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 etc Who Else Uses It o Television Ads NBC ABC UPS Hotels Washington Opera 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 o Tactical Segment market different prices Quarterly or annually 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 o Identification of customer segments and establishment of products targeted at those RM Strategy segments Types of Customers o Business o Leisure RM Systems RM Decisions 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 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 o Where their customers are coming from Military AARP seniors Family etc o How they prefer to book their hotel Contact center walk in GDS internet Market Segmentation needs 3 things Segments Channels 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 business arrived Demand of Forecasting PROBLEM o Hotel breakdown of how the business arrived at the hotel or through which channel the 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 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 o Turned away because capacity constraints or restrictions o Customers turned down because they are not inclined to pay the price Denials Regrets 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 OPTIONS are available MORE UNLIMITED Product is perceived as EXPENSIVE 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 Other 4 supporting PRO Activities 4 parts are part of the operational PRO 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 Sell to segments as micro markets NOT mass markets o Core Concept 3 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 that results in denial of a higher valued purchase at a later point constrained capacity acceptance of a low value purchase Displacement 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