It’s 8pm on a Thursday. You’re snuggled up on the sofa, laptop on your knees, and you’re searching for a train ticket for the following evening. Bad news: the ticket is far more expensive than it was just a couple of days ago. The next morning, however, you check again and the ticket now costs less than the night before. You really don’t understand what’s going on. How can these wild fluctuations in prices be explained? Well, the official term for it is yield management, and now we’ll dive into exactly what that means.
As is often the way with business jargon, there’s no precise definition of yield management. It essentially involves changing the cost of a service or goods based on the behaviour of consumers and the time remaining before the date of use or consumption. This allows businesses to optimise the number of places available for a given service and also maximise turnover.
Mostly used in the transport, tourism and hotel industries, in which services are sometimes referred to as ‘perishable products’, yield management relies on digital tools that sift through large volumes of big data. These can provide insight, at any moment, into the behaviours of consumers: the ticket prices they’re looking at, those they’re ignoring, those they’re willing to pay for, the times at which they’re doing all this, and so on. Combined with various predictable external factors like seasonality, holidays and recurrent social events, this analysis allows businesses to predict the price each consumer is willing to spend on a given service, train ticket or hotel room at the exact time they log on.
Yield management therefore relies on two principal criteria: the desirability of the service and its availability, which changes most often according to the time remaining before it happens or takes place. A train ticket for a seaside town in July is more in demand, and therefore more expensive, than one for February. The inverse is true for winter destinations like Méribel and Chamonix. The fewer tickets there are available, the higher the price too. But these principles don’t justify the sometimes surprising reduction in prices sold according to the logic of yield management.
That’s because there are in fact two very different forms of yield management. The first simply involves adjusting prices according to the rarity of the product, the time period and the demand. In short, prices are only going to get higher and it’s best to buy as soon you’re sure you need to. The second kind, often referred to as ‘dynamic’, is much more closely tied to consumer behaviour. When it comes to trains, the aim is to fill up the maximum number of carriages on the maximum number of services. However, if prices are just as high at less popular travel times as they are when things are much busier, no one would be keen to buy them. The result? Packed-out trains at peak times and empty trains the rest of the time. But if prices vary, people who can be more flexible with timings and who can’t afford to travel at peak times will opt for the less busy services.
Thus, while yield management clearly aims to increase profitability for rail firms, it also allows consumers to benefit from lower prices – as long as they think well ahead (and have a spot of luck) when booking tickets for a train, a flight or a hotel room. It essentially encourages customers to adopt certain behaviours, namely thinking long-term and flexibly. Better still, it allows firms to limit the number of empty flights and trains. According to France’s Institut National de la Consommation (INC), however, yield management creates volatility in pricing, a lack of clarity for consumers and a form of inequality between them. So there are some benefits, but also potentially quite a lot of downsides to this system. Business and consumers must make of it what they can and aim to make it fairer and better for both sides. Indeed it has the potential to be an important ally when creating a transport industry that’s more efficient, fairer, more comfortable, and crucially, better for the planet.