Yield Management
Lufthansa Cargo
1
Pricing Cleverly? The Airline Industry
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
2
Demand Volatility – The Toy Industry
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
3
Nature of Demand for Services
• Demand uncertainty
– Products
• Economic conditions
• Competition
• Human behaviors
– Services
• Perishability
• Simultaneity
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
4
Capacity Management
• Where is the constraint?
– people (time, labor)
– equipment
– processes
• Adapting capacity
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–
–
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add people, equipment
improve productivity
modify processes (front office, back office)
operational changes
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
5
Demand Management
• What drives demand?
– predictable components
– stochastic component
• What drives revenue?
– segmentation (consumer profitability)
• What drives costs?
– fixed
– variable
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
6
The Theory underlying Yield Management
• Standard price discrimination: groups with different demand curves
– higher price for the less elastic (business users)
– lower price for the more elastic (leisure segment)
• Yield Management
– what happens when capacity is fixed?
– in other words, if total sales for business and leisure segment under
the price discrimination scheme exceed available capacity?
• Intuition
– marginal cost now becomes foregone revenue from selling the seat
to the other segment.
– changes in demand of one group affects prices charged to the
other group (higher demand in one group raises price to the other!)
• Optimal choice of capacity
– marginal cost now includes marginal cost of increasing capacity
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
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Demand Management (contd.)
• Strategic choices
– reduce demand, increase demand
– shift demand, inventory demand
• The Services Marketing Mix
– 4P’s
– people (e.g., Baxter)
– processes (e.g., Alaska Airlines)
– physical evidence (e.g., Disneyland Paris)
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
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Managing Demand via Channel Choice
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
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Why doesn’t Rolls Royce Advertise More?
• What is the role of advertising?
– the type of the good
• Classic Theory: Nelson (1970)
– for experience goods, advertising signals quality
– linear relationship between quality and ad expenditures
• The Services Angle
– demand uncertainty
– perishability
– human intervention (employees versus machines)
– lumpy capacity
• Result (Horstmann & Moorthy, 2002)
– inverted U shape relationship between service quality and
advertising expenditures
P4 Sept/Oct -2003
Services Marketing – Professor V. Padmanabhan
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