Decreasing price sensitivity involving physical product inventory: a yield management application

Most airlines utilize a revenue maximizing technique called yield management, which allows the airlines to allocate their fixed capacity of “perishable” seat inventory to various fare categories in the most profitable manner possible. Demand for these fare categories is usually defined in terms of the “business” vs “leisure” customer segments, while capacity is apportioned between discounted vs non‐discounted seats. The discriminatory pricing goal is to sell only non‐discounted seats to the business travel segment. Suggests that yield management techniques may also be appropriate in certain retail settings involving physical products. In the case of physical products, capacity (i.e. product inventory) is not necessarily “perishable” in the same sense as unsold seats on an airline flight; however, its value may decline with the culmination of a well‐defined shopping period or with a particular special event. Examines how the appropriate use of early discount pricing in markets defined by decreasing customer price sensitivity can maximize the revenue gained from sales of a “seasonal” product.