Yield management involves the strategic control of inventory to sell it to the right customer at the right time for the right price. Book your flight to New York two days before you’re due to fly and you’ll get the idea of purchasing at the top end. Rather than considering late booking as a negative, why not apply airline pricing to your business to create demand among early buyers, or early adopters?
Airline pricing is an art that has helped airlines grow revenues and price their services to align with seasonal shifts, Icelandic volcanoes and the vagaries of economic downturns. Robert Crandall, former chairman and CEO of American Airlines, gave yield management its name and defined it as “the single most important technical development in transportation management since we entered deregulation.”
Airline pricing models can be applied to any perishable item whose existence will cease at a set time – if your tomatoes are one day away from the sell-by date, you’ll realize that the hope and expectation their earlier freshness delivered to your bottom line has all but gone.
We experience airline pricing in everyday life but find it very difficult to apply to traditional business models. If you run a train service or a hotel it’s obvious that you’ve lost money when the train leaves the platform or the clock strikes midnight, but if you run a university, you might not have considered your esteemed educational institution as being on a par with your local supermarket. Think again.
With the increases in tuition fees and decreases in government subsidies, the sharp focus on the viability of certain university courses has come in to question. In the U.K., a number of universities have cut their philosophy courses and other, less mainstream, subjects are set to follow. British universities have started to look to airline pricing models to incent students to select courses early. Early commitment means reduced tuition fees. The obvious benefit to university administrators is that they can plan ahead (towards their yield) and cut a course if it’s looking unpopular or destined not to hit break-even.
How this applies to bringing tech to market
Apply this to a startup that has a breaking technology that’s very hot, but with limited resources to support wider deployment until it secures its next funding round. There is, in our experience, an opportunity to incent early corporate customers with secured access to a technology, as long as they pay a reduced fee and share their experiences to hone the product development process – this is beneficial to everyone.
Not for the faint-hearted, most startups consider that they have to give their product away in the early stages to gain traction or take on the burden of integration, burning cash and incurring non-recurring engineering (NRE) losses.
However, for buying customers to risk taking on a new technology, albeit one that they consider will ultimately give them competitive advantage, then the ability to justify an early buying decision is that they are getting a lower-priced competitive advantage by participating early. This helps the startup with planning, early revenue and commercial traction.
Another example of airline pricing that’s affecting the building services sector is the phasing-out of refrigerants for air-conditioning systems. R22 is a CFC refrigerant that is used in air conditioning systems all over the world. Now only recycled refrigerant is allowed to be sold for use in systems. Come 2015 in the EU, it can’t be used at all. Large estate owners can take advantage of a four-year planning horizon to schedule expenses. However, as 2015 approaches and equipment, installation capacity and replacement products come more into demand, prices for replacement systems will become much higher.
Similar, in fact, to millennium bug-related services – fixes became more expensive closer to December 31, 1999 as skilled engineers became less available.
Yield-management pricing, or airline pricing, is something that is not without risk, and therefore it’s easier to stick to more regular pricing models. However, there is a competitive advantage that can be created by defining your own point in time. One price doesn’t fit all. If the price is simply set at the point where supply and demand curves meet, producers don’t derive the maximum possible revenue they could get if they price-discriminated at a time of their choosing.
About those Chilean wines
Revenue growth and optimization of fewer resources is a key way for thinly capitalized companies to scale up rather than risk everything. At last year’s London Wine Fair, online retailer Naked Wines, which launched in December 2008, sold £30,000 worth of wine in 24 hours after rolling out its airline pricing model.
The new model, called Advance Bookings, offered small-cap wineries a risk-free route to market by allowing them to pre-sell their wines before they’d exported them. One grower was “overwhelmed” by the business model. “We agreed to the order on Tuesday afternoon, and the wine was live on www.nakedwines.com a few hours later. I’d barely had the chance to phone Chile to tell them the news when I heard they’d all sold out!”
Airline pricing models and the imperative they create aren’t just applicable to perishable commodities; used creatively they can quickly rewrite established business and startup models – don’t miss your opportunity to take off!
Phil Newman is a London-based marketing and commercialization strategist for technology companies.