The dilemma of yield management
Yield management
Yield management is a dynamic pricing process that aims to maximize a company's total return through optimized pricing. Prices are adjusted in real time to market demand to optimize capacity efficiency and increase profits.
Many industries have mastered the art and science of maximizing sales through dynamic price adjustments and capacity management, such as hotels, retail, raw materials trading, transportation and logistics companies, aviation, etc. Companies adjust their prices in real time , depending on demand, booking dynamics and other variable factors to optimize their profitability.
However, our case from the logistics industry shows that under certain circumstances and conditions in India, yield management can generate (short-term) profits, but can also cause lasting damage.
The specific case
Our case study, a global leader in the logistics industry, had achieved a dominant market position among European companies in India for decades, which was lost within a few years due to serious strategy changes. The precise analysis of developments and decision-making processes is an instructive example of how yield management aimed at short-term increases in earnings can cost long-term market shares.
the initial situation
The company held an almost monopoly-like position in logistics in southern India, which was characterized by the close connection between Indian technology companies, the American Silicon Valley and the large Indian “ethnic colonies” on the east and west coasts of the USA. The transport route went from India to Europe and from there to the USA. The Indian goods that remained in Europe (about 1/3) were replenished with goods from European customers.
The dilemma
Despite this strong position, due to overly focused yield management, the company decided to reduce capacity for the Indian market in favor of the more profitable US-Europe route. This decision was based on maximizing unit revenue in the short term, but overlooked the long-term implications for the company's presence and influence in the Indian market.
With the control parameters set in the system at the time, the situation was as follows: The revenue per unit on the USA <> Europe route was more lucrative than the revenue per unit on the India <> USA route. So the capacity for Indian customers was reduced, so that many Indian customers could no longer choose the India <> Europe connection. The paradoxical situation arose that, despite continued demand, the company only served the India <> USA route to a very limited extent.
The company's unilateral capacity reductions allowed competitors to quickly fill the resulting gap and significantly reduce the company's previously outstanding market share. The former monopoly position was undermined by short-term oriented yield management that ignored the long-term strategic importance of the Indian market.
The long-term damage
The company's decision to neglect India had serious implications. When the Indian market became significantly more important a few years later, the company found itself in a weakened position, characterized by reduced market shares and a weakened negotiating position. The company went from being a market leader to being one provider among many, which significantly limited its chances of operating successfully in one of the world's fastest growing markets.
The long-term damage became evident when global focus returned to the Indian market. The Indian market, supported by an annual GDP growth rate of over 6%, and with a rising middle class that is increasingly international, has become a battleground with increased competition and reduced margins.
The company's market share fell dramatically, and orders fell accordingly. Other logistics providers increased their frequencies and capacities to meet demand. Indian customers, an inherently loyal customer group that values quality and reliability, turned to competitors.
The analysis
The irony of the situation lies in the fact that the company's original strategic goal was once to become the leading European logistics company in India. However, this vision could only be realized if the US-India corridor was served effectively. This is where management errors and overly focused yield management came to the fore.
The view of the future
India is forecast to increase its logistics industry revenue to $2025 billion by 380 and become the world's third largest economy before the end of this decade. Our case study highlights the critical importance of a balanced and future-oriented growth strategy. Companies operating in highly competitive and dynamically growing markets such as India must therefore carefully weigh short-term profits and long-term market presence.
Yield management, as critical as it is to optimizing revenue, must be viewed in the context of a broader, strategic vision. In global competition, especially in thriving markets like India, a dynamic, flexible and future-oriented view is essential to ensure sustainable success and growth. The ability to mentally ignore short-term gains and see the long-term impact of decisions made today will define the companies that will be at the top in the years to come.
Do you want to avoid other people's mistakes? We would be happy to support you with our more than 20 years of experience in optimizing your market position in India.
