the balance of supply and demand.
Marriott created a revenue management team and invested in automated systems that would provide daily forecasts of demand as well as make inventory recommendations for each of its 100,000+ rooms. As brands adopted the practice of “fenced rate logic” similar to airlines, they began to offer targeted discounts to price-sensitive market segments based on demand. To address the additional complexity created by variable length of stay, Marriott built a demand forecasting system to forecast guests’ booking patterns and optimize room availability by length of stay.
In less than a decade, by the mid-1990s, Marriotts’ successful execution of revenue management was adding between $150M – $200M to the company’s annual revenue.
While aviation and hospitality led the way for revenue management, the strategy would soon be adopted by most travel operators from third-party booking platforms and theme parks to concerts and cruise ships.
How Revenue Management Evolved in Each Industry
Aviation: The impact of the 1978 Deregulation Act and dynamic pricing has transformed the airline industry. Passengers around the world now search for tickets with the knowledge that different seats, different routes, and purchase dates will all impact price. Airlines continued to employ tiered packages that allow consumers to either save by selecting only their seats or upgrade with the addition of meals, early boarding, and specific seat selection. What was once novel has become commonplace and airlines’ profits have grown significantly in the decades since these practices were introduced.
One major difference for hotels today is that they do not have the same constraints around supply as airlines. While there will only ever be a set number of seats flown on a specific route each day, there is much more elasticity when it comes to room supply in a specific market, especially when one considers short-term rentals in addition to hotels. Supply elasticity makes revenue management more challenging and interesting for hospitality operators.
Hotels today have access to several demand management tools that allow them to dynamically price tickets across a broad selection of digital sales channels, from direct bookings on their branded sites to third-party platforms such as online travel agencies (OTAs). Operators can adjust prices by season, location, and specific events that drive up demand across all platforms.
Amusement Parks, Water Parks, Mountain & Ski Resorts: The world’s largest theme park operators Walt Disney World and Disneyland were two of the first tours and attractions businesses to adopt more sophisticated variable pricing models and move in the direction of dynamic pricing. After historically setting one admission price for every day of the year, Disney introduced variable pricing in 2016 and started charging different prices for admission on different days of the year. Six Flags Entertainment Corp. is another major theme park business–with 18 locations in North America–that implemented a form of variable pricing as early as 2012.
Today, it is common practice for theme parks and ski resorts to use dynamic pricing to optimize revenues through the sale of dynamically priced packages and day passes depending on season and consumer demand. In comparison to airlines, a dynamic pricing strategy used to incentivize advanced purchases is considered even more important to industries like theme parks and ski resorts due to a lack of capacity constraints. While people generally buy airline tickets in advance to avoid the sell-out risk, they are not always as motivated to purchase resort or park tickets far in advance. Therefore, pricing strategy is critical to encourage advance purchases.
Other Ticketed Attractions: Sporting events, concerts, and other ticketed attractions from bus tours to ziplining operators have come around to the power of dynamic pricing. Consumers are more familiar with dynamic pricing than in the past and have internalized the theory that buying early often results in savings. Operators can emphasize this practice through marketing messages and through their digital strategy to encourage consumers to buy early and save, which results in advanced purchases as well as optimized operational planning.
The Future of Yield Management
The revenue management teams best positioned for today and tomorrow are those that invest in smart, automated technology to help manage their pricing strategies and partner with companies experienced in revenue management. Systems that allow for automated price movements not only limit manual work from teams but also ensure that prices advance in real time to maximize revenue.
Real-time, action-oriented dashboards that can be used by people at all levels of the organization from pricing analysts to marketing leaders to the C-suite will ensure that information flows to decision-makers in real time.
Forward-thinking leaders will build on the innovations made possible by leaders like Robert Crandall, Bill Marriott, and Rich Barton to access digital platforms that optimize pricing as well as provide an e-commerce platform for resorts, parks, and attractions around the world.
Not only does this technology assist teams in making intelligent pricing decisions – it empowers customers to purchase tickets easily online at their convenience, helping increase advanced-purchase ticket sales and maximize conversion rates to deliver predictable revenue. The ability to forecast staffing, food and beverage needs, and streamline other operational tasks helps businesses deliver a better customer experience while managing operating costs.
To learn more about how Spotlio’s Pricing as a Service (PaaS) and Cloudstore products can benefit your business, schedule a demo today.
To learn more about how Spotlio's products can benefit your business, schedule a demo today.
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