14- Yield Management in Services

Introduction:

In service organisations, managing productivity is yet another strategic concern. Indeed, it is claimed that services are delivered rather than produced. Regardless, any service operation includes certain upfront and ongoing expenses. As a result, the productivity issue in service organisations cannot be disregarded. Rathmell underlined the importance of productivity in service organisations as early as 1974. It is now widely acknowledged to the point where it has become a primary strategic concern for all service organisations.

Yield Management:

Productivity is commonly defined as the ratio of a production process’s output to the total value of its inputs. Two essential assumptions underpin such a productivity paradigm: first, the output factors are precisely stated so they can be quantified, and second, the utility of the result is unquestionable.

This notion of productivity has been established based on experiences in the manufacturing industry. Services, on the other hand, differ from goods in the following ways:

• Services are performed and not produced
• Service facilities must exist before they are used
• Services can’t be stored
• Quality varies in the services sector
• Consumers are an integral element in service productivity.

These issues exacerbate the problem of measuring productivity in the services sector. The importance of productivity management, however, cannot be overstated.

Another service sector issue is that decreased productivity is driven by several factors specific to the business. The service business, for example, is more labour-intensive than the industrial sector, which is more capital-intensive. You must proportionately grow the personnel to boost output in the services industry. The second issue is fewer options due to economies of scale, a lack of labour specialisation, and a reliance on people. The magnitude of service operations is the third issue. A small number of people run a variety of service organisations. Examples include a nursing facility, a lawyer, and a consulting firm. There is no way to divide labour or specialise in this situation. These issues make managing productivity in service organisations much more complex, and it is thus seen as a significant strategic challenge.

Yield Management Process:

Yield management answers the complex problem of optimising prices to maximise revenue and profits. It requires three basic steps to be practical.

Step 1: Analyse Competition:

Examine the strengths and weaknesses of your competitors.

The first phase involves analysing competitor data to determine price strengths and shortcomings. A yield management system prepares competitive data for business research, such as in-store pricing, online price, market share, trade areas, etc. Because this data isn’t always available, the yield management system must allow users to make educated guesses about areas with little or no competitive data. It should also provide a way for the user to verify the accuracy of sales data before using it as a statistic in business decisions.

Even within the same market, not all competitive prices have the same “weight,” and not all competitors price each store the same way. Each rival has its trading territory, client base, and cost structure, all overlapping with each other’s, including the Internet. The diversity of rivals and their disparate methods make it more challenging to determine competitive strengths and weaknesses. The yield management system allows the computer to handle complexity, allowing the user to visualise competitor pricing methods while focusing on strategy, goals, and exceptions rather than the minutiae.

Step 2: Understand Consumer Demand:

• Quantify the relationship between pricing and unit sales movement by accurately measuring how customers value things.

Step two involves analysing previous sales data, the most direct form of contact a store has with its customers, to determine consumer trade-off decisions. When correctly analysed, this information can disclose how customers react to pricing changes, promotions, and other aspects of a retailer’s value proposition.

• Yield Management: More than Just Price Elasticity

The relationship between price and unit movement for a single product is known as price elasticity. A single data point is created each time a consumer makes a purchase. It is feasible to forecast the unit movement for a product at a given price using many data sources. The issue for merchants is that price changes are usually minor and accompanied by a promotion or other event. Without understanding of other factors that influence unit sales movement, analysing the effects of a price adjustment is likely to result in inaccurate forecasts.

• Price, Promotion, and More with Integrated Demand Modeling…

Yield management broadens the notion of price elasticity by combining all of the primary influences on unit sales movement (such as pricing elasticity, promotion elasticity, seasonal trends, competition, cannibalism, and so on) into a single study and projection. The yield management system allows a merchant to assess demand without frequent or significant price changes by combining many criteria into one study. It also stabilises the analysis, completing it at low demand levels (i.e. store, SKU, customer profile or day of the week).

• Quantifying a Retailer’s Competitive Price Image:

After thoroughly examining a retailer’s sales history and competitive data, the yield management system integrates variables, including item elasticity, competition, movement velocity, contribution, and promotional lift, with advanced algorithms to determine a retailer’s price image. The ensuing data and graphs give a store a visual depiction of how it compares to its competitors in the market. This knowledge is then utilised to fine-tune a retailer’s price image (if desired), subsequently used as a parameter in the yield management system to guide the price optimization process.

Step 3: Align Pricing with Enterprise Objectives:

Regularly align pricing with the company’s profit, revenue, and competitive price image goals. Step three allows executives to see the trade-off between enterprise revenue and profit goals based on consumer demand and market dynamics. Strategic decisions are made to satisfy the enterprise’s goals, and prices are optimised, resulting in SKU-level pricing instructions for various items. Yield management is a strategic platform that looks at the category, generates specific instructions, and is driven by enterprise and category-level financial goals. Whereas traditional pricing systems perform price elasticity analysis, leaving the user to handcraft the final pricing decision, yield management is a strategic platform that looks at the category, generates specific instructions, and is driven by enterprise and category-level financial goals.

• Yield Management: More than Just Price Optimization:

In the retail industry, price optimization has primarily been associated with two possible connotations: markdown optimization, in which a fixed inventory of perishable products (e.g., apparel) is subjected to a declining series of prices to zero out inventory by a specific date, and charging the highest price possible for a product. The former specifies a particular use for perishable inventory. The latter is inappropriate for yield management systems and cannot be deployed within them.

Pricing optimization as part of yield management is expanded to include desired long-term price image, revenue and profit goals, and intrinsic SKU-level price elasticity, allowing merchants to create a win-win relationship with their customers. It reflects cross-category interaction between SKUs and cross-channel interaction between distribution channels.

• Goal Management: Making Prices Work Together:

The ability to manage various, and sometimes conflicting, objectives is at the heart of yield management. Senior management, for example, might establish a goal of increasing profitability by 5%. Simultaneously, a retailer in a competitive region may aim to maintain category market share against an aggressive competitor, and a product manager may aim to win trade incentive dollars through vendor sales. Goal management combines these objectives with demand and market dynamics to determine prices that help the company achieve its goals. While doing so, it adheres to item-level price policies.

Strategies for Productivity:

Nonetheless, there are numerous tips for increasing productivity. Cowell has described these themes, which include enhancing employee performance through training, introducing technology into the system, lowering service levels, substituting items for services, involving customers in service creation, and minimising the supply-demand mismatch.

• Improving Staff Performance through Training:

The employees who interact with consumers are a visible part of the service. They should be taught how to deliver superior service through hard work and skill development. This would result in better productivity and customer satisfaction.

• Introducing Systems and Technology:

The ‘Production-line Approach to Services,’ a classic by Levitt, suggests that service businesses industrialise their services and adopt a manufacturing mindset when creating services. He suggested that CEOs in the service industry consider whether or not they are genuinely creating products. They’d then wonder what technologies and systems are needed, what machines can take the place of people, and what systems are required to replace serendipity.

Levitt said that technology may be used in three ways to industrialise services. The first is complex technology, which entails replacing people with machines (e.g. airport surveillance of baggage with x-ray equipment). He referred to the second as “soft technology,” which entails using pre-programmed systems to replace individual service operations (e.g. fast food operations). He described the third as hybrid technology, which entails merging the first two, namely equipment and planned systems, to achieve higher order, speed, and efficiency.

Parsuraman added a new layer to Geronross’s three-stage external, internal, and interactive marketing model by incorporating technology as a service delivery option. He found that introducing customer-contact technology haphazardly can backfire by irritating customers and instilling distrust. As a result, relevant technologies and systems should be implemented to attract and keep customers through effective delivery mechanisms and increase productivity.

Greenwald and Biema both shared similar sentiments. They discovered that inadequate management is the key factor for the service sector’s stagnant productivity growth rate. According to the authors, managers can significantly increase productivity growth rates by putting existing technologies, labour force, and capital stock to work.

• Reducing Service Levels:

Lowering the quality of service can increase productivity (for example, a doctor can spend less time with a patient, and a younger doctor can write the preliminary investigations or the patient’s history). However, a balance must be struck between quantity and quality of service provided.

• Substituting Products for Services or Adding New Services:

Increasing the quantity of services available can boost productivity. For example, the Department of Post launched a courier service and followed up with a non-document courier service, expanding their offerings. A hotel might add events and weddings to their banquet offerings to increase productivity.

• Customer Interaction:

Involving customers instead of your personnel in the service delivery process, such as in a self-service restaurant, can boost productivity. In other cases, the customer may be willing to pay more rather than ‘waiting’ themselves. Customers in hospitals, for example, do not want to assist in creating services and want to leave everything to the medical staff.

In their essay “Look to Consumers to Increase Productivity,” Lovelock and Young pointed out that initiatives to boost productivity in many services will likely fail unless consumer cooperation is secured. In their quest for operational efficiency, many service organisations, on the other hand, regard customers as a nuisance, a limitation, and a productivity obstacle. Lovelock and Young examined five scenarios where service organisations attempted to increase productivity through automation, self-service operations, consistent product codes, uniform postal codes, and low-demand time. As a result, from the consumer’s perspective, productivity-related modifications must be identified and executed. They said that the following tips below can help avoid being insensitive to your consumers.

First, through a systematic and planned communication programme, build client trust in productivity-related changes. Second, learn about your customers’ behaviour and the factors influencing their decisions. Consumer evaluation methods for services differ from those for commodities, according to Zeithaml. Because of the intangibility, non-standardization, and inseparability of services, they have a high level of experience and credibility features, which makes them more difficult to evaluate than goods. Third, new methods and technology must be tested before being on the market. This would not only save a significant amount of money, but it would also save your present markets.

Additionally, your communication plan should deliver an advantage to the customer by encouraging experimentation and, as a result, winning the consumer’s acceptance. Fourth, educate customers on how to use service innovations – merely putting them in place may not be enough. Finally, productivity enhancement is a dynamic process that occurs over time, not a one-time event. As a result, keep track of and analyse performance regularly.

Reduce Mismatch between Supply and Demand:

De-marketing (Kotler) refers to temporarily or permanently discouraging customers from achieving demand-supply synchronisation. For such an effort, he coined the term “synchro-marketing.” Either demand or supply management, or both, should be the plan.

Sasser proposed fundamental ways to adjust demand to fit within the available capacity. The four strategic alternatives in such scenarios where capacity is limited are as follows:

1. Developing off-peak pricing schemes
2. Non-peak promotion and demand creation
3. Developing complementary services
4. Creation of a reservation system

The development of off-peak pricing schemes will aid in shifting demand from peak to non-peak periods. Resorts and hotels offer off-season packages to move demand, and even telephone companies have differential pricing to move demand to non-peak hours. If you shop at a retail chain or a department store during non-peak hours, you can get a direct reduction on your total bill.

Such an approach, however, may not always be effective. It has also been noticed that during the off-season, businesses provide training to their employees, perform equipment maintenance, and clean their facilities to prepare for the next season. If demand increases during this time, customers may be disappointed. Unfavourable word of mouth may even impact a company during peak season.

Developing complementary or facilitating services is another strategy for moving demand away from peak periods. Such services would not only divert customers away from bottleneck operations during peak hours, but they may also provide an alternate service while they wait in line for capacity-limited processes. For example, a lounge with a large-screen television playing an intriguing movie or a bar at a casino would divert some tourists away from limited-capacity service activities. This method would generate additional cash and provide an opportunity to set the service apart from the competition.

Finally, the reservations approach can aid in demand management and, as a result, client happiness.

Table reservations in restaurants and advance movie ticket reservations are two examples of such an approach.

Capacity Management:

The other set of strategic options is related to managing capacity and controlling the supply side by selecting out of the following strategic options:

1. Using part-time employees
2. Increasing efficiency of existing personnel involving customers
3. Sharing capacity with others
4. Investing in expansion options.

• Local kids can be hired to serve clients at a resort hotel during peak seasons. The best example is management schools that use part-time / guest faculty to teach their regular courses.
• The other alternative is to provide training to existing personnel to increase their efficiency. By training them in numerous activities, most employees can be engaged in important duties of delivering the service during peak hours, and support chores can be deferred to slack periods. This strategy can work well at a tiny hotel where only a few workers are responsible for room, housekeeping, and restaurant service.
• The third option is for consumers to deliver service, reducing the producer’s labour requirements. Such a concept can be seen at self-service grocery floors or restaurants.
• The fourth technique involves sharing capacity with others rather than building capacity in-house. Rather than investing in expensive equipment, hospitals collaborate with pathology labs, X-ray clinics, and CAT-scanning labs, for example. Similarly, rather than investing in ice cream-producing equipment, eateries sell branded ice cream.
• Finally, expanding capacity is always possible by investing in expansions to meet the increased demand. This method is most effective if the increase in demand is long-term.

Although higher productivity means higher profits, service managers should not drive productivity to the point where quality suffers. The delivered quality may remain the same, but the consumer perceives a drop in quality. As a result, a balance must be struck between productivity, consistent quality, and customer service.