YIELD MANAGEMENT AT NATIONAL CAR RENTAL
Faced with possible liquidation in 1993 by General Motors, its parent company, National Car Rental was under significant pressure to produce both a substantial and sustainable profit. To accomplish this, management decided to adopt a comprehensive revenue management system. Instead of a constant car rental price all the time, the revenue management system demonstrated that a variable pricing policy that would fluctuate with demand would result in significantly· higher profits. The revenue management system was implemented in two phases. The first phase was introduced in July 1993, with the goal of showing immediate profits, which it did. The second phase focused on developing a state-of-the art revenue management system for the car rental industry.This phase was successfully implemented in July 1994. As a result of thus revenue ranaqernent system, profits were significantly increased, and General Moors was able to sell National Car Rental in 1995 for 3Il amount in excess of $1 billion.
In order to take maximum advantage of yield management, a service should have the following characteristics: (a) the ability to segment its markets. (b) high-fixed and low variable costs, (c) product perishability, and (d) the ability to presell capacity.
A major i sue in the successful implementation of yield management is the ability of the firm to segment its market. Proper segmentation will prevent all of the firm’s customers from taking advantage of price reductions when they are offered to fill available capacity.Market segmentation can be done in several ways. The first is to impose signify; .strictions on customers who use the lower prices. For example. airlines require customer stay over a Saturday night or to purchase their tickets from 7 to .30 days in advance to quify for lower airfares. These very same conditions. however. prevent the business. tr who usually travels midweek on short notice, from taking advantage of the lower are another method of segmentation is to offer lower prices on only specific days of t week or times of ‘the day. Movie theaters offer reduced ticket prices for matinees, which senior citizens can take advantage of during weekdays. Similarly. downtown hotels typically offer discounts on weekends when business travelers are home. as an incentive for tourists.
High-fixed and low-variable co ts allow a firm to offer significant discounts while still being able to cover variable costs. When a service firm has this type of cost profile, profits are directly related to sales. In other words, the more sales generated. the more profits made. For example, if the variable cost associated with having a hotel room cleaned is estimated at $25 (which would include the labor to clean the room and the replacement of any material that was consumed. such as soap and shampoo, as well as fresh sheets and towels), then any price that the hotel could get for the room above the S25 variable cost would be financially beneficial (as opposed to leaving the room empty for the night).