Using Customers to Maximize Profits

I recently rode on a newer bus line, Megabus. The reason I chose Megabus is due to cost: $45; a Greyhound ticket cost $75. I didn’t check other alternatives. The book A Confederacy of Dunces taught me that a bus ride is necessary every once in a while, to keep collecting good life experiences.  A rider on this trip catalyzed my 2009 Social Experiment goal!  I digress.

I find Megabus’ business model interesting.  That is the company charges people less the earlier they buy the ticket. The first seats purchased on a Megabus ride sell for $1!  This is a logical business plan.  A lot of businesses in the travel industry use this method, like airlines and hotels.

Using my University of Wikipeidia knowledge, it turns out this method is called Yield Management. I think the benefits of yield management is predicting cyclical trends, maximizing profits, and even controlling cyclical trends.  At a given future time, the more tickets sold, the more likely that passengers will be wanting to travel on that trip. For predictability purposes, yield management can raise prices to maximize the profits, if you are willing to add extra resources, in this case an extra bus.  Megabus can do this by “just renting another bus.” However, this is not as easy for airlines or hotels, so the price discrimination often raises drastically for the later industries to maximize profits while considering the available resource restraints.

I found Roscoe’s, my Megabus driver, loyalty to the company quite amazing.  He informed us passengers that Megabus is hiring, and an experienced bus driver can make $60,000 a year.

Whoa whoa whoa!

I am assuming that Greyhound does not pay their drivers near this amount.  Even with government subsidies, Greyhound has additional costs that Megabus does not: bus stations, ticket agents, and a lot more infrastructure and overheard to support many more, unpopulated stops than Megabus. For, Megabus only goes to major cities, i.e. New York, Washington D.C., Chicago, etc.

In general, I think Megabus adapted yield management to a good service.  I also think Megabus has, and can afford, a slightly higher operating expense, like giving Roscoe a little extra pay, possibly to prevent driver turnover.

I wonder what other markets could benefit from yield management.  I think sandwich shops could, to help control and maximize the profits of the lunch and/or dinner rushes.  I think the Wikipedia article has a good section on pointing out the drawbacks to Yield Managent, namely pissing off the customer.  “You paid less, WTF!?!”


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