Revenue Management: A Practical Pricing Perspective

Book Discription

Understanding Your Customers and Pricing Strategies

To be successful in business, it’s crucial to understand your customers. This involves knowing how much they are willing to pay for your product and developing appropriate strategies based on that information.

Knowing Your Market Segment

Instead of offering the lowest price possible just to attract customers, focus on understanding your market segment. This includes:

  • Identifying the price point at which they are comfortable making a purchase
  • Determining when they are most likely to buy
  • Figuring out which distribution channels they prefer

Differentiating Pricing and Revenue Management

It’s important to distinguish between pricing and revenue management:

  • Pricing is about deciding where you want to position yourself in the market – as a premium or low-cost option.
  • Revenue management involves making strategic and tactical decisions to maximize your revenues and profits.

The Evolution of Revenue Management

Revenue management has evolved significantly over the years. It has been influenced by:

  • The groundbreaking work of Peter Belobaba on air travel demand and airline seat inventory management in 1987
  • The development of sophisticated management science models
  • The increasing accessibility of technology
  • The recognition that revenue management can greatly improve the financial performance of businesses

Revenue Management Across Industries

In the past, revenue management was primarily used in the airline industry. However, with the shift from manufacturing to service-based economies, it has become relevant in various sectors.

Nowadays, many consumer products and services are based on managing time slots as inventory. This, along with the ability for customers to make instant purchases online, has made revenue management crucial in industries such as:

  • Hospitality (hotels)
  • Food service (restaurants)
  • Transportation (including airlines)

“Revenue Management: A Practical Pricing Perspective” – Book Overview

This book is a valuable resource for anyone interested in learning about revenue management. It features chapters written by leading researchers, experts, and practitioners in the field.

The target audience includes:

  • Academics and students studying price management
  • Managers working in operations or at a unit level within service industries that have limited capacity (e.g., hotels, restaurants, airlines)

Key Features of the Book

  • Latest Research and Theories: The book covers the most up-to-date research and theories on revenue management.
  • Practical Guidance: It also provides practical insights on how to implement revenue management strategies effectively.
  • Diverse Perspectives: Since the book is written by various authors from different backgrounds and industries, each chapter has its own unique style. However, all chapters are authoritative and accessible to both beginners and experienced professionals.

The book is complemented by a series of audio and PowerPoint presentations available on Henry Stewart Talks. These resources are part of the “Practical Pricing and Revenue Management” series.

Whether you prefer reading individual chapters or following the book sequentially, “Revenue Management: A Practical Pricing Perspective” offers valuable knowledge for anyone

Book Information

Print Length

293 Pages

Language

English

Publisher

Palgrave Macmillan

Publication Date

December 8,2010

Dimensions

6 x 1 x 9 inches

ISBN-10

0230241417

ISBN-13

978-0230241411

About The Author

About Ian Yeoman

Dr. Ian Yeoman - Futurist Ian is probably the world's only professional futurologist dedicated to specializing in travel and tourism. Ian learned his trade as the scenario planner for VisitScotland, where he established the process of futures thinking within the organisation using a variety of techniques including economic modelling, trends analysis and scenario construction. Today he is

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About Una McMahon-Beattie

Professor Una McMahon-Beattie is Head of AACSB Accreditation and the former Head of Department for Hospitality and Tourism Management which includes the award winning restaurant, The Academy, Belfast, and the Consumer Insight Lab (CIL) and the Food and Consumer Testing Suite (FACTS), Coleraine. Una studied Modern History at Queen’s University Belfast. In 1988 she completed an MSc in International

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Table Of Contents

Revenue Management (RM) and pricing may be described as the art of selling products to the right customers at the right prices. The concept is based on the assumption that different customers are willing to pay different prices for the same product and that by differentiating the price according to customer characteristics, overall revenue can be maximized. While the term “Revenue Management” often refers to the problem of defining the amount of products to be offered at one price, the term “pricing” usually refers to the problem of defining optimal prices. Historically (Bobb and Veral, 2008), Revenue Management started as an operations management function, focusing only on capacity allocation given exogenous demand estimates (Gallego and Van Ryzin, 1997). In the 1960s, American Airlines started to use Operations Research models for Revenue Management decisions. Littlewood (1972) presented the revenue maximization model through booking limits and inventory control systems. The 1980s saw Revenue Management become a robust and workable system for solving the problems of fixed capacity, time-varied demand, segmentation, perishable inventory and high fixed costs, bringing a practical solution. One Significant milestone in Revenue Management was Peter Belobaba’s PhD thesis work, Air Travel Demand and Airline Seat Inventory Management (1987) which was a significant contribution to management of complexity, capacity allocation and real-time inventory solutions.

Revenue management has been widely studied (for a review of the Revenue Management literature, see Boyd and Bilegan, 2003; McGill and van Ryzin, 1999; Weatherford and Bodily, 1992) and has been applied to a number of industries including the airline industry (Smith et al., 1992), the hotel industry (Hanks et al., 1992), the restaurant industry (Kimes et al., 1998), the golf industry (Kimes, 2000), professional services (Siguaw et al., 2003), broadcast advertising (Bollapragada et al., 2002) and meeting space (Kimes and McGuire, 2001). Companies using Revenue Management have shown a revenue increase of 2-5 percent (Hanks et al., 1992; Kimes, 2004; Smith et al., 1992).
Revenue management can been used in industries that have a relatively fixed capacity, perishable inventory, high fixed cost and low variable costs, varying customer price sensitivity, time-variable demand patterns and the
ability to inventory demand through either reservations or through waiting lists (Cross, 1997). Kimes and Chase (1998) proposed that companies using Revenue Management have two strategic levers at their disposal: the management of time and the management of price. Time can be managed by controlling arrival and duration uncertainty and reducing the amount of time between customers and purchase transactions. Price can be managed by determining the optimal mix of prices and developing the rate fences associated with these prices. The key to a successful Revenue Management strategy is to be able to determine the optimal balance between time and price.

Given the significant impacts that pncmg and revenue optimization programs have on a firm’s profitability, it may come as somewhat of a surprise that rather little has been written about the impacts of staff effectiveness on such programs or the tactics and strategies that can be adopted to increase staff effectiveness (Okumus, 2004). Further, the criticality of staff effectiveness has been widely acknowledged, as “poor organizational planning is often the reason cited for the failure of a Revenue Management implementation, and poor training is frequently blamed for subsequent inadequate performance” (Talluri and Van Ryzin, 2004).1 Indeed, based on the authors’ experience over the past 25 years in more than a dozen industries, we estimate that superior pricing staff are likely to enable revenue gains of at least % percent and perhaps as much as % percent of revenue (excluding benefits resulting from improved decision support tools). This chapter identifies key principles that we have found enable staff to perform better and generate greater revenues.
A preliminary observation may be worth noting: frequently we talk in terms of failure or success. With respect to revenue optimization, such a dichotomy is likely to lead to errors, either through inaction or overreaction. We view revenue optimization success as a continuum; what makes the concepts in this and other chapters of the book so critical is that small advancements in revenue management success tend to have dramatic impacts on a company’s bottom line. For many companies, improved pricing decisions enable greater revenues with little increase in operating cost; the leverage on profits is exceptional.

In the last 4S years, the airline industry has undergone an expansion unrivalled by any other form of public transport. This expansion has been driven by falling costs and fares, which has stimulated higher demand for
services. High growth for the most part has also spelt low profits. While some airlines have consistently managed to stay in the black, the industry as a whole has been only marginally profitable. The long-term trend for air transport is declining fares (ICAO.int, 2009). As customers get accustomed to low fares this could have a significant impact on revenue. Consequently, performance improvement may have to come through sensitivity to costs and how they are managed.
The years 2008-09 have been two years of tsunami for aviation. Fuel prices soared to $140 from $70 in 2008 and subsequently in 2009 the demand for travel dropped by 4.2 percent resulting in reduced passengers, yield and profitability (see Table 4.1).
Revenue management has been busy managing this bust and recovery, experiencing late and sporadic demand whose ebb and flow has never been more dramatic. Though revenue management technology has been advancing at a rapid pace most of these changes dealt with how to best respond to competitive pressures in the market place in a relatively stable environment. Effective pricing and revenue management technology also involved getting the right price to maximize revenue possible. This legacy view has not prepared traditional revenue management for the paradigm shifts in the business environment they faced in the last two years. The two commonly acknowledged revenue challenges facing airlines are:

Trust of products, services and organizations is not a subject that people regularly think about. Indeed, trust may sound like some “faddish” or “fuzzy” concept to Revenue Management professionals but a significant amount of research has indicated that profit depends on it to a surprisingly large extent. It is something that can really make a marked difference when it comes to establishing, building and maintaining healthy buyer-seller relationships. What is clear is that in today’s society, characterized by widespread consumer distrust of companies and public bodies, revenue managers need to work hard at developing a trust-based relationship with their customers.
Indeed, in the service industries where demand is variable and fixed costs are a high proportion of total costs, the practice of Revenue Management through variable pricing has become widely accepted as a method for maximizing financial returns. However, the perception of trust and its effect on variable pricing decisions is an undervalued and under-researched area. It will be argued here that price discrimination which is implicit in Revenue Management systems may undermine trust in an organization, when buyers perceive that they have been treated less fairly than other buyers. Trust is at the heart of relationship marketing strategies, and yet there would appear to be a potential conflict between the aims of relationship marketing and the technologically-integrated customer relationship management (CRM), and Revenue Management

When Marie Antoinette supposedly said “let them eat cake”, she was seen as a lUxury junkie who’s out of control spending grated on the poor and unfortunate French people. But today, cake has become one of our favourite
lUxury foods. A revolution has taken place where individuals in the world have got richer. Luxury is no longer the embrace of the kings and queens of France but the mass marketing phenomenon of everyday life. Simply put, lUxury has become luxurification of the commonplace (Berry, 1994; Twitchell, 2001). The word luxury is derived from luxus, meaning sensuality, splendour, pomp and its derivative luxuria, means extravagance, riot and so on.

The rise of the lUxury in Western society is associated with increasing affluence and consumption. It is a phenomenon that has been creeping up in society for hundreds of years. At the turn of the twentieth century, it was
Thorsten Velben (1899) who coined the term “conspicuous consumption” in his theory of the leisure class. Veblen’s argument is based upon the belief that as wealth spreads, what drives consumers’ behaviour is increasingly
neither subsistence nor comfort but the “attainment of esteem and envy of fellow men”. Because male wage earners are too circumspect to indulge themselves, they deposit consumption on surrogates. Vicarious ostentation is observed in Victorian men who encouraged their wives and daughters to wear complicated trappings of wealth. Velben thought that the purpose of acquisition was public consumption of esteem, status and anxiety displayed by materialism. What Velben termed as conspicuous consumption were the trophies such as slaves or property where people would show off their wealth.

With the steep decline in asset values in 2008 and the deepening worldwide economic crisis, these are uncertain times for the tourism industry. In 2009 demand dramatically weakened across all customer segments. Under these economic conditions, airline CEOs are focused on airline profitability, capacity reductions, economic slowdown, escalating fuel costs, low-cost carrier (LCC) competition, ancillary revenues, channel efficiency, alliances/joint ventures and reducing complexity (Vinod, 2009b). Many of these core initiatives are influenced by Revenue Management and product distribution. Revenue Management and product distribution are inextricably linked to each other. Product distribution is the storefront that displays the recommendation of the Revenue Management process – the supplier’s products that are available for sale. There are two distribution channels – direct and indirect. The direct channels have an online and offline component, the supplier website and call center, respectively. The direct channels transact directly with an airline’s computerized reservations system (host CRS). The indirect channels also have an online and offline component, online travel agencies (OTA) and brick-and-mortar travel agencies. The indirect channels typically transact with a global distribution system (GDS) for schedules, fares and availability. The indirect channels contribute over 50 percent of the bookings worldwide.

The key driver for the evolution of airline pricing and Revenue Management since the US deregulation in 1978 is the ability to price discriminate. Price discrimination can lead to increased efficiency and is tolerated by the public if it is not perceived as too unfair. We believe that the airline industry would not be able to offer its current public service level for both leisure and business customers without it. Since the whole industry is permanently operating on low or negative margins, we also do not believe that such practices extract too much surplus from the customers.
The capabilities for price discrimination go hand in hand with the technical development of computerized distribution and Revenue Management systems. It is therefore useful to look at this process starting from the early introduction of reservation systems or global distribution systems (GDS) for travel agents, up to the use of the Internet under the aspect of the airlines’ desire to price discriminate. Specifically, the Internet, as pioneered by low cost carriers, offers unprecedented new opportunities for differential pricing (see Odlyzko, 2003 for an extensive discussion). As early as 1946 airlines experimented with a computerized reservation system in order to keep track of bookings and passenger information. By the 1960s many other airlines established their own reservation systems and placed terminals in their ticketing offices which allowed seats to be booked directly from a centrally maintained inventory database

Business to business (B2B) pricing differs from business to consumer (B2C) pricing. In both paradigms modeling demand as a function of price is central, but the nature of demand in the two cases is different, necessitating different analytic models. B2C is characterized by large demand volumes, each transaction representing a very small proportion of total revenue. On the other hand, B2B is characterized by relatively smaller transaction volumes, with each transaction representing a much larger proportion of total revenue. The fundamental differences in transaction volumes and revenue per transaction require different analytic processes. In the B2C setting demand can be modeled in aggregate and individual price recommendations applied to multiple transactions. In the B2B setting, each transaction is analysed and priced individually, characteristics enabled by the relatively smaller volume of transactions, and necessitated by the much larger revenue impact of each transaction.
In the context of this chapter, B2B pricing decision problems are characterized by the following features:
• A distinct offering or deal, often characterized by a contract.
• Some degree of custom pricing, including discounts, freight costs and other deal terms.
• Deals can be characterized as won or lost.

Air cargo is the second largest mode of transportation in terms of traffic and value of goods transported. The maritime industry, as measured in ton kilometers of goods transported, is much larger than the air cargo industry.
In 2007, the world maritime industry generated a total of 60.9 trillion Revenue Ton Kilometers (RTK) of traffic compared to 193 billion RTKs of traffic for the air cargo industry (Boeing, 2008). Air cargo plays a vital role in the
global logistics supply chain for transporting goods such as medical supplies and legal documents in a fast and reliable manner. Air cargo has been displacing other modes of transportation in almost all regions and for all goods except for very short distances and for very large size cargo.
A simplified view of the air cargo supply chain is shown in Figure 12.l. The air cargo supply chain starts with cargo originating from a shipper and then to a forwarder who consolidates it and ships it through one or more air carriers to the final destination to be delivered to the consignee. An air carrier may ship cargo directly from origin to destination on a non-stop flight or move it through one or more terminals using connections depending upon space availability and service time commitments. Either the shipper or the carrier may pick up or deliver the cargo from/to the door.