Exam 2 Study GuideHFTRM INTRO•RM is the application of disciplined tactics that predict consumer behavior at the micro-market level and optimize product availability and price to maximize revenue growth•History of Revenue Management:o1978 – Airline Deregulationo1980 – Hotel Manual Inventory Controlo2007 – Many industries use RM:Rental Cars, Cruise Lines, RestaurantsHospitals, Golf Courses, Electricity, Advertising, Sport Events, Theater, Pop Concerts, Public transits•Which firms use RM?oAirline (All)oHotels (Hyatt, Marriott, Hilton, Sheraton, Forte, Disney)oVacations (Club Med, Princess Cruises, Norwegian)oCar Rental (National, Hertz, Avis)oWashington OperaoTelevision Ads (CBS, ABC, NBC)oUPSoTexas Children’s hospital•Techniques of RM are applicable when these conditions are met: oCapacity is limited and immediately perishableoCustomers book room ahead of timeoPrices are changed by opening and closing predefined booking classes•Lessons Learned from airlinesoPricing and revenue optimization can deliver more than short-term profitabilityoe-commerce enables pricing and revenue optimizationoEffective segmentation is critical•Four characteristics of e-commerce that increased the urgency of pricing and revenue optimization:oThe internet increases the velocity of pricing decisions oA typical major domestic airline needs to evaluate 500,000 price changes a week oThe internet makes available and immediate wealth of information about customer behavioroThe internet provides a unique laboratory for experimenting with pricing alternativesoThe internet may provide deeper information about cost and competitive prices •5 key components to RM:oDemand analysisoCompetitive knowledgeoStrategic pricing and distributionoWeekly strategy meetingoThe revenue manager•Product Value Cycle:o Demand is less elastic when:•Fewer options are available•Product is perceived as inexpensive•Limited time available to select a producto Demand is more elastic when:•More options are available•Product is perceived as expensive•Unlimited time available to select a product•Different Types of Demand:oStable demandoSeasonal DemandoPerishable demandoTime sensitive demand Cross Ch.3•Revenue Management: interaction of technology, people and business processes toward a goal oSystems are logical and tirelessoPeople are creative and intuitiveoProcesses are disciplined, repeatable and measurable.oRevenue Management pulls these three things together to maximize the value of a company•The 7 Core Concepts:oFocus on price rather than cost when balancing supply and demand•Equilibrium points: Exist for each market segment and productIdentify where the supply and demand produce optimal returnsoUse market-based pricingoSell to segmented micro markets not to mass markets•Sell to small customer groups•Creates products for each customer group•Market segments are groupings of customers that share product behavior and product needsDifferent methods of market segmentations:•Time of purchase•Customer characteristics•Sales channel (online, offline)•Offer a discount to large customers•Offer a discount for slow delivery•Clustering:When different groups of customers value things differently they are assigned to groups known as "clusters" or "market segments"•Dilution/Displacement:Dilutions: selling a product to a customer at a lower price than they would have otherwise been willing /able to payDisplacement: the acceptance of a low value purchase that results in the denial of a higher valued purchase at a later point in time•Fences: In order to keep revenue from disappearing, market segments are kept separate to limit "leakage" from high priced segments to low priced segmentsoSave your products for the most valuable customers•If a product is increasingly limited then the price rises, when a customer is willing to pay this high price, then they are the ones to get the product. The limited quantity is automatically given to the highest bidder oMake decisions based on knowledge•Humans vs. MachinesHumans are intuitive, creative, have cognitive limits, and are biasedComputers are logical, mindless, have physical limits, indifferentoExploit each products value cycleoContinually re-evaluate your revenue opportunities Cross Ch.6•Value Creation (Getting into the customers mind) vs. Value Extraction (getting into the customers wallet)•9 Critical Steps to Success:oEvaluate Unique Market NeedsoEvaluate Your Organization and Process:•Define and document specific issues addressed to maximize revenues•Interview, documentation, and data gathering affecting the products offered, the prices, competition, and customer behavior•Important to understand what the customer is buying rather than what you are offeringoQuantify the Potential Benefits:•Quantification methods:"Back of the Envelope" :rough and simple calculation to test a hypothesis. Better than a guess, but less definite that a mathematical proof.Simulation modeling•Expected ROI given costs and constraintsoEnlist TechnologyoImplement Forecasting:•Predicts future events•3 rules of forecasting:Must be at the right level of detailAn appropriate amount of data must be analyzedFrequent reforecasting must occur•Once segments are created, the next step in the RM process id to forecast demand for each segment•2 step process:Build an off-line demand model for each segment using various forecasting techniquesBuild an online updating system for keeping the demand model current•How to know the model is accurate:Measure with historical dataMeasure error and look at chartsoApply Organization:•Optimization suggests what you should do about the results from forecasting•Optimize price/Maximize ProfitCost information X Market Information and Strategic Goals = Optimal PriceoCreate Teams:•Identify RM "Champion"•Create Support and Responsibilities•Establish Roles•Communicate Objectives to Entire CompanyoExecute:•Ideas are Nothing; Implementation is EverythingoEvaluate Success:•Were revenues gains achieved?•What was competitive response?•Where do additional opportunities lie?•Potential Pitfalls:oParalysis by AnalysisoFailure to Quantify BenefitsoMarket Segmentation ErroroLack of Well-Defined PlanoLack of Senior Management OversightoViewing the System as the SolutionoHeld Hostage by Techies Philips Ch.2: Intro to Pricing and Revenue Optimization•3