OM in the News: Yield Management Hits the Zoo
Adult passes to the Indianapolis Zoo used to cost $16.95. Now they set customers back $8 or $30—or almost anywhere in between. The zoo prices tickets like airfares, changing prices daily based on advance sales and expected demand. Since introducing such dynamic pricing last year, the zoo’s admission revenue has grown 12%.
Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, or even the minute, writes The Wall Street Journal (Dec. 14, 2015). Frequent price changes are increasingly common in the physical world, amplifying the effects of supply and demand on everything from parking spots to golf course fees. A Dallas highway shifts toll prices every 5 minutes depending on traffic. Kohl’s uses electronic price tags in 1,200 stores to change prices for busy and slow times. More than 250 ski resorts in North America adjust the price of tickets daily.
Airlines pioneered more sophisticated dynamic pricing (called yield management) in the 1980s. Hotels and rental car firms followed in the 1990s. Coca-Cola tested raising its vending-machine prices on hot days in 1999 but retreated after customer backlash.
More recently, sports teams, bands and SeaWorld have begun adjusting prices based on demand. Uber and Lyft charge multiples higher from one moment to the next, based on the number of users looking for a ride and drivers on the road. Consumers typically resist dynamic pricing when it is introduced, but then quickly acclimate. Five years ago, Major League Baseball teams caught flak when they began changing ticket prices based on factors such as date, opponent, weather forecasts and seats remaining. Now pretty much every one of them is doing it routinely. Our video case study, Using Revenue Management to Set Orlando Magic Ticket Prices, provides a great in-class example.
Classroom discussion questions:
- What are the advantages and disadvantages of this approach?
- What is the impact of yield management to the Orlando Magic (see the Chapter 13 video)?