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Dynamic Pricing vs Yield Management: What are the Differences?

Dynamic and yield management are two of the most commonly employed pricing models Each have their pros and cons based on the sector they're used in.

Let's say you check the price of a hotel room, and it's €280. A week later, you check again, and now it's €345. It's the same hotel, the same city, probably even the same room. What changed?

Externalities did. Perhaps a major sporting event is going on, and hotels are currently charging premiums. Or it's the holiday season, and sunshine is on the calendar. So people are now even willing to pay more.

If the hotel doesn't consider these factors, it leaves money on the table.

So the price goes up and down with circumstances – often guided by one of several pricing strategies, dynamic pricing and yield management among them. The latter is often used by industries selling products with a fixed supply, like hotels, concert venues, and airlines, since it helps maximise returns over the year.

But many businesses are turning to the former, which uses data differently. For instance, dynamic pricing doesn't look at historical data like holiday dates – it adjusts prices in real-time based on customer demand at that moment.

Which should you choose? The good news: it doesn't have to be either/or. With the availability of data bringing an ever-wider range of variables into consideration, you may want to mix and match your approach to pricing – and SYMSON lets you do it.

In this blog, we'll explore the differences between yield management and dynamic pricing, to see where each shines.

The Role of Price Elasticity in Dynamic Pricing and Yield Management

Yield pricing and dynamic pricing become possible with a concept you'll recall from Economics 101: price elasticity. It comes in two flavours: demand, and supply. Only demand matters to us here.

Price elasticity of demand divides the change in demand by the change in price. For example, if raising prices by 20% leads to a 40% drop in the number of sales, the PEoD(Price Elasticity of Demand) is 2 (40%/20%); this is highly elastic, since the higher price significantly reduces demand. (Anything over 1 is elastic.)

If, however, the rise only caused sales to drop by a few units, it is inelastic (under 1): pricing doesn't have much effect on the units sold. Petrol, lipstick, and bread are traditionally inelastic: people want to feel good, get to work, and avoid starvation, whatever the price.

Let's see how this bouncing concept of price works with two approaches to pricing.

Going for Yield Management: optimising Revenue

Industries like hospitality and transport use yield pricing a lot because the supply of what they're selling is fixed. (If one more weary traveller turns up at a fully-booked hotel, they can't build another room for them.)

The products are also strictly time-limited: nobody buys tickets to yesterday's concert. This means every empty bed, every unfilled seat, represents revenue lost forever, thereby making them inelastic.

How does yield management help pricing professionals maximise sales? By looking at the data. For a concert, promoters look at ticket sales at previous performances. For airlines and hotels, it's holiday dates and weather forecasts. With software assistance (the right software, obviously), you can swing in many additional variables to make this more accurate. Effective yield management ensures every piece of inventory sells for the highest price possible: the maximum yield.

This strategy can match supply to demand with surprising precision given enough data.

(One approach used primarily by airlines goes even further: selling more than 100% of inventory, based on data that suggests a certain percentage of customers won't turn up.) But here's the crux: if you're using only yield management, you may miss out.

Yield management

The Dynamic Pricing Approach

While it can work brilliantly, yield management is something of an RVM (rear-view-mirror) approach, reflecting historical data like holiday dates or a performer's popularity. And because it's commonly used where supply is fixed – the capacity of Carnegie Hall or a 787 – it seeks to maximise a single factor: the sale price, which isn't always best for profit.

Dynamic pricing looks at many of the same variables – but instead of using them to set a price that persists, it adjusts pricing minute-by-minute, even second-by-second, based on customer demand.

This has a significant effect where PEoDs are inelastic, more dependent on wanton desire than the sticker price.

In a sudden downpour, passengers are willing to pay whatever it takes for a ride home. (The principle driving Uber.) Last-minute business travellers with a million-dollar deal at stake will pay ten times the economy price to get on the same plane leaving the same afternoon. And in energy markets, "spot pricing" for emergency supply can be hundreds of times the "normal" price for brief periods.

This is why dynamic pricing tends to be the rule in sectors whose products aren't easily removed or substituted, such as commodities and luxuries. But price elasticity isn't a hard-and-fast rule. It differs from industry to industry and varies between companies in the same industry, which is why it's worth looking at both when deciding your prices.

Yield pricing determines a Price mainly by looking at past Conditions.

Let's summarise: yield pricing determines a price mainly by looking at past conditions. On the other hand, dynamic pricing determines a price by how urgently people want the product.

What unites these two approaches: they're all about data.

Historical data. Competitor data. Inventory data. Customer data. And the more relevant data points you put in play, the more optimised your pricing can be.

What if you discovered the real variable affecting your hotel's profit wasn't your rack rate, but cost inputs like bed linen and cleaning? Maybe you'd want to drive those down rather than crank prices up.

With modules for setting prices based on business rules, market conditions, and known factors like price elasticity for your industry – all given depth and detail by data – you can test approaches and run scenarios to see what works best

And you're not limited to the two above: there are eight approaches to choose from, including cost-based, rule-based, stock-based and more.

Explore Yield Pricing and beyond with SYMSON

With our automated smart pricing engine providing insight – even changing prices on the fly, according to criteria, you decide – our tech lets you determine the price based on the maximum the customer can pay when they're ready to buy. Automating your pricing strategy ensures no opportunity is missed.

At SYMSON, our Genius Dynamic Pricing solution combines several pricing strategies. Brands can execute agile price testing, set smart business rules, and leverage the data at their disposal. Our plug-and-play software lets you select prices for different geographies and markets.

Do you want a free demo to try how SYMSON can help your business with margin improvement or pricing management? Do you want to learn more? Schedule a call with a consultant and book a 20 minute brainstorm session!

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