HFTRM Intro Definition of RM 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 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 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 RM 1978 Airline Deregulation 1980 Hotel Manual Inventory Control 2007 Many industries use RM Rental Cars Cruise Lines Restaurants Hospitals Golf Courses Electricity Advertising Sport Events Theater Pop Concerts Public transits Which firms industries use RM Airline All Hotels Hyatt Marriott Hilton Sheraton Forte Disney Vacations Club Med Princess Cruises Norweigan Car Rental National Hertz Avis Washington Opera Television Ads CBS ABC NBC UPS Texas Children s hospital The origins of RM Bill Marriott story Bill Marriott s story Robert Cross wanted to interview Bill Marriott because he was a big proponent of RM 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 and 1 for each additional person The average room slept four and with a roll away cot making a fifth bed Bill could get up to 13 per night 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 Techniques of RM are applicable when these conditions are met Capacity is limited and immediately perishable example empty hotel room Customers book capacity ahead of time This gives airlines the opportunity to track demand for future flights and adjust prices accordingly to balance of supply and demand Prices are changed by opening and closing predefined booking classes Airlines establish a set of prices fare classes for each flight and then open or close those fare classes as they wish 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 Four characteristics of e commerce that increased the urgency of pricing and revenue optimization The internet increases the velocity of pricing decisions A typical major domestic airline needs to evaluate 500 000 price changes a week The internet makes available and immediate wealth of information about customer behavior The internet provides a unique laboratory for experimenting with The internet may provide deeper information about cost and pricing alternatives competitive prices The Financial Impact of Pricing and Revenue Optimization McKinsey Study Some retailers are achieving gains in gross margins of 5 15 from pricing optimization systems Results of two studies on the average impact of a 1 improvement in different variables on operating profit McKinsey 1992 A T Kearney 2000 11 1 8 2 Price Management Variable cost Sales volume Fixed Cost 7 8 3 3 2 3 5 1 3 0 2 0 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 on demand conditions and product strengths Effective management of internet channels with an eye towards profitability Innovative packaging Search Engine Optimization SEO GDS marketing Weekly Strategy Meeting Opportunity for the RM team to discuss detailed pricing and distribution tactics both short and long term for group and transient Evaluate effectiveness of past strategies tactics and apply lessons learned The Revenue Manager Oversees the development implementation and measurement of all RM initiatives and practices ensuring execution of transient and group pricing and distribution strategies tactics that optimize revenue capture from existing demand RM is the quarterback A dedicated resource that provides a competitive edge RM process flow Produce value cycle conditions of demand elasticity 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 PhillipspricingCh2 PRO 3 traditional approaches to pricing Cost plus Market based Value optimization Price waterfall a graphical way of showing