Exam 2 Study Guide HFTRM 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 o 1978 Airline Deregulation o 1980 Hotel Manual Inventory Control o 2007 Many industries use RM Rental Cars Cruise Lines Restaurants Hospitals Golf Courses Electricity Advertising Sport Events Theater Pop Concerts Public transits Which firms use RM o Airline All o Hotels Hyatt Marriott Hilton Sheraton Forte Disney o Vacations Club Med Princess Cruises Norwegian o Car Rental National Hertz Avis o Washington Opera o Television Ads CBS ABC NBC o UPS o Texas Children s hospital Techniques of RM are applicable when these conditions are met o Capacity is limited and immediately perishable o Customers book room ahead of time o Prices are changed by opening and closing predefined booking classes Lessons Learned from airlines o Pricing and revenue optimization can deliver more than short term profitability o e commerce enables pricing and revenue optimization o Effective segmentation is critical Four characteristics of e commerce that increased the urgency of pricing and revenue optimization o The internet increases the velocity of pricing decisions o A typical major domestic airline needs to evaluate 500 000 price changes a week o The internet makes available and immediate wealth of information about customer behavior o The internet provides a unique laboratory for experimenting with pricing alternatives o The internet may provide deeper information about cost and competitive prices 5 key components to RM o Demand analysis o Competitive knowledge o Strategic pricing and distribution o Weekly strategy meeting o The 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 product o 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 o Stable demand o Seasonal Demand o Perishable demand o Time sensitive demand Cross Ch 3 Revenue Management interaction of technology people and business processes toward a goal o Systems are logical and tireless o People are creative and intuitive o Processes are disciplined repeatable and measurable o Revenue Management pulls these three things together to maximize the value of a company The 7 Core Concepts o Focus 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 returns o Use market based pricing o Sell 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 When different groups of customers value things differently they Time of purchase Customer characteristics Sales channel online offline Offer a discount to large customers Offer a discount for slow delivery Clustering are assigned to groups known as clusters or market segments Dilution Displacement they would have otherwise been willing able to pay 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 segments Dilutions selling a product to a customer at a lower price than Displacement the acceptance of a low value purchase that results o Save 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 o Make decisions based on knowledge Humans vs Machines biased Humans are intuitive creative have cognitive limits and are Computers are logical mindless have physical limits indifferent o Exploit each products value cycle o Continually 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 o Evaluate Unique Market Needs o Evaluate 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 are offering Important to understand what the customer is buying rather than what you o Quantify 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 Expected ROI given costs and constraints Simulation modeling o Enlist Technology o Implement Forecasting Predicts future events 3 rules of forecasting Once segments are created the next step in the RM process id to Must be at the right level of detail An appropriate amount of data must be analyzed Frequent reforecasting must occur forecast demand for each segment 2 step process forecasting techniques current How to know the model is accurate Measure with historical data Measure error and look at charts o Apply Organization Build an off line demand model for each segment using various Build an online updating system for keeping the demand model Optimization suggests what you should do about the results from forecasting Optimize price Maximize Profit Optimal Price Cost information X Market Information and Strategic Goals o Create Teams o Execute o Evaluate Success Identify RM Champion Create Support and Responsibilities Establish Roles Communicate Objectives to Entire Company Ideas are Nothing Implementation is Everything Were revenues gains achieved What was competitive response Where do additional opportunities lie Potential Pitfalls o Paralysis by Analysis o Failure to Quantify Benefits o Market Segmentation Error o Lack of Well Defined Plan o Lack of Senior Management Oversight o Viewing the System as the Solution o Held Hostage by Techies Philips Ch 2 Intro to Pricing and Revenue Optimization 3 Approaches to pricing o Cost Plus Oldest approach Most popular Determine the cost of each product and a surcharge to determine price Surcharge is calculate to reflect an