Yield management, also known as revenue management, is the process of understanding, anticipating and reacting to consumer behaviour in order to maximise revenue. Firms that engage in yield management usually use computer yield management systems to do so. The Internet has greatly facilitated this.

Yield management system

Yield management systems attempt to understand, anticipate and react to consumer behaviour in order to maximise revenue. They periodically review transactions for goods or services already supplied and for goods or services to be supplied in the future. They may also review information (including statistics) about events (known future events such as holidays, or unexpected past events such as terrorist attacks), competitive information (including prices), seasonal patterns, and other pertinent factors that affect sales. The models attempt to forecast total demand for all products/services they provide, by market segment and price point. Since total demand normally exceeds what the particular firm can produce in that period, the models attempt to optimize the firm's outputs to maximize revenue.

The optimization attempts to answer the question: "Given our operating constraints, what is the best mix of products and/or services for us to produce and sell in the period, to generate the highest revenue production?"

The optimization call help the firm adjust prices to meet the total demand characteristics of its markets. They can determine prices that will maximize revenue:

• by goods (such as a seat on a flight or a seat at an opera production)
• by group of goods (such as the entire opera house or all the seats on a flight)
• by market (such as sales from Seattle and Minneapolis for a flight going Seattle-Minneapolis-Boston)
• overall (on all the routes an airline flies, or all the seats during an opera production season)

Yield management is particularly suitable when selling perishable products. That is, goods that become unsellable at a point in time (such as just after a flight takes off). If sales were simply made first come, first served, with no concern about the variations in demand by day, week, season for theater seats or hotel rooms or electrical power, then total revenue would be about the same for high periods or medium periods, maybe even low periods.

With an advance forecast of demand and pricing flexibility, buyers will self-sort based on their price sensitivity (using more power in off-peak hours or going to the theatre mid-week) or their demand sensitivity (must have the higher cost early morning flight or must go to the Saturday night opera).

In this way, yield management's overall aim is to provide an optimal mix of goods at a variety of price points. The system will try to maintain a distribution of purchases over time that is balanced as well as high.

Good yield management maximizes (or at least significantly increases) revenue production for the same number of units, simply by taking advantage of the forecast of high demand/low demand periods. It tends to serve more people, since the increased variety of prices appeals to more people.

Firms who have raised prices year after year in order to improve profitability, sometimes turn to yield management as a last resort. After a year or two using yield management, many of them are surprised to discover they have actually lowered prices for the majority of their opera seats or hotel rooms or other products. That is, they offer far higher discounts more frequently for off-peak times, while raising prices only marginally for peak times.

By doing this, they have actually increased demand by selectively introducing many more price points, as they learn about and react to the diversity of interests and purchase drivers of their customers.