revenue management by iqbal

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Revenue ManagementSupply Chain Management


Introduction

• In Revenue Management, we focus on how to set the best prices for the offered products.

• The airline industry, where tickets for the same flight may be sold at many different fares depending on the remaining time until departure and the number of unsold seats.

• Essentially means setting and adjusting prices on a tactical level in order to maximize profit.


Definition

• “Revenue management (RM) is the science and art of enhancing firm revenues while selling essentially the same amount of product.”

• Revenue Management is an approach taken by businesses that want to optimize their revenue stream. This is achieved through a thorough understanding of the marketplace that manipulates product demand, timing and targeting to best effect.


History and Background

• 1985 – Airline Industry, American Airlines and Delta Airlines.

• 1990 – Transportation Companies, National Car Rentals

• 1993 – Manufacturing Companies, General Motors

• 1996-2000 – TV Channels, NBC


RM - Preconditions• Product is perishable • Can be sold in advance (Airline Tickets)

• Capacity is limited (Hotel Rooms)

• Market can be segmented (Business Class and Economy Class)

• Variable costs are low (Cost per Passenger)

• Demand varies (On Eid demand for train travel is high)


How does it Work?

• Market Segment Pricing

• Peak/Off-Peak Pricing

• Forecasting Demand

• Inventory Allocation Basics


Market Segment Pricing

• Define the various segments of the market\• Economic Price Discrimination. • Airline Industry Segmentation

Characteristics Business Travel Leisure Travel

Advance Booking Booking close to departure.

Booked well in advance of departure.

Stay at Destination Rarely Include a weekend.

Usually includes a weekend.


Market Segment Pricing - Cont

• Segmenting the total market for various industries.

Industry Method of Market Segmentation

Freight Transportation

Vary rates by commodity being shipped.

Health Care Time sensitive care vs. postponable care.

Broadcasting Guaranteed spots vs. preemptable spots vs. rotatable spots.

Utilities Urgent, non-discretionary service vs. non-urgent, interruptible service.


Peak/Off-Peak Pricing

• Time element is added to the pricing.• Raising prices during periods of peak demand.• Discounting prices during periods of slack demand

Industry Type of Discount

Air Travel Night Coach fares.

Car Rental/Hotel Weekend discounts in major cities (not resorts).

Telephone Companies

Reduced long distance rates on nights and weekends.

Theaters Discounted Matinees.

Golf Discounted off peak tee times.


Forecasting Demand

• Demand Patterns (such as time -of-day, day-of-week or season-of-year)

• Demand Trends (growth in demand due to growth in the economy at large)

• Uncertainties in Demand

1. Producing the best possible forecast of demand.2. Acknowledging the uncertainty and reflecting it

in the decision analysis process.


Inventory Allocation Basics

• Allocate inventory among price levels/market segments to maximize total expected revenue or profits in the face of uncertain levels of demand.


Inventory Allocation Basics - Cont

• Example• We have a unit of capacity (an airline seat or a hotel room or 30

seconds of television advertising time)

• Customer A

• Customer B

• Customer C

• Customer D



• Customer A

• Potential Customer• Market Segment – Price $100 per unit• Probability that Customer A will want this unit – 70%• Expected Revenue for that unit = $70 ($100 x 70%)• 10 times the same situation gives $700 ($70 x 10)



• Customer B

• Offers – Price $60 for the unit, in cash• Probability that Customer B will want this unit – 100%• Expected Revenue for that unit = $60 ($60 x 100%)• 10 times the same situation gives $600 ($60 x 10)



• Customer C




• Customer D



Inventory Allocation Basics - ContPotential Customer A

Customer B Customer C Customer D

Price $100 $60 $80 $70Probability 70% 100% 100% 100%Expected Revenue for the unit

$70 $60 $80 $70

10 Times $700 $600 $800 $700Decision - Reject Accept Indifferent

• We should never sell a unit of capacity for less than we expect to receive for it from another customer, but if we can get more for it, the extra revenue goes right to the bottom line.


Use by Industry

• Understand & analyse libraries’ concerns about business models

• Analyse strengths & weaknesses of business models– New models as well as current models– Open access became even more prominent as an issue as

the study progressed– Strong interest in repositories emerged

• Identify “new” models that might solve some problems


Use by Industry

• Airlines Industry

• Hotel Industry

• Rental Cars Industry


Airlines Industry

• Capacity is regarded fixed.• Unsold seats can be said to have perished.• Special software to monitor how seats are being

reserved and react accordingly.• Keep a specific number of seats in reserve• Price of each seat varies inversely with the

number of seats reserved


Hotel Industry

• To calculate the rates, rooms and restrictions on sales in order to best maximize the return.

• Selling rooms and services at the right price, at the right time, to the right people.


Rental Car Industry

• In the rental car industry, yield management deals with the sale of optional insurance, damage waivers and vehicle upgrades.

• It accounts for a major portion of the rental company's profitability, and is monitored on a daily basis.


Other Issues in RM

• Ethical Issues And Questions Of Effectiveness

• Econometrics

• Revenue Management and E-Commerce


Thank You!

revenue management by iqbal

Business

inventory

unit 100expected

demand

unit 70

unit

customer

capacity

10 times