Yield Management with Discount Models

Yield management is a strategy to maximize revenue. Tixys implements yield management through so-called “discount models”, which are rule sets for dynamic pricing.

Free vs. Premium

Yield management is only available in the “Premium“ version.

About yield management

Yield management is the art of maximizing revenue, even if the market conditions are not optimal.

In a perfect world, all the seats of a bus would always be booked at the highest price per seat. Of course, that’s never going to happen in the real world. Some seats are occupied by passengers who pay a reduced fare, such as children or seniors. Some seats remain entirely unbooked.

What can be done about the unbooked seats? If you think that a lower price would attract more customers, you can reduce the fare for these seats in certain situations.

Well-known patterns and personal experience

But how do you know how many seats should be sold at a lower fare, and what would be an appropriate price? The answer is: You cannot know, but you can apply well known patterns and your personal experience to make useful predictions.

For example, we know that people travel a lot during the morning and evening hours (obviously commuters), while much less people are on the road around noon. Also, it is well known that many people travel long distance on Friday evenings, because they are going home for the weekend.

However, for a particular service, the situation may be different. For example, if you are operating an airport shuttle service, your schedule will be bound to the flight schedules on the airport. And your utilisation during summer will be higher than during winter – obviously because more people are going on vacation by plane in summer.

Every business has to make assumptions about how many units of a good or service it can sell at which price. For public transportation companies this means that they must set up a sensible schedule and think of appropriate fares.

Yield management takes the pricing aspect one step further: Instead of thinking of a set of prices that are applied statically throughout a season, the actual prices offered to customers in certain situations can differ from your base prices.

Some concepts of “yield management” include algorithms that proactively create discount models, based on historical data. Tixys does not implement such algorithms and does not adapt your discount models automatically. You may, and have to, set up suitable discount models based on your own assumptions and experience yourself.

How to apply yield management with Tixys

Create a discount model

Tixys implements yield management through so-called discount models. A discount model is a set of rules that is applied to a set of base prices. Each rule defines a margin and a discount – if the margin meets a certain condition, the discount will be applied.

To create a discount model, go to Administration areaSaleDiscount models and click create new. Each discount model has the following notable properties:

Discount typeYou can choose between utilisation-based discounts or discounts based on the number of days before a tour’s departure.
Condition

Defines if a value must be above or below a margin in order to match.

Example: You could say that a large discount is granted 60 days before departure – the condition would be “greater than” in this case. But you could as well offer some kind of last-minute booking and set the condition to “less than”.

RulesEach rule consists of three components: the margin, the amount and the mode. The margin is either the utilisation percentage or the number of days, depending on the condition. The amount and the mode determine by how much the fare is changed. The amount is a number, the mode can either be a percentage, a fixed deduction or an absolute price. In most scenarios, you will want to choose the percentage mode.

Add a discount model to a price model

To apply a discount model to a price model, go to Administration areaSaleSingle-ride ticket fares and select a price model for editing.

Each relation, there’s the field “Discount model”. Select a discount model from the list, then save the price model. Discounts will be immediately available through the booking form.

Discount models are only applied to single-ride tickets. Multi-ride tickets cannot benefit from discounts, because they are not related to a tour – which would be necessary to find out the utilisation or the day of departure.

Internals of discount application

Tariff sorting

Tixys uses a special process to ensure a fair and consistent discount behaviour (see “Discount calculation” below). An important key is tariff sorting: Before Tixys goes through the list of passengers one by one, it will sort their seat prices either from ascending to descending, or vice versa.

This is an important difference if you are using a utilisation-based model with percentage discounts, which is a very common set-up.

In such a screnario, if the cheapest seats are on top, the total discount per ticket will be lower, because the more advantageous discounts are applied to the lower seat prices.

You can change the sorting behaviour on the Administration areaSettingsBooking page in the “Tariff sorting” field.

Discount calculation

To understand the internals of how discounts are applied, consider the following example:

  • The bus from A-Town to D-Town, via B-Town and C-Town, has 50 seats.
  • On the leg from A-Town to B-Town, 14 seats are occupied. On the leg from B-Town to C-Town, 23 seats are occupied. On the leg from C-Town to D-Town, 26 seats are occupied.
  • Mr. John Smith wants to go from A-Town to C-Town with his wife and his child.
  • The adult tariff from A-Town to C-Town is 20 Euros, the child tariff is 10 Euros. This makes a regulare fare of 50 Euros for the Smith family.
  • The relation A-Town – C-Town in the tour’s price model has a discount model with the following rules:
    • “If the utilisation is lower than or equals 50%, grant a discount of 20%.”
    • “If the utilisation is lower than or equals 80%, grant a discount of 10%.”

So, how does Tixys apply this discount model on the total fare of 50 Euros?

  • First, it calculates the highest utilisation on the legs which are passed by the passengers for this ticket, which is 23.
  • Then Tixys sorts the tariffs by ascending or descending order (see “Tariff sorting” above). Let’s assume tariffs are sorted from cheap to expensive.
  • Now Tixys goes through the passengers, one by one, checking which discount rule applies for them:
    • Before adding any of the passengers, the utilisation is 46% (23/50×100).
    • By adding the first passenger, the utilisation would be be at 48%. This means, the first passenger matches the 50% margin of the discount model, and a discount of 20% is applied.
    • By adding the second passenger, the utilisation would be be at 50%. A utilisation of 50% matches the rule of “lower than or equals 50%”, so this passenger also gets a 20% discount. Note that if the rule had been “lower than 50%”, the rule would not match for this passenger.
    • By adding the third passenger, the utilisation would be be at 52%. This matches the 80% margin, so the passenger gets a 10% discount.
  • In summary, this means: (10 Euros - 20% discount) + (20 Euros - 20% discount) + (20 Euros - 10% discount) = 8 Euros + 16 Euros + 18 Euros.
  • This equals a total fare of 42 Euros for the family, with an effective discount of 16%.

As a brain-teaser, you can now calculate what the total fare and the effective discount would be if the tariffs were sorted from expensive to cheap.