Clear Channel has hired John Kaufman as the company’s new SVP of Revenue Management. The goal is to apply yield management principles to the pricing of radio time. Apparently ownership believes that one of radio’s problems is that we haven’t managed our inventory properly.
We all see yield management at work with airline ticket prices. When there are a lot of seats available, prices are low. As seats are sold, prices increase. The belief is that this maximizes revenue by keeping seats filled at the highest average ticket price possible.
The principle has worked particularly well with airlines and hotels (two industries with which Mr. Kaufman had some experience). Mr. Kaufman and Clear Channel, unfortunately, will not see the same positive results applying the principles to selling radio time. And ironically it is because of the actions of Clear Channel and the other large groups.
Radio once practiced rate integrity. Stations had a rate card and stuck to it. Stations kept rates high by limiting inventory. When we were sold out, we were sold out. Today there is no rate integrity and stations are never sold out. We price to sell and we always have room for more spots.
To understand what that has to do with yield management, think about the airlines. If there are 150 seats on an airplane, there are 150 seats to fill. Therefore, as the plane nears capacity, the airline can sell those last remaining seats for more money. But what if the airline could keep expanding the plane by adding seats? That would have the effect of lowering the average ticket price because it is easier to sell more cheap seats than sell those last few expensive seats.
Yield management works most effectively for the airlines when there is greater demand than supply. When the number of people who want to fly somewhere exceeds the number of seats, demand pushes ticket prices up. When seats exceed the number of potential flyers, tickets get cheaper.
Radio today has too many avails to control spot prices. The excess inventory pushes prices down, and in that environment, yield management is ineffective.
What’s the solution? For airlines, it is taking planes out of the sky. If there are too many seats flying, ground the planes. That both lowers inventory while at the same time lowering the airline’s costs. Can radio do that? The first problem is that reducing the spot load does not significantly lower a station’s costs. The marginal cost of a unit of inventory is near zero. So there’s little short term incentive to reduce spot loads.
Reducing loads might ultimately drive rates higher were it not for the fact that we have too many over-leveraged groups who need cash competing for a declining pool of available dollars. In this environment, survival trumps what is good for the industry.
While airlines can ground airplanes to reduce supply, we can’t shut down stations. If each of the large groups took a few of their station’s dark, spot rates might go up, but the FCC might object.
Yield management has demonstrated it’s effectiveness in a number of businesses, but it is doomed to fail for radio. Some of the reasons are beyond our control, but most we have brought on ourselves.
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