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FSU HFT 4471 - Revenue Management

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- Revenue Managemento 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 RMo 1978: Airline Deregulationo 1980: Hotel Manual Inventory Controlo 2007: Industries who use RM: rental cars, cruise lines, hospitals, pop concerts, etc.- Who Else Uses It?o Television Ads (NBC, ABC), UPS, Hotels, Washington Opera- Origins of RMo 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 Decisionso Strategic Segment market & different prices• Quarterly or annually o Tactical Calculates & updates booking limits• Daily or weeklyo Booking Control Determine which bookings to accept and which to reject• Real time.- Tactical Revenueo Calculate & periodically update booking limitso 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 resourceso Most important component of RM- RM Strategyo Identification of customer segments and establishment of products targeted at those segments- Types of Customerso Business Less price sensitive, book later, less flexible, & less accepting of restrictionso Leisure Highly price sensitive, book earlier, more flexible to departure.- RM Systemso Calculate & update booking limits within reservation system.o Database: computer system.- RM Decisionso Maximizing expected net contributiono Maximize revenue instead of maximizing contribution (profit)o- Booking Controlo 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 Optimizationo 1992: McKinsey.o 2000: A.T. Kearney, upgraded McKinsey’s work, 1% improvement.- 5 Components to RMo 1. Demand Analysiso 2. Competitive Knowledgeo 3. Strategic Pricing & Distributiono 4. Weekly Strategy Meetingo 5. Revenue Manager- RM Process Flowo 1. Segmentationo 2. Forecasting (Predict Customer Demand)o 3. Optimization (Price)o 4. Dynamic Recalibration Monitor performance and update market response.- Segmentso Where their customers are coming from Military, AARP, seniors, Family, etc.- Channelso 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 Businesso Hotel breakdown of how the business arrived at the hotel or through which channel the business arrived- Demand of Forecastingo Use of history and current trends to forecast future demando Little control over which customer type receives the product and at what price; PROBLEM.- Unconstrained Demando 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.- Denialso Turned away because capacity constraints or restrictions- Regretso Customers turned down because they are not inclined to pay the price- Product Value Cycleso 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 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 Demando Stable Demand: grocerieso Seasonal: holiday itemso Perishable: food (fruits, veggies, etc.)o Time Sensitive: travel or show tickets- 3 Traditional Approaches to Pricingo Cost Plus Based On: Costs Ignores: Competition & Customers Liked By: Financeo Market-Based Based On: Competitors Ignores: Cost & Customers Liked By: Saleso Value –Based Based On: Customers Ignores: Cost & Competition Liked By: Marketing- PRO Cubeo Goal of PRO Right Price For every product Every customer segment  Every channelo The PRO Process Divided into 8 activities 4 parts are part of the operational PRO Other 4 supporting PRO Activities.- Seven Core Conceptso 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 Sell to segments as micro markets, NOT mass markets Micro 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 : selling product at lower price than they would have been willing & able to pay• 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 Save your products for your most valuable customers• Bill Marriott used this!!!o Core Concept #5 Mark decisions based on knowledge, not supposition• Orbit Example• Human vs. Machineo Core Concept #6 Exploit each products’ value cycleo Core Concept #7 Continually re-evaluate your revenue opportunities.- Critical 9 Steps to Successo 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


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