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Business owners belonging to capacity-constrained service organizations are faced with the challenges of fluctuations in demand. They are aware of the fact that fluctuations of this nature threaten the firm’s profitability. There are concerns that using yield management pricing only favors the company.
However, an overview of yield management pricing and combining it with principles of service inventory can easily put these fears to rest. Therefore, capacity-constrained organizations can lay claim to being customer centric provided that business owners and corporate leaders are willing to invest in order to combine the benefits of yield management pricing and service inventory.
Yield Management Pricing in a Nutshell
Business strategies crafted through a yield management pricing framework have been successfully applied to the airline, car rental, and hotel industries (Rouse, 2010). Yield management pricing is a business concept that allows business owners to increase revenue from a business model that is hampered by a relatively fixed capacity (Berman, 2005). For example, the main constraint in the hotel industry is the finite number of rooms available for guests.
During peak seasons, a significant number of travelers may descend on a particular area. It is possible that on this particular time of the year, hotels in the area are unable to accommodate those who are willing to pay even the most expensive rates. Thus, the hotels in the area are able to enjoy healthy profit margins. However, the profit gained during peak seasons are easily canceled out by the low number of guests during lean seasons.
The application of yield management pricing assures business owners of a steady increase in revenue, by creating opportunities in attracting new customers. It is possible to accomplish this goal by constantly updating the hotel or the airline’s price levels through the evaluation of reservations made by customers.
The information gleaned from this process is cross-referenced to future purchases in a specific time slot “against a projection of demand for each time slot” (Berman, 2005, p.169). As a result, business owners are able to “adjust prices to fill all available capacities” (Berman, 2005, p.170). The key factor here is the price of the product or service offered to the general public.
Revenue tends to increase when businesses are able to attract new customers. The best way to accomplish this goal is to lower the prices of goods and services. Therefore, those who are unable to afford the product or the services that were offered during peak seasons are given the chance to sample the product at a reduced price.
The only condition given is that these new customers must acquire the same service during off-peak months. It must be made clear that repeat customers are also viable sources of additional revenue. The reduction in the price of the goods offered means that loyal customer are now able to enjoy the product during different seasons in a year.
Service Dominant Logic
The application of yield management pricing is an effective strategy that helps business owners deal with fluctuations in demand. The airline industry was able to solve this problem by forecasting demand for airline seats. Airline executives use information gleaned from forecasting mechanisms to determine the specific dates in a year when demand for products and services are relatively lower compared to peak seasons. For example, there is higher demand during the holidays.
Based on this information, airline companies create limited time only offer of significantly reduced fares. These offers are difficult to refuse for frequent flyers, and those who want to travel but cannot afford regular fares. Although the strategies based on yield management pricing has been proven to be effective in countering the impact of demand fluctuations, it is important to know if these practices do not have a negative effect on the quality of service provided by capacity-constrained organizations.
It can be argued that organizations that practice yield management pricing can make the claim that they adhere to the principles of Service Dominant Logic (SDL), and that they are consumer centric in their orientation towards their clients (Maglio, 2010). These organizations can make this claim provided that they are willing to do two things.
First, they need to make the necessary investment in order to provide quality service for their clients. Second, they need to understand the impact of service design comprised of the following factors: 1) targeted levels of quality; 2) speed; 3) customization; and 4) cost for given resource levels (Chopra & Lariviere, p. 57).
Therefore, capacity-constrained organizations must invest in understanding the value of service inventory. There are different examples of service inventory. However, the core component of a service inventory is the performance of a service “before the service request has arrived” (Chopra & Lariviere, p. 57). By doing so the company has a newfound capability to overhaul its service design. As a result it is now able to affect quality of service, speed, and customization.
Application of the principles of service inventory in the airline industry can be seen in the study of how other businesses have effectively used RFIDs or radio frequency tags to improve their services towards their clients (Rayport & Jaworski, 2005). A good example of using RFID’s can be seen in the model implemented by Singapore’s public libraries. In the past students and faculty are frustrated when it comes to borrowing books from libraries.
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They complain about unfriendly staff and the cumbersome process of borrowing and returning books. In most cases, it takes considerable time to borrow books as borrowers are forced to wait for the librarian or library worker to look for a particular book in the shelves. The problem is exacerbated if the book is misplaced or lost. It will take time to track the books.
In addition, the documentation process is also cumbersome, because the borrower has to write down pertinent information before the books can be checked out from the library. Users also complain when they have no time to return the books. Books have to be returned at a specific time. The failure to return the books can result to exorbitant fines. However, there are times when users are unable to return the books because of other valid reasons.
The use of RFID or electronic tagging of books in Singapore eliminated or drastically reduced the face-to-face interaction of the borrower and library personnel. When the book is taken out from the shelves, the data about the book and the time it was taken out of the library is recorded in a database. When it is time to return the books, Singaporeans are not compelled to commute or walk back to the library. There are designated receptacles located in various public areas that they can use to return the books. These receptacles are like ATM machines.
RFID tagging can be applied to airline tickets or boarding passes. By doing so, airline companies can eliminate the need for passengers to line up and interact with airline personnel. The moment they pass through designated areas in the airport, the computer automatically records the presence of the said passengers through the RFID in the ticket or boarding pass.
Capacity-constrained organizations must use yield management pricing principles in order to counter the impact of demand fluctuations. By doing so they can steadily increase revenue by attracting new customers and encouraging the patronage of repeat customers. They can also lay claim that they adhere to principles of SDL provided that they are willing to invest in strategies and mechanisms that will allow them to use service inventory principles.
Berman B 2005 ‘Applying yield management pricing to your service business, Business Horizons, vol. 48, pp. 169-179.
Chopra, S & Lariviere M 2005, ‘Managing service inventory to improve performance, MIT Sloan, vol. 47, no.1, pp.56-63.
Maglio, P 2010, Handbook of service science, Springer, New York, New York.
Rayport, J & Jaworski B 2005, Best face forward Harvard University Press, Boston, Massachusetts.
Rouse, P 2010, Revenue management for service organizations, Business Expert Press, New York, New York.