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 better known as Revenue Management — is a pricing strategy based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits. It strategically manages inventory in order to sell the product to the right customer at the right time for the right price.
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. Its 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 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 practice to optimize their revenue and make informed decisions around pricing.
Dynamic pricing has a cascade of benefits including:
- 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 is important to first 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 sale volume. However, it is former American Airlines CEO and Chairman Robert Crandall who 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 American’s lowest fares. Major carriers faced challenges from this new competition as well as a mild recession. American responded by investing millions in next-gen capabilities, which they named ‘Dynamic Inventory Optimization and Maintenance Optimizer’ (DINAMO). American 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’s Ultimate Super Saver fares had to be purchased at least 30 days in advance and were available for only around one-third of American’s seats on most flights at the time. Once purchased, 25 percent of the price became non-refundable. American 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’s profits grew 40 percent 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 hospitality..
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.
Let’s see how revenue management has evolved in each of these categories:
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 date will all impact price. Airlines continued to employ tiered packages that allow consumers to either save by selecting only their seat 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.
Hospitality: 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 a number of 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 OTAs. Operators can adjust prices by season, location, and specific events that drive up demand across all platforms.
Theme Parks, 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 demand. In comparison to airlines, a dynamic pricing strategy used to incentivize advanced purchase 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.
How COVID-19 Reset Revenue Management
Revenue management had come a long way since its inception in the 1970s when pandemic-related travel bans brought the industry to a halt and most operators faced the biggest challenge of their existence. The pandemic rendered the typical reference points used in revenue management, such as historical booking patterns and trends, meaningless.
Neither automated tools nor analysts could make reliable recommendations.
The article ‘The Great Reset for Revenue Management in Travel’ published by the Boston Consulting Group outlined how revenue management logic and systems reset overnight:
- Historical price elasticities became misleading since the data underpinning them came from an industry that no longer existed.
- Analysts often optimize prices with a bias toward volume. If applied during the height of COVID-19’s impact, this practice would have triggered a race to the bottom that would harm revenue and price positions even more.
- Algorithms used by revenue management tools drop prices when demand drops in order to stimulate demand. That is pointless when there is no demand to stimulate.
Players across the travel industry including airlines, cruise lines, hotels, railways, car rental companies, and tour operators were tasked with setting prices and generating revenue from scratch.
In the short term, the best crisis strategy included putting emergency policies in place that overrode the revenue management system, communicating regularly with customers, and adopting generous policies for cancellations and refunds.
Although it was impossible to predict how the market would react to the sweeping travel bans put in place in Spring of 2020, travel is back and stronger than ever in 2022. Travel companies across the board have had to reset their pricing strategy following an unprecedented global event.
The best way to “start over” required leadership to analyze contextual data including government regulations, customer sentiment, macroeconomic trends, and internet search trends to create a top-down approach from scratch. These companies needed a new set of price elasticities, which they likely found by testing hypotheses around which prices help stimulate demand.
Although many operators have had to rethink their strategy, it is still valuable and advantageous to work with a software provider whose technology and team can provide rich historical data sets as well as assist with on-the-fly adjustments and post-pandemic predictions. As demand returns, as seen in summer of 2022, a partner such as Catalate is able to track trends in real-time and provide the insights needed to set a dynamic pricing strategy that reflects the market. There’s never been a smarter time to invest in a pricing partner.
The Future of Yield Management
Amidst so much change, 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, F&B needs, and streamline other operational tasks helps businesses deliver a better customer experience while managing operating costs.
To learn more about how Catalate’s Pricing as a Service (PaaS) and Cloud Store products can benefit your business, schedule a demo today.
Catalate is a global pricing and e-commerce company empowering ski resorts, parks, and attractions to increase online revenue. As the only purpose-built ticketing platform for the industry, Catalate has developed successful strategies for hundreds of Partners across $1 billion in online sales.