The Fundamentals of Yield Management & Dynamic Pricing
Updated: Feb 26, 2021
What’s Yield Management?
Yield management is a variable pricing strategy based on the principle of maximizing the revenue from a fixed, limited resource.
It finds the optimal balance of supply and demand, where the price perfectly matches the demand. This is the sweet spot where your rates will “yield” the highest number of demand at the highest possible price.
If you order an Uber at three different times of the day - you’ll get three different rates, depending on the number of cars available (supply) and the amount of people who requested a ride (demand). That is a yield management pricing strategy.
Yield Management and Parking
Yield management pricing strategies work best when the following conditions are met:
Inventory is perishable
Product is sold in advance
Industries where yield management strategies work well include: ride share, hotels, airline, and parking. All have a fixed amount of inventory that needs to be priced based on the demand and the remaining amount of inventory available.
If a can of soda is on the shelf one day and sold the next day - there is no loss. Whereas, a parking spot is open all day - that revenue is lost forever, making yield management strategies vital in parking.
Traditional Pricing Strategies
For decades, the pricing of parking inventory has been largely based on: competition, location, and historical performance. It does not consider the demand of the market nor does it price inventory appropriately given the remaining daily supply.
Typically, prices are updated yearly, seasonally, or at best - monthly. It is a slow and time-consuming process that is inefficient and leaves thousands of dollars on the table monthly.
In today’s world, since this process can be automated, companies that rely on traditional pricing methods will soon find themselves edged out by the competition.
The Mobile Movement in Parking
It’s estimated that about 30% of traffic is caused by drivers searching for parking. To reduce the congestion and stress that comes with looking for an available spot, the demand for parking reservation apps is growing, and now more than ever, commuters are reserving their space before they leave their home.
Overall the U.S. is behind the curve in terms of adopting mobile reservations, currently under 20%. In China, over 90% of parking transactions are processed online. Currently, the US parking market is a $131 billion dollar industry and is only growing. It’s estimated that within the next 10 years, more than half of all US parking transactions will be completed digitally.
The direction of the parking industry is clear - it’s critical to expand your parking operations to online channels. Your competitors will continue to improve their online presence and shift parkers away from your facilities. Behaviors are changing - commuters are searching and securing spots before they go.