Kimes Sheryl E. and Chase Richard B.
Journal of Service Research
The previous articles of Sheryl Kimes I analyzed focused on mathematical and tactical approach to Revenue Management. Therefore, when I found an article that shows more managerial application I decided to read it.
The central part of this article is recognition of how different combinations of pricing and duration can be used as strategic levers to position service firms in the market and how to use those levers to achieve strategic advantage. Moreover, the authors state that yield management (revenue management) should have a broader definition so other service industries could gain the benefits of yield management thinking.
Standard Yield Management definition is the application of information systems and pricing strategies to offer the right product, to right customers at the right price. So basically the most important variables are: time-perishable capacity (which is segmented to time when was booked), the duration and the type of customer. The authors expanded this definition to:
Yield Management is managing 4 Cs of perishable service: calendar (how far in advance reservations are made), clock (the time of day service is offered), capacity (the inventory of service resources) and cost (the price of the service) to manage a fifth C, customer demand, in such a way as to maximize profitability.
Business have two primary interrelated strategies to effectively control customer demand:
- Variable pricing – which can take form of discount prices at off-peak hours for all customers (or for special group), such as lower weekday rates in compare to weekend ones
- Fixed pricing – is pretty straight-forward and appears where the prices don’t change regarding of time or class of customer
- Predictable or
Different industries use different combination of price and duration. following matrix show most popular.
Because predictable duration enables clear delineation of service portfolio, and variable pricing enables generating maximum revenue, the industries in second Quadrant can benefits the most from Yield Management. However, industries from quadrants 1, 3 and 4 can achieve some of the revenue gains by using some specific tools that will enable them to manipulate duration and price.
If managers want to increase control over duration they can:
- Refine the definition of duration - the duration might be measured in terms of time or event. However, controlling the second term is much more difficult therefore, industries should focus on the first one. An example of refining definition of duration might be Sheraton Hotels that allows customers to check in and out not in the standard time by any time of the day. By such a tactic they improved customer satisfaction, made better use of capacity and increased revenue.
- Reduce the uncertainty of arrival - because fixed capacity industries have perishable inventory they need to secure their selves from no – shows and late arrivals. They can do it:
- Internally – by overbooking models e.g. Markovian decision process, simulation approaches, service-level approaches or critical fractile method.
- Externally – shift the responsibility to customers by e.g. deposit policies or cancellations penalties.
- Reduce the uncertainty of duration - to better gauge capacity requirements and hence make better decisions as to which reservation accepts. They can do it:
- Internally – by accurate forecasting of length of use and number of late and early arrivals.
- Externally – by deposits and penalties, however, they might harm the company in long term .
- Reduce the amount of time between customers - so more customers can be served between the working hours. It can be managed by systems that e.g. notify waitress that the bill was paid or decreasing time of turnarounds of aircrafts. However, in case of delay of one process, the others can be delayed if the slack time is limited.
On the other hand, if managers want to change the pricing into more variable without harming the relation with customer, they can use on of following mechanisms to do so:
- Proper price mix - basically it means that price differentiation should reflect the customer’s expectations. Unfortunately, determining the right price mix is difficult as management has often little information about price elasticity which is crucial. One way of addressing this issue is using optimal pricing policies, where customers are asked to name the prices that they would consider cheap, expensive, to cheap to have reasonable quality and too expensive to be considered.
- Rate fences - are basically an official logic that companies apply to their pricing decision. Usual logic is regard to when the service is booked or consumed. Rate fences can be divided into:
- Physical – such as room type, view from the room, seat type, table location etc. They can also have a form of additional meditates such as: free golf cart, free breakfast or soft drink in movie theater.
- Non-physical – are used to shift demand from peak periods to slower ones. They can have form of: cancellation or change penalties, benefits based on where the reservation was booked, desired service duration, group membership or affiliation and time of use.
The last part of this article are the recommendations for different types of industries how to use strategic levers described in this article to achieve benefits from yield management.
Differential Pricing (Q1 -> Q2)
Movie theaters should apply the variable pricing based on seat location, time of show and access to amenities. Good thing is that European cinemas already used such practices, now this is time for US ones. The big challenge for movie theaters is to develop the overbooking methods.
Control Duration (Q3 -> Q1)
Golf courses have unfortunate to traditionally charge fixed amount for event of usually unknown duration. The authors proposed that golfers will run between holes and receive two scores, elapsed time and stroke count at the end of each round. However, I believe that this is the most ridiculous idea I read in Sheryl’s articles and completely out of touch with golfers’ reality. Better idea, would be deposit policy or some kind of overbooking. Although, the golf society is more eccentric than any other customers therefore it could harm the high-end courses. I believe that the best idea to decrease the time between service would be provision of free golf carts so players will move easily and fastly between holes.
Control Duration (Q4 -> Q2)
Health care use differential pricing but have problems with managing duration. The best idea would be accurate forecast of how long the patients will be using beds or rooms, however, the health care cannot be treated as any other business because of its importance. Putting penalties fees on customers whose health worsen would be immoral and could harm the image of hospital. Other ideas (less immoral) would be designing a mix of private-pay and Medicare patients.
Differential Pricing (Q3 -> Q4)
Internet service providers use some kind of overbooking, because customers use internet in different times and with different load. Therefore companies can sign more agreement than it is the capacity of network, however, it also cause problems at peak hours when too many customers using it at the same time. Common practice nowadays is to differentiate pricing not by usage (as it was in the past) but by speed of connection. Different customers need different speed and moreover it is easy to create different plans and fence rates.
This article explained how the strategic levers in yield management works and how we can use it in industries like: movie theaters, golf courses, health care or internet providers. I really like the practical approach and many examples to explain theoretical concepts. I would strongly recommend reading the whole article for all that want to apply yield management benefits in their industry.
Author: Mateusz Konopelski
Kimes, S. E., Chase R. B.’The Strategic Levers Of Yield Management’. Journal of Service Research 1.2 (1998): 156-166.