Exam 2 Review Background and Introduction Definition of Revenue Management 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 A business philosophy and a systematic approach to applying price and inventory controls in order to increase revenues and maximize returns on assets by responding to current and potential demand The art and science of predicting real time customer demand at the micro market level and optimizing the price and availability of products to match that demand Sell the right product through the right channel to the right customer at the right time for the right price History of Revenue Management 1978 Airline Deregulation 1980 Hotel Manual Inventory Control 2012 Many industries use RM Rental Cars Cruise Lines Restaurants Hospitals Golf Courses Electricity Advertising Sport Events Theater Pop Concerts Public transits The origins of Revenue Management Bill Marriott story In 1957 he was finishing a tour of active duty in the US Navy when his father Bill Sr just built his first hotel the Key Bridge Marriott in Washington D C The elder Marriott asked his son to run it Young Bill knew nothing about the hotel industry or much about business for that matter but he proved to be very astute Bill noticed that the hotel which was very convenient to most of the governmental agencies was almost always full during the middle of the week At the time the Key Bridge hotel had a very simple pricing structure 9 per night The average room slept four and with a roll away cot making a fifth bed Bill could get up to 13 per night and 1 for each additional person The hotel had a drive up registration window which Bill himself would manage On the nights when they predicted sell out of all the rooms he would stick his head out of the window and count the bodies in the cars as they drove up to register If it had only one or two people in it he would politely tell them No Vacancy 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 Core Concept number 4 in the book Marriott now has more than 3 100 properties worldwide over 550 000 rooms 66 countries 146 000 associates 75 million reservation transactions and 13 B revenue in 2008 He no longer sticks his head out of the window since he has a sophisticated RM system Which firms industries use Revenue Management Car Rental National Hertz Avis Airline All Hotels Hyatt Marriott Hilton Sheraton Forte Disney Vacations Club Med Princess Cruises Norweigan Washington Opera Television Ads CBS ABC NBC UPS Texas Children s hospital Techniques of Revenue Management are applicable when these conditions are met 1 Capacity is limited and immediately perishable an empty seat on a departing aircraft or an empty hotel room cannot be stored to satisfy future demand 2 Customers book capacity ahead of time Advance booking are common in industries with constrained and perishable capacity since customers need a way to ensure ahead of time that capacity will be available when they need to consume it This gives airline the opportunity to track demand for future flights and adjust prices accordingly to balance supply and demand 3 Prices are changed by opening and closing predefined booking classes A system designed to establish a set of prices for each flight and then open or close those fare classes as they wish Lessons learned from Airline Industry 1 Pricing and revenue optimization can deliver more short term profitability benefits 2 E Commerce both necessitates and enables pricing and revenue optimization Electronic distribution was pioneered from airlines industry their computerized distribution systems Sabre and Galileo allowed immediate receipt and processing of customer booking requests It also enabled airlines to change prices availabilities and update information instantaneously 3 Effective segmentation is critical The ability of the airlines to segment customers between early booking leisure passengers and late booking business passengers is a key success to revenue management 4 Characteristics of E Commerce that increased the urgency of pricing and revenue optimization 1 The internet increases the velocity of pricing decisions 2 The internet makes available an immediate wealth of information about customers behavior that was formerly or only available after a considerable time lag This information is being captured and analyzed by companies both to support cross selling and up selling and also o understand customer behavior and segmentation 3 The internet provides a unique laboratory for experimenting with pricing alternatives and alternative pricing models eBay and Priceline are each have a business model based on variations of auction pricing 4 Even in cases where a customer does not buy online the internet may provide deeper information about cost and competitive prices In 2001 62 of new car buyers consulted the internet for information before buying Merchants need to be able to use intelligent targeting pricing in order to maintain profitability The financial impact of pricing and revenue optimization McKinsey Study The McKinsey researchers concluded that a 1 improvement in profit would on average result in operating profit of 11 1 Price improvement is the fastest and most cost effective way to increase profit and it is likely to gain in importance as the velocity and complexity of pricing decisions increases Furthermore a new generation of information technology provide the information and algorithmic power needed to analyze and exploit market opportunities Finally pricing is often the area that can be improved the most with the least investment Five key components to Revenue Management Demand Analysis Revenue Management System RMS Decision support tool capable of analyzing history and pace and developing inventory strategies based on availability and length of stay requirements to maximize demand Accurate Forecasting Business Mix Manipulation and Optimization Need to understand demand dynamics within the market as well Competitive Knowledge Knowing your strengths and weaknesses in the market provides confidence in formulating and deploying effective revenue management strategies Strategic Pricing and Distribution Deploy pricing strategies that are competitive within the market based