Demand and Supply Management in Service Marketing! In this article we will discuss about how to manage demand, supply and yield of service firms. Learn about:- 1. Introduction to Demand and Supply Management 2. Definition of Demand Management 3. Meaning of the Nature of Demand 4. Determining the Demand Pattern 5. Elements to Shape Demand Patterns 6. Other Methods of Managing Demand 7. Supply Management 8. Yield Management.
Contents:
- Introduction to Demand and Supply Management
- Definition of Demand Management
- Meaning of the Nature of Demand
- Determining the Demand Pattern
- Elements to Shape Demand Patterns
- Other Methods of Managing Demand
- Supply Management
- Yield Management
1. Introduction to Demand and Supply Management:
Demand and supply management continues to be a challenge for service managers. Despite the importance of this aspect of management and the impact it can have on profits, little is understood about this sometimes ambiguous aspect of service management. Indeed, interviews show that although services use many demand and supply management options, managers do not think of this area as a whole — rather working at individual pieces without necessarily recognizing how these pieces fit together.
ADVERTISEMENTS:
Is it possible for services such as banks, retail establishments, and restaurants to influence when customers will desire their services? If so, how can services gain the understanding necessary to accomplish this? What options are available? On a broader scale, how should services approach the area of Demand and Supply Management (DSM) and integrate the decisions between both domains?
DSM may be both the most troublesome management problem for services and the single greatest determinant of success. Managers agree that if demand could be smoothened (thereby allowing supply to be more closely matched to demand) it would have a positive impact on profits.
This text defines, summarizes and categorizes a large number of DSM practices. This is a more comprehensive treatment than found in current literature and provides structure to this little understood area. Information from interviews with service managers gives insight into the use and value of the various options. Secondly, using empirical data from a bank, we show that it may indeed be possible for services to impact the timing of their demand, sometimes with very little cost.
Finally, decision making tools and suggestions for integrating DSM decisions are given. It is important to note that although the discussion should apply to some extent to all firms that provide services, it is primarily concerned with those services that cannot schedule customers. This is currently the area of greatest need, since firms that have the ability to schedule customers already have good tools available (e.g., yield management for airlines and hotels, network and integer programming formulations for trucking companies, scheduling heuristics for outpatient clinics).
ADVERTISEMENTS:
Also, note that some services such as emergency services and insurance claim offices have virtually no ability to control demand. These types of firms are likely not at benefit from the demand management (DM) discussion, although the supply management (SM) presentation may be helpful.
2. Definition of
Demand Management:
Demand management (DM) is defined in this text as:
‘All the activities and decisions management carries out in order to plan and implement how they will attempt to influence the level of demand for any service offered at any point in time’.
ADVERTISEMENTS:
Some DM efforts are aimed at increasing demand, and some at changing the timing of demand. This paper looks primarily at those actions that change the timing of demand, although these efforts may also have the effect of increasing or decreasing total demand. Note that demand can only be managed if patterns (time and/or place) can be predicted and influenced.
While it is sometimes assumed that influencing demand is impossible (based on discussions with managers and researchers), we will see that all services we studied already use DM. At the same time, the potential for influencing when customers demand service is limited for services that cannot schedule customers. For instance, a bank likely cannot eliminate the large demand on paydays, and a supermarket cannot entirely reduce the peak resulting from customers stopping on their way home from work.
The effectiveness of various Demand Management Options (DMOs) will depend on the particular service industry, the location, and the customer base. For instance, a supermarket manager revealed that it is easier to influence the timing of demand at a store that has retired people as its primary clientele, since these people are not restricted to non-working hours.
A fast food outlet manager revealed that an outlet located downtown will generally have higher lunch demand but much lower dinner and evening demand than an outlet located in the suburbs. Despite these uncontrollable factors, services can be successful in encouraging customers to change their habits.
ADVERTISEMENTS:
Almost all DM efforts represent an effort to smooth demand, to reduce the peaks and increase the valleys. In some cases this involves smooth demand for only one part of the service as occurs when a bank installs an ATM machine. The machine can handle few of the types of services the bank offers, but has the effect of reducing the demand for basic services during regular hours and increasing the demand after hours.
3. Meaning of the Nature of Demand
:
A service firm with a fixed level of capacity encounters wide fluctuations in demand for its product. “It’s either feast or famine for us!” sighs the manager. “In peak periods, we’re turning customers away. In low periods, our facilities are idle and our employees are standing around looking bored.”
Service businesses, by contrast, can’t normally stockpile their output, because the time-bound nature of service delivery makes it impossible to inventory the finished service. For instance, the potential income from an empty seat on an airline flight is lost forever once that flight takes off, and the “room-nights” which constitute the basic unit of production for every lodging establishment are equally perishable.
ADVERTISEMENTS:
Likewise, the productive capacity of an auto repair shop (facilities, personnel, and equipment) is wasted if no one brings a car for servicing on day when the shop is open. Conversely, when demand for service exceeds supply, the excess business may be lost. If someone can’t get a seat on one flight, another carrier gets the business, or the trip is cancelled or postponed. And if an accounting firm is too busy to accept tax and audit work from a prospective client another firm will receive the assignment.
But demand and supply imbalances are not found in all service situations. The horizontal axis classifies organisations according to whether demand for the service fluctuates widely or narrowly over time; the vertical axis classifies them according to whether or not capacity is sufficient to meet the peak demand. As a generalisation, capacity problems are more likely to exist today in service organisations that involve physical processes than in those that involve information-based processes.
What are the strategic implications for marketing managers in each instance? Organisations in point—
(i) Could use increase in demand outside peak periods, those in point;
ADVERTISEMENTS:
(ii) Must decide whether to seek continued growth in demand and capacity, or to continue the status quo and those in point;
(iii) May need temporary de-marketing until capacity can be increased to meet or exceed current demand levels. Service organisations in point;
(iv) Face an ongoing problem of trying to smooth demand to match capacity, which involves both stimulation and discouragement of demand. It is the fourth category that offers the greatest marketing challenge.
4. Determining the Demand Pattern:
ADVERTISEMENTS:
Managing demand is a major challenge for many service marketers, especially in people — processing and possession — processing services when opportunities to manage the level of physical capacity (represented by facilities or personnel) are tightly constrained. For many service organisations, successfully managing demand fluctuations through marketing actions is the key to profitability.
To determine the most appropriate strategy in each instance, we need to seek answers to some additional questions. Are demand fluctuations cyclical and, if so, what is the typical cycle period? What are the underlying causes of these demand fluctuations? Do they reflect customer habits or preferences that might be changed by marketing efforts? Or do they derive from decisions by third parties, such as employers and school setting working and classroom hours?
Alternatively, are variations in demand caused by more random events, such as weather conditions and health emergencies?
One way of smoothen the ups and downs of demand is through strategies that encourage customers to change their plans voluntarily, such as offering special discount prices or added product value during periods of low demand. Another approach is to ration demand through a reservation or queuing system, which basically inventories demand rather than supply. Alternatively, to generate demand in periods of excess capacity, new business development efforts might be targeted at prospective customers with a counter-cyclical demand pattern.
Determining what strategy is appropriate, requires an understanding of who, or what is the target of the service. If service is delivered to customers in person, there are limits as to how long a customer will wait in line; hence strategies designed to inventory or ration demand should focus on adoption of reservation systems. But if the service is delivered to goods or to intangible assets, then inventorying demand should be more feasible, unless the good is a vital necessity.
It is necessary to have a clear understanding of demand patterns to manage fluctuating demand effectively in a service business, which are as follows:
ADVERTISEMENTS:
(1) Charting Demand Patterns:
First, the organisation needs to chart the level of demand over relevant time periods. Organisations that have good computerised customer information systems can do this very accurately. Others may need to chart demand patterns more informally. Daily, weekly, and monthly demand levels should be followed, and if seasonality is a suspected problem, graphing should be done for data from at least the past year’s data.
In some services, such as restaurants or health care, hourly fluctuations within a day may also be relevant. Sometimes, demand patterns are intuitively obvious; in other cases patterns may not reveal themselves until the data are charted.
(2) Random Demand Fluctuations:
Sometimes, the patterns of demand appear to be random—there is no apparent predictable cycle. Yet even in this case, causes can often be identified. For example, day-to-day changes in the weather may affect use of recreational, shopping, or entertainment facilities.
Although the weather cannot be predicted far in advance, it may be possible to anticipate demand a day or two ahead. Health-related events also cannot be predicted. Accidents, heart attacks, and births-all increase demand for hospital services, but the level of demand cannot generally be determined in advance. Natural disasters such as floods, fires, and hurricanes can dramatically increase the need for such services as insurance, telecommunications, and health care. Acts of war and terrorism such as that experienced in the United States on September 11, 2001, generate instantaneous need for services that can’t be predicted.
ADVERTISEMENTS:
AT&T was faced with a sudden increase in demand for services to the military during the Gulf War. During this period, 500,000 U.S. troops were deployed to the Middle East, many without advance warning. Before their deployment, these men and women had little time to attend to personal business, and all of them left behind concerned family and friends. With mail delivery between the United States and the Middle East taking more than six weeks, troops needed a quick way to communicate with their families and to handle personal business.
Communications with home were determined by the military to be essential to troop morale. AT&T’s ingenuity, responsiveness, and capacities were challenged to meet this unanticipated communications need. During and after the Gulf War crisis, more than 2.5 million calls were placed over temporary public phone installations, and AT&T sent more than 1.2 million free faxes to family and friends of service men and women.
(3) Predictable Cycles:
In looking at the graphic representation of demand levels, is there a predictable cycle daily (variations occur by hours), weekly (variations occur by day), monthly (variations occur by day or week), and/or yearly (variations occur according to months or seasons)? In some cases, predictable patterns may occur at all periods. For example – in the restaurant industry, especially in seasonal tourist settings, demand can vary by month, by week, by day, and by hour.
If there is a predictable cycle, what are the underlying causes? The Ritz-Carlton in Phoenix knows that demand cycles are based on seasonal weather patterns and that weekly variations are based on the workweek (business travellers don’t stay at the hotel over the weekend). Tax accountants can predict demand based on when taxes are due, quarterly and annually.
Services catering to children and families respond to variations in school hours and vacations. Retail and telecommunications services have peak periods at certain holidays and times of the week and day. When predictable patterns exist, generally one or more causes can be identified.
ADVERTISEMENTS:
(4) Demand Patterns by Market Segment:
If an organisation has detailed records on customer transactions, it may be able to disaggregate demand by market segment, revealing patterns within patterns. Or the analysis may reveal that demand from one segment is predictable, while demand from another segment is relatively random. For example – for a bank, the visits from its commercial accounts may occur daily at a predictable time, whereas personal account holders may visit the bank at seemingly random intervals.
Health clinics often notice that walk-in or “care needed today” patients tend to concentrate their arrivals on Monday, with fewer numbers needing immediate attention on other days of the week. Knowing that this pattern exists, some clinics schedule more future appointments (which they can control) for later days of the week, leaving more of Monday available for same-day appointments and walk-ins.
5. Elements to Shape Demand Patterns
:
There are many marketing mix elements. Those have a role to play in stimulating demand during periods of excess capacity and in decreasing it (demarcating) during periods of insufficient capacity. Price is often the first variable to be proposed for bringing demand and supply into balance but changes in product, distribution strategy, and communication efforts can also play an important role. Effective demand management efforts often require changes in two or more elements jointly.
(1) Product Variations:
ADVERTISEMENTS:
Although pricing is the most commonly advocated method of balancing supply and demand, it is not quite as universally feasible for services as for goods. A rather obvious example is provided by the respective problems of ski manufacturer and a ski slope operator during the summer. The former can either produce for inventory or try to sell ski in the summer at a discount. If the skis are sufficiently discounted, some customers will buy before the ski season in order to save money.
However, in the absence of skiing opportunities, no skiers would buy lift tickets for use on a mid-summer day at any price. So, to encourage summer use of the lifts, the operator has to change the product by installing a dry ski run or an alpine slide (a winding plastic channel for wheeled toboggans), or by maintaining hiking trails and promoting the views from the summit. In recent years, a growing number of ski resorts have created a booming summer business in mountain biking.
Customers rent bikes, buy a lift ticket, and are transported to the summit, from which they descend bike trails to the base (only the hardiest of bikers, it seems, are willing to ride up to the summit!). Similar solutions have been adopted by tax preparation firms that offer book-keeping and consulting services to small businesses in slack months, and by landscaping firms in many parts of the United States and Canada that seek snow removal contracts in the winter. These firms recognise that no amount of price discounting is likely to develop business out of season.
Many service offerings remain unchanged throughout the year, but others undergo significant modifications according to the season. Hospitals, for example, usually offer the same array of services throughout the year. By contrast, resort hotels sharply alter the mix and focus their peripheral services such as dining, entertainment, and sports to reflect customer preferences in different seasons. There can be variations in the product offering even during the course of a 24-hour period.
Restaurants provide a good example, marking the passage of the hours with changing menus and levels of service, variations in lighting and decor, opening and closing of the bar, and presence or absence of entertainment. The goal is to appeal to different needs within the same group of customers, to reach out to different customer segments, or to do both, according to the time of day.
(2) Modifying the Timing and Location of Delivery:
ADVERTISEMENTS:
Rather than seeking to modify demand for a service that continues to be offered at the same time in the same place, some firms respond to market needs by modifying the time and place of delivery.
Three basic options are available:
The first represents a strategy of no change – regardless of the level of demand; the service continues to be offered in the same location at the same times.
By contrast, a second strategy involves varying the times when the service is available to reflect changes in customer preference by day of week, by season, and so forth. Theatres often offer matinees at weekends when people have leisure time throughout the day; during the summer in hot climates, banks may close for two hours at midday while people take a siesta, but remain open later in the evening when other commercial establishments are still active.
A third strategy involves offering the service to customers at a new location. One approach is to operate mobile units that provide the service to customers, rather than requiring them to visit fixed-site service locations. Travelling libraries and vans equipped with primary care medical facilities are two examples that might be copied by other service businesses.
A cleaning and repair firm that wishes to generate business during low demand periods might offer free pick-up and delivery of portable items that need servicing. Alternatively, service firms whose productive assets are mobile, may choose to follow the market when that, too is mobile. For instance, some car rental firms establish seasonal branch offices in resort communities. In these new locations, they often change the schedule of service hours (as well as certain product features) to conform to local needs and preferences.
(3) Communication Efforts:
Even if the other variables of the marketing-mix remain unchanged, communication efforts alone may be able to help smooth demand. Signing, advertising, and sales messages can remind customers of peak periods and encourage them to travel at un-crowded, off-peak times when service is, perhaps, faster or more comfortable.
Examples include postal service requests to “Mail Early for Christmas,” Public transport messages urging non-commuters— such as shoppers or tourists—to avoid the crush conditions of the commute hours, and communications from sales reps.
For industrial maintenance firms advising customers of periods when preventive maintenance work can be done quickly. In addition, management can ask service personnel (or intermediaries such as travel agents) to encourage customers with discretionary schedules to favour off-peak periods. Changes in pricing, product characteristics, and distribution must be communicated clearly. If the firm wants to obtain a specific response to variations in marketing-mix elements it must, of course, inform customers fully about their options.
(4) Pricing Strategies:
For price to be effective as a demand management tool, the marketing manager must have some sense of the shape and slope of a product’s demand curve (i.e., how the quantity of service demanded responds to increases or decreases in the price per unit) at a particular point of time. It’s important to determine whether the aggregate demand curve for a specific service varies sharply from one time period to another.
If so, significantly different pricing schemes may be needed to fill capacity in each time period. To complicate matters further, there may be separate demand curves for different segments within each time period, reflecting variations between segments in the need for the service or in ability to pay. One of the most difficult tasks facing service marketers is to determine the nature of all these different demand curves.
Research, trial and error, and analysis of parallel situations in other locations or in comparable services are all ways of obtaining an understanding of the situation. Many service businesses explicitly recognise the existence of different demand curves for different segments during the same time period by establishing distinct classes of service, each priced at levels appropriate to the demand curve of a particular segment.
In essence, each segment receives a variation of the basic product, with value being added to the core service in order to appeal to the higher paying segments. For instance, top-of-the-line service in airlines offers travellers larger seats, free drinks, and better food; in computer service bureaus, product enhancement takes the form of faster turn around and more specialised analytical procedures and reports. In each case, the objective is to maximise the revenues received from each segment.
However, when capacity is constrained, the goal in a profit-seeking business should be to ensure that as much capacity as possible is utilised by the most profitable segments. For this reason, various usage conditions may have to be set to discourage customers willing to pay top-of-the-line prices from trading down to less expensive versions of the product. Airlines, for instance, may insist that excursion tickets be purchased 21 days in advance, and that ticket holders remained at their destinations for at least one week before returning — conditions that are too constraining for most business travellers.
6. Other Methods of Managing Demand
:
In other methods of managing demand, there are three ways:
(1) Reservations:
One way to smooth demand and to reduce customer discomfort associated with waiting is through the use of reservations. The system can often direct customer arrivals into time periods that would otherwise be slow. However, the downside of a reservation-based system is that customers occasionally fail to show up for appointments.
This typically results in lost revenues, since there is too little time to contact and reschedule other customers to fill the gaps in the schedule. For this reason, services that are able to do so demand prepayments which are not refundable unless adequate cancellation time is given.
Hotels usually offer a mixture of reservation agreements. Because those that take reservations also have many unscheduled arrivals as well, they do not generally penalise customers who fail to arrive, since reserved rooms are not held past 6 p.m. and can often be resold if unclaimed. Only so-called guaranteed reservations, which are held all night, require non-refundable deposits because they provide the hotel with no chance of filling the lost capacity if the customers fail to show up.
A common strategy to deal with no-shows when customers suffer no penalties for not appearing is to overbook, i.e., to promise more reservations than there is capacity available. If the firm has a good understanding of the percent of customers who tend not to show up and uses this information to limit the amount of overbooking, this policy can work most of the time.
However, given the nature of random variation, the number of arrivals will occasionally exceed available capacity. In those cases, the firm must be ready to assuage angry customers with some form of compensation. Airlines, whether justified or not, are notorious among customers for overbooking, but are usually prepared to pay excess passengers with valuable free tickets to take later flights.
(2) Waiting Lines:
Intangible services cannot be inventoried in advance, but once a customer arrives, he or she may be willing to wait for service to begin – in effect one can inventory customer arrivals instead. Making a customer wait for service is the equivalent of a backorder to a manufacturer.
However, the length of time a customer is willing to wait for service is generally much shorter than the time one is willing to wait for an ordered product to arrive. If a service firm can determine the maximum length of time that customers consider to be acceptable and can predict the probability distribution of arrivals, it is then possible to use an area of applied mathematics called queuing theory to design the service delivery system’s capacity to keep queue lengths to generally satisfactory lengths.
It is also possible to affect the perceived length of time that customers must wait by providing diversion. For example, many restaurants offer lounges where patrons can pleasantly pass the time (and provide additional profits for the firm) until they are ready to be served.
At Disney world’s Epcot Centre in Florida, waiting areas for some of the attractions provide high-quality entertainment such as short films to help visitors pass the time until the actual shows begin. Many companies play recorded music or advertising messages for telephone callers who have been put on ‘hold’. And of course, doctors stock their waiting rooms with magazines and children’s toys to help waiting patients pass the time.
Although many queues operate on a first-come, first-served basis, other priority arrangements (known as “queue disciplines”) are possible. Certain services, such as emergency rooms, provide service on the basis of critical need (using a “triage” system) rather than order of arrival.
Retail stores with express lanes are segmenting customers into separate queues based on estimated length of service time. Some services also divide customers by segment, such as banks that have separate teller lines for retail and commercial customers, a good but imperfect predictor of the actual time needed to complete transactions.
In each of these queue disciplines, the marketer must balance the overall level of service provided against the aggravation of those who must be forced to wait the longest. If a customer feels that he or she has been forced to wait an unreasonable amount of time, there is usually an option of leaving the system and going to a competitor.
By segmenting customers into different queues, overall customer satisfaction can be maximised. With a few exceptions, grocery customers with full shopping carts expect to wait longer, whereas customers buying “six items or less” may be generally less tolerant and in more of a hurry.
(3) Letting the Market Figure it out:
It is not absolutely necessary that the service organisation take upon itself the task of smoothen demand. To some extent, it can be left to the customers to learn when the facilities are crowded and when they aren’t. This allows customers to self-select the level of waiting and crowding they can tolerate. Those who are sensitive to these matters, will have an incentive to come at less busy times, whereas those who don’t mind, will continue to arrive at peak periods. This approach assumes that demand will remain high and that customer will continue to find the effort involved worthwhile.
Clearly some government offices use this approach, because their customers have no alternatives when demand is high and the managers do not have to worry about covering their fixed costs when demand is low. But commercial services that are truly concerned about customer satisfaction and profits must take active steps to match demand to available capacity.
7. Supply Management
:
Supply management (SM) is defined in this text as:
“All the activities and decisions management carries out in order to plan and implement how they will serve demand”. Thus, these decisions influence the capacity of the service, which can take on several dimensions. For instance, the size of a facility is a longer term type of capacity than are staffing decisions. SM decisions also influence the quality of the service as experienced by the customer on several dimensions.
For instance, having an inadequate number of staff on hand may cause some customers to balk or wait a very long time and become irate. In one of the early texts on DSM, Sasser presented two alternatives for services to use – chase-demand and level-capacity. A number of factors contributed to the choice of alternative. For instance, if the skill level and training required was low, a chase demand strategy was recommended.
Heskett et al. expanded on Sasser’s work to include a third alternative – “modified” chase-demand. This was for the cases where a service did not fit neatly into either chase-demand or level-capacity. They identified other factors that would favour a chase-demand strategy, including large fluctuation in demand, a low cost of poor service and a high cost of lost business.
Besides the overall strategies, numerous authors have developed and listed specific options, here referred to as supply management options (SMOs). We have combined these lists, attempting to eliminate overlap and adding a few more SMOs to fill in gaps. Some of those added were defined as a result of discussions with service managers.
One goal here was to separate SMOs from one another, being as inclusive and as exclusive with each definition as possible. This may be impossible in a practical sense due to the broad definitions sometimes found in the literature, but the exercise is helpful in defining more clearly what is meant by supply management.
While it is unlikely that this list is completely exhaustive of all potential SMOs, it is more comprehensive than any list found in current literature. It is important to note that most services will use a number of SMOs in combination and that the various SMOs are not independent of one another.
For instance, a service that has the ability to cross train employees to help cover for each other when it gets busier will likely schedule fewer staff than a service that is not able to cross train. There are many specific examples in the literature of how SMOs have been used.
Managing Supply:
Services can manage supply through part-time employees, employees working overtime, peak-time operating procedures, cross-training of employees, customer participation, shared facilities, and outsourcing. Part-time employees offer the benefits of cost reduction and increased capacity. Marketing concerns include less training, lower performance, lower productivity, and poor attitude.
Customer concerns include the possibility of less knowledgeable employees, lower levels of service, less personalization, and higher turnover. Peak-time operating procedures offer the benefit of keeping the operation near capacity. The primary marketing concern is identifying the peak routines that will be done and the tasks that will not be performed. Customers are concerned about the lack of personal attention, an incomplete job, crowded facilities, and feeling cheated in terms of the service provided.
Cross-training offers the benefits of keeping operations near capacity, reducing bottlenecks in the service, and filling in for absent employees. Marketing concerns focus on potential for lower service quality and lower productivity. Customers are concerned about receiving inferior service quality. Increasing customer participation will increase productivity and maximize capacity.
From a marketing perspective, customers may lack expertise to do part of the job and it may also create a conflict with pre-learned scripts. Customers are concerned about the conflict of scripts and the reduced level of service quality. Shared facilities offer the benefits of reduced capital investment costs and maximization of facility utilization. Marketing concerns would be efficient scheduling and having access to the shared facility.
Customers concerns would focus on confusion about where or who is performing the service. Using third parties or outsourcing has the benefit of expanding capacity. Marketing concerns would be the level of service quality being provided by the third party and if they would steal customers. Customer concerns would be the quality of the service and the conflict of who was hired to do the work.
8. Yield Management
:
Yield management is a term that has become attached to a variety of methods, some very sophisticated, matching demand and supply in capacity-constrained services. Using yield management models, organisations find the best balance at a particular point of time among the prices charged, the segments sold to, and the capacity used. The goal of yield management is to produce the best possible financial return from a limited available capacity.
Specifically, yield management has been defined as ‘the process of allocating the right type of capacity to the right kind of customer at the right price so as to maximise revenue or yield.’ Although the implementation of yield management can involve complex mathematical models and computer programs, the underlying effectiveness measure is the ratio of actual revenue to potential revenue for a particular measurement period. Yield is a function of price and capacity used.
Recall that capacity constraints can be in the form of time, labour, equipment, or facilities. Yield is essentially a measure of the extent to which an organisation’s resources (or capacities) are achieving their full revenue-generating potential. Assuming that total capacity and maximum price cannot be changed, yield approaches as actual capacity utilisation increases or when a higher actual price can be charged for a given capacity used.
For example – in an airline context, a manager could focus on increasing yield by finding ways to bring in more passengers to fill the capacity, or by finding higher-paying passengers to fill a more limited capacity. In reality, expert yield managers will work on capacity and pricing issues simultaneously to maximise revenue across different customer segments.
Problems Involved in Yield Management:
By becoming focused on maximising financial returns through differential capacity allocation and pricing, an organisation may encounter these problems:
(i) Incompatible Incentive and Reward Systems – Employees may resent yield management systems if these don’t match incentive structures. For example – many managers are rewarded on the basis of capacity utilisation or average rate charged, whereas yield management balances the two factors.
(ii) Inappropriate Organisation of the Yield Management Function – To be most effective with yield management, an organisation must have centralised reservations. While airlines and some large hotel chains and shipping companies do have such centralisation, other smaller organisations may have decentralised reservation systems and thus find it difficult to operate a yield management system effectively.
(iii) Lack of Employee Training – Extensive training is required to make a yield management system work. Employees need to understand its purpose, how it works, how they should make decisions, and how the system will affect their jobs.
(iv) Loss of Competitive Focus – Yield management may result in over-focusing on profit maximisation and inadvertent neglect of aspects of the service that provide long-term competitive success.
(v) Employee Morale Problems – Yield management systems take much guesswork and judgment away from sales and reservations people. Although some employees may appreciate the guidance, others may resent the rules and restrictions on their own discretion.
(vi) Customer Alienation – If customers learn that they are paying a higher price for service than someone, they may perceive the pricing as unfair, particularly if they don’t understand the reasons. Customer education is thus essential in an effective yield management program. Customers can be further alienated if they feel victimised (and are not compensated adequately) to overbooking practices that are often necessary to make yield management systems work effectively.