The birth of the first venture under the strict concept of Yield Management was the basis and inspiration for every new idea that was later transformed into a real business.
The adoption of the Yield Management concept to the furthest extent surged EasyJet to the fourth European Airline Company to date.
However, the success of the firstling of the group hasn’t rehearsed among all others Stelio’s group new ventures, at least so far.
What Easy companies seek to offer to its clients is the lowest price for its products or services based on “no added frills”. The companies envisage in each of its product or service the basics that each customer would be satisfied of knowing he is not paying for what he doesn’t worth and he doesn’t want to pay for. The technological platform leads all operation process to work electronically, with the minimum human intervention. It is an e-business model to its extent which surpasses conceivable use of internet by dealing many products and services which seemed not practicable before easy companies brought it up to the market.
Stelio at London easyHotel launch, 2005
The Yield Management
Yield management is a Methodology to optimize/maximize the revenue earned from a fixed, perishable resource by understanding, anticipating and reacting to consumer behavior. The main goal is to sell the right resources to the right customer at the right time.
Yield management implements the basic principles of supply and demand economics in an intelligent and focused way to generate additional revenues.
There are four essential conditions for revenue management to be applicable:
1) That there is a fixed amount of resources available for sale.
2) That the resources sold are perishable. This means that there is a time limit to selling the resources, after which they cease to be of value.
3) That different customers are willing to pay a different price for using the same amount of resources.
4) Also is important to have direct access to consumers. The sales through intermediaries or wholesalers makes the process much harder to understand demand and often impossible to control and vary price.
Yield management is often applied through a computer system which process mathematics models of simulation and prediction of trends and it is particularly suitable for dealing with perishable products, i.e. goods that become unsellable at a point in time (for example air tickets just after a flight takes off). Industries that use yield management include airlines, hotels, stadiums and other venues with a fixed number of seats, and advertising. Applying the model an advance forecast of demand and pricing flexibility, buyers will benefit of the price sensitivity by using more power in off-peak demand or by purchasing with considerable anticipation. Customer’s demand affects the final price; early morning flights will have higher cost as well as weekend’s theatre seats. Internet has become the greatest instrument to facilitate this process.
Synthesizing, Yield management is a process of knowing, comprehending, anticipating and reacting to the trends of demand in order to maximize revenues and/or occupancy.
Benefits of the use of Yield management methodology
As previously mentioned, internet has been the greatest facilitator to spread out the benefits of Yield management methodology.
Customers have reached a powerful ability to manage its own profile of consuming. The same person can act as a conscious money saver when plan his vacation trip by searching the best deals offered by Yield management applying companies in flights, hotels, car rentals, stadiums or theatre seats or when he is living his regular days as a businessman who is not concerned on paying more for a seat when booking late.
In the case of EasyJet customers they are all aware that they will not have free meals or any other “frills” which raise tickets prices to a level unfair regarding these “frills” may be considered unworthy to them.
Having a look from EasyJet side which built its business on the Internet, the benefits are enormous: It books 95 percent of its tickets over the Web. It never issues paper tickets, and runs an almost paperless office to boot. EasyJet has also never served a free in-flight meal, which is one reason its jets turnaround times average about 30 minutes, among the best in the business. As Yield management is a computing intensive system working on behalf of the company its anticipate demand and maximize pricing and seat occupancy to get the most revenue out of every flight.
However, the Easy managers are still learning how best to adapt yield-management techniques to new ventures. As an example, EasyInternetCafe stretched its Web Cafes from Europe to US having the world’s largest LAN house opened its doors offering 800 computers but no amount of yield-management sorcery could keep them occupied. The venture lost an estimated $150 million from 2000 to 2003. In face of this bad results, Stelio brought in to the company an internet expert who set up partnerships enabling Easy to put about 20 terminals each in dozens of Burger King, McDonald's, and Subway outlets all over western Europe; last year the Internet cafe business made a modest profit, and it is now expanding into eastern Europe.
This ability of simulation and prediction provided by the cited methodology also enable the company to better plan its demands with its suppliers. Nonetheless, intermediaries are forcedly excluded from this game.
Interactive relationship provided by e-technology platforms is a key factor for the success of the implemented strategy aiming increasing sales and enhancing profits. Companies which have implemented the Yield management system saw its turnover increasing as much as 10% although a number around 4% is more often achieved while profits can raise 50 to 100% without any increase cost.
Benefits for customers
The variety of client groups that can benefit themselves from the Yield management system can’t be smaller than almost the totality of customers spread out worldwide. Everyone who is willing to consume any good or product can make use of this tool to optimize prices they will pay for its purchase.
Cultural changes are in process and will enhance ability of customers to adopt new attitude to pricing what they want to buy.
The use of Yield management tended to be limited to larger companies that can afford expensive software to analyze patterns of demand and alter prices accordingly. Smaller companies need to insert themselves into this new world of techniques and tactics as they don’t have competitiveness in comparison with who carries known brands worldwide.
In fact, many small companies already do use Yield management techniques intuitively. "Market traders do it when they sell off fruit cheap at the end of the day or when they drop prices because the weather is poor," explains David Molian, co-director of Credo, the small business unit at Cranfield Business School. "Fashion and technology retailers do it when they charge a premium for the very latest designs. I see no reason why window cleaners and other service providers shouldn't at least consider doing the same."
Our culture has a history of having one publicly announced price for goods and services. YM involves having many prices, often subsidizing ridiculously low prices with ludicrously high prices. This cultural consuming changing is the drive which will enlarge the benefits of the YM to any kind of groups of consumers.
It is a powerful tool that must be profited by everyone. Revenues for companies and money savings for customers can be come from many sorts of products, as long as they carry the 4 essential conditions previously mentioned ( fixed amount of resources available for sale; resources being perishable; different customers willing to pay different prices for the same products and no intermediaries between sellers and buyers).
The basics for revenues increasing is to sell cheaply when the demand would be, in past times, lower and raise the prices following the demand movement.
Nevertheless, companies ought to understand their customers intimately. For instance, airline companies should not set its early prices so low that it would fill the plane with people paying peanuts or when it comes to peak demand set the prices so high that people refuse to travel. “Get it right and it can transform your business. Get it wrong and it could put you out of business” states Molian.
The model application
Despite the fact Yield management have been created by airline industry as a consequence of deregulation of its industry by early 1980s and developed to attend its needs to increase and optimize airline seats occupancy (and profits, of course), the model shows to be applicable to many different products or services. The system got its development in parallel with the implementation of GDS -Global Distribution Systems (Sabre, Apollo, System One). This system allowed airline companies to have direct access to thousands travel agents worldwide online.
Nowadays, it’s clear that the use of Yield management can be used off line as well, even for small and non systematized companies of any size or business scale. As an example cited above, even an open air market’s fruit and vegetable trader can apply YM by understanding his customers, their consumption trend and the perishability of his products.
easyHotel
As the mathematical algorithms required by Forecasting & Optimization used by Yield Management Solutions are highly complex, there are only a handful of companies who can provide such technology today. Existing Systems require intensive consulting and necessitate months of data collection before being fully operational for their use by YM specialists within the operation.
easyHotel is one of the several companies part of the easyGroup which uses Yield management in order to optimize its prices and room occupancy.
Hospitality industry is quite similar to airline and car rental industry on the matters related to simulation and prediction that Yield management mathematics algorithms system can calculate.
easyHotel likewise it sister company easyJet has adopted YM to its further extent which allows management team to:
- Increase revenue by maximizing occupancy and protecting rates when necessary
- To have access to accurate statistical reports both future, current and historical
- Detailed demand forecasting information to help with sales and marketing initiatives
- Competitor analysis on both the internet and GDS to help react to market influences
- Group analysis to help evaluate the impact group reservations have on occupancy and therefore revenue
- Series analysis which assess the impact a tour series contract will have on your property
- Access to reports and real time information on a group wide basis for Head Office personnel
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