Revenue Management Series Part 1: Yield Management

Published on
May 25, 2022

This is part of our Revenue Management series. Read our Introduction to Revenue Management, Part 2, Part 3, Part 4 and Part 5.

What we’re talking about here is simple supply and demand.

You have lots of eager customers but only so many tickets (or seats, or shows, or whatever!) The product may look different depending on your business vertical, but in any case, this is your inventory. Your goal is to sell your inventory at the most profitable price point that meets the demand of your customers.

The options are either to set up a standard first-come-first-served system at your base price, or with your margins in mind, you can run tests on your pricing to find your sweet spot. Ideally you’ll create a kind of bidding war for the available inventory.

This is yield management, otherwise described as a variable pricing strategy. It is aimed at maximizing revenue from a fixed, time-limited resource.

“Price is what you pay. Value is what you get.” — Warren Buffett, Berkshire Hathaway

Large hotel operators are highly effective at this, and describe it as a delicate balance:

Yield management is a tug-of-war of sorts between price and quantity. Set your rates too high, demand drops, bookings slow, and occupancy sinks. Set your rates too low and you sacrifice revenue for volume, potentially pushing demand beyond your ability to supply it. that’s a bad place to be, as it not only pushes demand to your competitors but also increases the strain on your staff.

Let’s examine the key components of an effective Yield Management Strategy.

Dynamic Pricing — Fixed, Time-Limited Resource

When a ticket for a flight you’ve been watching shoots up in price near the flight date, or your ride home in an Uber is suddenly much more expensive during rush hour – you are experiencing a variable pricing model, commonly referred to as dynamic pricing.

Customers are willing to pay more for highly sought-after inventory, which allows operators to capture additional profit. Variable pricing strategies are all about scarcity. In order to charge more, customers must be competing against one another for a finite good or service.

For instance, a restaurant has only so many seats on their patio for a Friday night in the summer. The restaurant is in a great position to start a price discovery process to uncover just how much the market will pay for their most popular timeslots.

It’s up to you to learn your customers’ habits. We see that generally tours sell most of their tickets in the 72 hours leading up to the departure time.

With this in mind, and the tools available, you can set customized price rules where tickets in the month leading up to departure are set at your regular base rate.

As demand increases, you can increase rates and improve your margins per ticket and revenue per customer. And depending on how sales have gone, you can take advantage of the final days and hours of ticket sales by increasing the urgency to buy.

There are a number of ways to do this. One popular solution is showing that there are only so many tickets left available. Setting a timer on the ticket purchase process is another way to secure that ticket sale.

On the other hand, if sales are slow and you have plenty of seats left to sell, you can increase demand by running a last-minute promotion and price drop.

It’s common practice among the most popular types of ticket sales to hold some back from the general inventory and release them just hours before the event to capitalize on last-minute and impulse buying.

As you run more tests on your pricing, you’ll begin to learn more about your customers and how they buy.

Tours of all types - be they by boat, ferry, plane, car, bus or helicopter - satisfy these conditions nicely. A fixed capacity of seating with a set time of departure is a great place to begin a price discovery process.

Buyer Psychology

Finally, the demand for your product must be such that customers will step outside of a purely rational buying decision when purchasing. It is not economically rational to buy a Ferrari for transportation purposes, but many people dream of owning one for emotional reasons.

It could be the prestige of ownership, it could be for the thrill of driving at ridiculous speeds, or it could simply be because the neighbor has one too. People make logical and rational buying decisions - except for when they’re making emotional decisions.

Tickets to a tour or attraction fall into the latter category. On any given day you have parents looking to create a lifetime memory with their kids, an affluent group of business associates looking to impress a client in a new city, a nervous man preparing to propose to his girlfriend (and lining up a perfect picture for their Insta).

Your role as a tour operator is to facilitate these moments. You may be surprised how much some folks are willing to pay for them when an emotional decision is compounded by a sense of urgency to grab the last available tickets.

And now that rationality is out the window, it’s time to really show your customers that they will never have an experience like yours.

In addition to adding urgency to the sale, you can look for ways to add to the value of their visit. Once they’ve committed to purchasing your ticket, you want to make sure they really get their money’s worth.

Upselling food and beverage packages, valet parking, photos and gift shop items that they can pick up on the day of their visit are all ways to increase the average spend of each customer, while also giving them the best possible experience.

This is where the advantage of an all-in-one ticketing, retail, and business operations system such as RocketRez can work to your advantage. Detailed revenue reports and insights will show you the complete customer journey of each visitor who books with you.

You might discover that your customers on average spend more on-site when they’ve purchased their tickets further in advance, or that lower priced tickets don’t get purchased until closer to the day of the event.

Business insights are essential to successfully optimizing your revenue management.

Management Questions to Consider

To capture the most value from a Yield Management strategy you need an idea of the factors that influence demand in your business, which is about knowing and segmenting your customers. A few questions to consider:

  • Is your pricing strategy premium or economy?
  • What is your break-even volume?
  • Do people tend to book at the last minute?
  • Are your customers families, couples, corporate groups, or something else?
  • How affluent are they?
  • How frequent do they visit?
  • How cyclical is your business? What are your peak, trough, and shoulder seasons? Does your data show any interesting spikes in demand unexplained by cyclicality?

We recommend taking the time to examine your data to set a baseline of revenue performance across your highest demand periods. From there, you can begin experimentation with variable pricing.

“We want to become part of the decision-making tree for families to come to Maui. If we do things right, they will visit our brand several times before they physically come here. Since we know people spend an average time here of 7.82 days, I want them to visit the first or second day, and it will set the tone for their entire visit. We have a high rate of return visitors.” – Tapani Vuori, General Manager of Maui Ocean Center
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Matt Lederman

Matt Lederman is the Marketing Manager at RocketRez.

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