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Revenue Management o Application of disciplined tactics that predicts consumer behavior at the MICRO market optimize product availability o Business Philosophy Systematic Approach Increase Revenue maximize returns History of RM o 1978 Airline Deregulation o 1980 Hotel Manual Inventory Control o 2007 Industries who use RM rental cars cruise lines hospitals pop concerts o Television Ads NBC ABC UPS Hotels Washington Opera etc Who Else Uses It Origins of RM o Bill Marriott Forecast demand and save product for MORE VALUABLE CUSTOMER Core Concept 4 RM Applicable IF o 1 Capacity is limited and immediately perishable o 2 Customers book capacity ahead of time o 3 Prices change by opening and closing predefined booking classes 3 Levels of RM Decisions o Strategic Segment market different prices Quarterly or annually o Tactical Calculates updates booking limits Daily or weekly o Booking Control Determine which bookings to accept and which to reject Real time Tactical Revenue o Calculate periodically update booking limits o Determines which far classes should be open and which closed for all products in order to maximize returns from a fixed set of resources o 3 Problems 1 Capacity Allocation 2 Network Management LOS 3 Overbooking Network Management LOS o Combination of resources o Most important component of RM RM Strategy o Identification of customer segments and establishment of products targeted at those segments Types of Customers o Business o Leisure RM Systems Less price sensitive book later less flexible less accepting of restrictions Highly price sensitive book earlier more flexible to departure o Calculate update booking limits within reservation system o Database computer system RM Decisions o Maximizing expected net contribution o Maximize revenue instead of maximizing contribution profit o Booking Control o Real time face of RM 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 Create different products that appear to different segments Charging different prices to different segments people Financial Impact of Pricing Rev Optimization o 1992 McKinsey o 2000 A T Kearney upgraded McKinsey s work 1 improvement 5 Components to RM o 1 Demand Analysis o 2 Competitive Knowledge o 3 Strategic Pricing Distribution o 4 Weekly Strategy Meeting o 5 Revenue Manager RM Process Flow o 1 Segmentation o 2 Forecasting Predict Customer Demand o 3 Optimization Price o 4 Dynamic Recalibration Monitor performance and update market response Segments o Where their customers are coming from Military AARP seniors Family etc Channels o How they prefer to book their hotel Contact center walk in GDS internet Market Segmentation needs 3 things 1 Clear customer definition 2 Segments that apply to both corporate and property level applications 3 Understanding of the source of business Source of Business o Hotel breakdown of how the business arrived at the hotel or through which channel the business arrived Demand of Forecasting o Use of history and current trends to forecast future demand o Little control over which customer type receives the product and at what price PROBLEM Unconstrained Demand o Not constrained by the capacity of the hotel o Decline in reservation or requests that could have been accommodated if the hotel had unlimited space o Breaks into denials and regrets Denials o Turned away because capacity constraints or restrictions Regrets o Customers turned down because they are not inclined to pay the price Product Value Cycles o Determined by market segment sensitivity to price elasticity o Demand is LESS elastic when 1 FEWER options are available 2 Product is perceived as INEXPENSIVE 3 LIMITED TIME is 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 groceries o Seasonal holiday items o Perishable food fruits veggies etc o Time Sensitive travel or show tickets 3 Traditional Approaches to Pricing o Cost Plus Based On Costs Ignores Competition Customers Liked By Finance o Market Based Based On Competitors Ignores Cost Customers Liked By Sales o Value Based Based On Customers Ignores Cost Competition Liked By Marketing PRO Cube o Goal of PRO Right Price For every product Every customer segment Every channel o The PRO Process Divided into 8 activities 4 parts are part of the operational PRO Other 4 supporting PRO Activities Seven Core Concepts o Core Concept 1 Focus on price rather than costs when balancing supply and demand Supply Response vs Price Response o Core Concept 2 Replace cost based pricing with market based pricing Market based pricing includes lost profit o Core Concept 3 Micro Markets Sell to segments as micro markets NOT mass markets Sells to small customer groups Creates products for each customer group Mass Markets Sell to large customer groups Creates Sells a single product to large customer group Dilution vs Displacement Dilution willing able to pay selling product at lower price than they would have been Displacement constrained capacity acceptance of a low value purchase that results in denial of a higher valued purchase at a later point o Core Concept 4 o Core Concept 5 Save your products for your most valuable customers Bill Marriott used this Mark decisions based on knowledge not supposition Orbit Example Human vs Machine o Core Concept 6 o Core Concept 7 Exploit each products value cycle Continually re evaluate your revenue opportunities Critical 9 Steps to Success o 1 Evaluate Unique Market Needs As you increase yield you can increase revenue If you keep increasing yield you eventually lose revenue to competitors o 2 Evaluate Your Organization Process Define document specific issues addressed to maximize revenue It s important to grasp what the customer is buying rather than what you are offering o 3 Quantify the Potential Benefits Quantification Methodologies Back of the Envelope Simulation Modeling Consensus on Corporate Objectives Constraints Expected ROI given costs constraints o 4 Implement Forecasting Predicting future events 3 Rules 1 Forecast must be at right level of detail 2 Appropriate amount of data must be analyzed 3 Frequent reforecasting o 5 Apply Optimization Forecasting suggests what customers are likely to do Optimization suggests what you should

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FSU HFT 4471 - Revenue Management

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