Revenue Management Summary
Semester 4
, Introduction
A bit of history
- Revenue management comes from the airline industry
o Airlines had fixed prices
- So how did they compete? services
- 1978 important, deregulation act was implemented
- pre-deregulation
o Price allowance
o Prices are negotiated twice a year.
- Post deregulation
o The birth of low-cost carriers
o Inventory manager
o Implementation of Yield and Load factor as KPI’s
Some definitions
- Revenue management = the art and science of predicting (real-time) customer
demand at the micro market level and optimising the price and availability of products
(Robert G. Cross)
- Revenue management/ Yield management = Yield management was the process
of given the demand streams coming in, determining what is the most profitable
demand to accept, i.e. yielding (Steve Pinchuk)
- Revenue management = A set of revenue maximization strategies and tactics
meant to improve the profitability of certain businesses (Gabor Forgacs)
Science of explaining tomorrow why the predictions you made today did not come
true
- Discounting is always done from top – down
- Somebody who pays a discount rate can be more profitable because he/she stays
longer or/and more often.
Simply put:
- The right product (capacity)
- The right person
- For the right price
- In the right period
- At the right place
Characteristics of service industries
- Relatively fixed capacity
o Supply is fixed, even in a restaurant
- Segmented market with predictable demand per segment
, o We segment our customers. People who are sensitive to price and people who
are not. Business or leisure guests.
- Perishable inventory
o We cannot store the room, it cannot be sold twice
- Appropriate cost and pricing structure
o High fixed costs, relatively low fixed costs. How much does it cost to increase
with 1 room. How much does selling the room costs (cleaning etc.)
Fixed costs: If you do not sell the room you still have to pay the manager or
energy costs.
- Time variable demand
o Weather, vacation, almost weekend can have an effect on the demand. Demand
varies
- Convenience factor (willingness to pay)
o If your company pays e.g. you would take the time that fits you instead of the
price.
Cinemas, public transport, sports events they all apply revenue management
as well
The idea of RM
- E.g. variable costs are €10
- Fixed costs (salaries, administration) €35
- What is minimum rate you can sell the room for €11
o Why? If the room is empty you pay €35 anyways, whether you sell it or not.
o If you sell it then you still face the variable costs of €10
o When you sell it for €11 you cover at least the fixed costs
Stages or Revenue Management
Core concepts
- Do not base your pricing by just looking at costs but also at what the market is willing
to pay.
- Focus on price rather than costs when balancing supply and demand
- Replace cost-based pricing with market- or customer-based pricing
- Reserve sufficient space for your most valued clients
- Make decisions based on knowledge, not on gut feeling
Semester 4
, Introduction
A bit of history
- Revenue management comes from the airline industry
o Airlines had fixed prices
- So how did they compete? services
- 1978 important, deregulation act was implemented
- pre-deregulation
o Price allowance
o Prices are negotiated twice a year.
- Post deregulation
o The birth of low-cost carriers
o Inventory manager
o Implementation of Yield and Load factor as KPI’s
Some definitions
- Revenue management = the art and science of predicting (real-time) customer
demand at the micro market level and optimising the price and availability of products
(Robert G. Cross)
- Revenue management/ Yield management = Yield management was the process
of given the demand streams coming in, determining what is the most profitable
demand to accept, i.e. yielding (Steve Pinchuk)
- Revenue management = A set of revenue maximization strategies and tactics
meant to improve the profitability of certain businesses (Gabor Forgacs)
Science of explaining tomorrow why the predictions you made today did not come
true
- Discounting is always done from top – down
- Somebody who pays a discount rate can be more profitable because he/she stays
longer or/and more often.
Simply put:
- The right product (capacity)
- The right person
- For the right price
- In the right period
- At the right place
Characteristics of service industries
- Relatively fixed capacity
o Supply is fixed, even in a restaurant
- Segmented market with predictable demand per segment
, o We segment our customers. People who are sensitive to price and people who
are not. Business or leisure guests.
- Perishable inventory
o We cannot store the room, it cannot be sold twice
- Appropriate cost and pricing structure
o High fixed costs, relatively low fixed costs. How much does it cost to increase
with 1 room. How much does selling the room costs (cleaning etc.)
Fixed costs: If you do not sell the room you still have to pay the manager or
energy costs.
- Time variable demand
o Weather, vacation, almost weekend can have an effect on the demand. Demand
varies
- Convenience factor (willingness to pay)
o If your company pays e.g. you would take the time that fits you instead of the
price.
Cinemas, public transport, sports events they all apply revenue management
as well
The idea of RM
- E.g. variable costs are €10
- Fixed costs (salaries, administration) €35
- What is minimum rate you can sell the room for €11
o Why? If the room is empty you pay €35 anyways, whether you sell it or not.
o If you sell it then you still face the variable costs of €10
o When you sell it for €11 you cover at least the fixed costs
Stages or Revenue Management
Core concepts
- Do not base your pricing by just looking at costs but also at what the market is willing
to pay.
- Focus on price rather than costs when balancing supply and demand
- Replace cost-based pricing with market- or customer-based pricing
- Reserve sufficient space for your most valued clients
- Make decisions based on knowledge, not on gut feeling
