Definition of RM HFTRMIntro Predicting consumer behavior at the micromarket level and optimize product availability and price to maximize revenue growth Selling the right product to the right consumer at the right time for the right price RM is not only a computer system It is an integrated set of business processes that brings together people and technology with the goal of understanding the market History of RM 1978 Airline Deregulation 1980 Hotel Manual Inventory Control 2007 Many industries use RM Which firms industries use RM Events Theater Pop Concerts Public transits The origins of RM Bill Marriott story Rental Cars Cruise Lines Restaurants Hospitals Golf Courses Electricity Advertising Sport You think that this RM is such a new concept but I ve been doing it for a long time He was saving the last rooms for high value customers with three or more people He was maximizing his revenue opportunities by forecasting demand and saving his products for the more valuable customers RM Techniques of RM are applicable when these conditions are met Capacity is limited and immediately perishable Customers book capacity ahead of time Prices are changed by opening and closing predefined booking classes Lessons learned from airline industry Pricing and revenue optimization can deliver more than short term profitability e commerce enables pricing and revenue optimization Effective segmentation is critical Create different products that appeal to different segments Charging different prices to different segments 4 characteristics of e commerce that increased the urgency of pricing and revenue optimization The internet increases the velocity of pricing decisions The internet makes available and immediate wealth of information about customer behavior The internet provides a unique laboratory for experimenting with pricing alternatives The internet may provide deeper information about cost and competitive prices The Financial Impact of Pricing and Revenue Optimization McKinsey Study Results of two studies on the average impact of a 1 improvement in different variables on operating profit Five Key Components to Revenue Management Demand Analysis Competitive Knowledge Weekly Strategy Meeting The Revenue Manager Strategic Pricing and Distribution RM process flow Segment the Market based on buying behavior Predict Customer Demand forecast capacity at product price level Optimize Price Recalibrate Dynamically Produce value cycle conditions of demand elasticity Demand is less elastic when Fewer options are available Product is perceived as inexpensive available to select a product Limited time Demand is more elastic when More options Unlimited time Product is perceived as expensive are available available to select a product Different types of demand Stable demand groceries Seasonal demand holiday items Perishable demand fruits vegetables and so on Time sensitive demand travel or show tix 3 traditional approaches to pricing Cost plus Market based Value optimization Price waterfall a graphical way of showing the discounts Study Table 2 1 comparison of 3 approaches p16 Cost Plus cased on costs ignores competition and customers and liked by finance Market based based on competitors ignores cost and customers and liked by sales Value based based on customers ignores cost and competitions and liked by marketing 3 Dimensions of the pricing and revenue optimization cube Channel customer type and product The Pricing and Revenue Optimization Process Set goals and constraints update market response analyze alternatives choose the best alternative execute pricing the market monitor and evaluate performance Understand Figure 2 5 the sequential processes The overall PRO process has been divided into 8 activities 4 activities are part of operational PRO Analyze alternatives choose the best alternative execute procing monitor and evaluate performance Supporting PRO activities Segment Market Set goals and constraints Update market response Determine Market response The Seven Core Concepts Focus on price rather than costs when balancing supply and demand Replace cost based pricing with market based pricing Sell to segmented micromarkets not mass markets Save your products for your most valuable customers Make decisions based on knowledge not supposition Exploit each products value cycle Continually re evaluate your revenue opportunities Different Methods of Market Segmentation Time of purchase time segmentation perishable products that age demand goes down as products age seasonality Customer characteristics e g seniors AARP Sales channel online offline Offer a discount to large customers Offer a discount for a slow delivery Dilution Displacement Dilution Selling a product to a customer at a lower price than they would have otherwise been willing and able to pay Displacement In constrained capacity situations the acceptance of a low value purchase that results in the denial of a higher valued purchase at a later point in time Fences Revenue will disappear unless market segments are kept separate to limit leakage from high priced segments to low priced segments Tools to maintain segment separation are called fences Examples of fences The fee airlines charge to modify a low fare ticket schedule usually 150 200 The requirement for a Saturday night stay over for a low fare ticket Booking and paying requirement 90 or 60 days in advance Cross Ch 6 Critical 9 steps to success 1 Evaluating Unique Market Needs 2 Evaluate your organization and progress Define and document specific issues addressed to maximize revenues Interviews documentation and data gathering affecting the products offered the prices competition and customer behavior It is important to understand what the customer is buying rather than what you are offering 3 Qualify the Potential Benefits Quantification Methodologies Back of the Envelope Simulation Modeling Expected ROI given costs and constraints Consensus on Corporate Objectives Constraints 4 Enlist Technology 5 Implement Forecasting Forecasting is the art and science of predicting future events Three rules of good forecasting The forecast 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 is to forecast demand for each segment A two step process 1 Build an off line demand model for each segment using various forecasting techniques e g qualitative techniques time series and