¨In the fast-changing, information-filled world of the Internet, you never know what you might find. Maybe you’ll discover a great price on an airline ticket, or maybe you’ll come across that quote you’ve been racking your brain for.¨
Travel product pricing is random because travel is the most perishable commodity on Earth.
Generally, most people think of fruit or meat as perishable because they will rot if unsold after a short time. However, travel is even more perishable than fruit.
If a hotel does not rent a room for the night or the airline does not sell a seat for a flight, they never will be able to make that sale again. They can’t, like many industries, store the product in inventory and wait for purchase later.
High Capital Costs
The industry also has exceptionally high built-in capital costs. Hotels, airplanes, and cars are expensive. The industry needs to rent a lot of rooms, sell many seats, etc. every day to insure that they cover their initial investment.
In order to be profitable they need to charge a lot of fees and offer consumers the opportunity to buy a lot of other non-travel related products and services.
The Solution: Yield Management
As a result of the product perishability and high capital costs, travel companies have to find a price that both:
- maximizes their profit, and
- ensures that they sell as much of their inventory as possible every day, flight, etc.
Determining the right price to meet both these criteria is not easy. It requires that the travel industry understands a lot about their clients and their purchase patterns. To do so, the industry has developed a pricing model called yield management. Yield management will be discussed in the next course.