If demand comes in small increments from a large, evolving base of customers, investing in yield management systems will likely increase revenue from existing capacity. A pure cost-based approach will leave money on the table in times of limited industry capacity, and contribute to lost revenue and unused capacity during industry downturns. Although the sophisticated analytics required by yield management may be intimidating to users (and costly for businesses to implement), returns can be substantial. Moreover, the logic behind these tools, and the processes adopted to use them, can be leveraged to gain larger jobs and longer-term customers.
Neither yield management nor open-book pricing is inherently superior. Both models give customers confidence in their buying decisions. Yield management makes pricing options transparent and allows customers to choose when to pay a premium and when to seek a discount. Open-book pricing shows underlying costs and ensures that the supplier is not seeking exorbitant margins. Imprudent mixing of strategies, however, sends confusing signals to customers, who then wonder if a better deal is possible through an alternative pricing approach.
Best yet, either end of the spectrum can be available, depending on the business strategy selected. Our cup-holder manufacturer can choose to focus on a small number of customers and work jointly to reduce costs through open-book pricing. But it could also choose to use its plastic injection molding machines to produce a wide variety of products other than cup holders for the many industrial customers seeking plastic parts. With no single order or customer representing a significant share, the supplier could employ advanced yield management techniques to dynamically adjust prices to customer demand patterns. To truly maximize profits, the choice must be made strategically, and not haphazardly.
Reprint No. 05202
Tim Laseter (firstname.lastname@example.org) is the author of Balanced Sourcing: Cooperation and Competition in Supplier Relationships (Jossey-Bass, 1998). He serves on the operations faculty of the Darden Graduate School of Business at the University of Virginia. Formerly a vice president with Booz Allen Hamilton, he has 20 years of experience in supply chain management and operations strategy.
Elliott Weiss (email@example.com) is the Isadore Horween Research Professor of Business Administration at the Darden Graduate School of Business at the University of Virginia. Over his 25-year career, he has published and consulted extensively in the area of scheduling and capacity management.