Revenue Management: Yieldable versus Priceable

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Suresh Acharya, vice president of product development, JDA Software explores how the emergence of advanced price elasticity models and readily available comp-set price shop data has driven this shift from a “yieldable” to a “priceable” approach.

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  • Other things you want to say to point out value to client:They had a 10% increase in on-time deliveriesIn-stock positions climbed from 82% to 97% in first 6 monthsI don’t like the orange but the 6th slide has only so many colors to chooseNumbers always use $ (not ‘dollar”) and % (not ‘percent’)
  • While companies have had access to competitor prices, the internet has provided unprecedented price transparency to the end customer
  • This is a suboptimal approach - before a system can predict a priceresponse, it must first understand the positioning of the hotelagainst its competitors.
  • By incorporating competitive intelligence into the core of its analytics, PSRM provides a systematic framework to sense and respond effectively to changing market conditions
  • PSRM optimizes all key components of the RM process and enables the user to focus on managing exceptions and planning strategic initiatives
  • Shows the steps in increasing maturityQM – commuter & regional TOCsRRO – where GNER, Virgin, SNCF etc. are nowPSRM – ES has moved into a position of leadership, i.e. they have moved away from traditional RM towards pricing and are leading the way in implementing new technologies, even ahead of many airlines
  • Revenue Management: Yieldable versus Priceable

    1. 1. Revenue Management: Yieldable to Priceable… Suresh Acharya, JDA Software September 13, 2012
    2. 2. TopicsTraditional Yield Management • History • Assumptions • ShortcomingsPrice Optimization • New Reality • Concepts • EvolutionWhat next?? Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    3. 3. What is Revenue Management? Selling the right product to the right customer at the right time for the right price through the right channelRevenue Management is a process of maximizing revenue from a “perishable” product through a combination of pricing and inventory control. Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 3
    4. 4. What is Revenue Management? Perishable Products or Services Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 4
    5. 5. History Lesson: AA & People Express The Challenger: People Express • Product - Full-service network carrier • Fare Structure - Regulated oligopoly • Average Cost - 8.9¢ per Available Seat Mile • Average Yield - 12.3¢ per Revenue Passenger Mile The Champion: American Airlines • Product - Low cost, no-frills • Fare Structure - Rock-bottom • Average Cost - 5¢ per Available Seat Mile • Average Yield - 7.2¢ per Revenue Passenger Mile Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    6. 6.  Because they were able to underprice us at will All they needed to take away from us was that marginal traffic above break even All you have to do is take away a few seats on every flight and the guy is dead “The day…American Airlines came at us with Ultimate Super Savers…was the end of our run.” ““What changed? Nothing changed at our company, but our competitors used widespread yield management in every one of our markets, and they pushed us straight into bankruptcy.” – Don Burr, CEO, People Express Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 6
    7. 7. The Birth of Revenue Management First Class First Class Extra Revenue Fare $60 Economy Fare $120 $60 Fare $100 $40 Fare $80 $20 Fare $60 $0 30 Spoiled Seats Fare $50 Fare $40 } passengers unwilling to pay even $60 • 1 price sells 105 economy seats • 6 prices sell 126 economy seats • $6,300 revenue • $9,420 revenue
    8. 8. Assumptions of Traditional RMTraditional RM worked best when: – Prices were pre-determined – Unconstrained demand was often larger than capacity – Booking classes were well-fenced (e.g., a B-class customer would never purchase a Q-class ticket) – Competition did not heavily influence demand Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    9. 9. Prices: Flexible but they Change DynamicallyPrice-sensitive customers can now compare the prices of competing products. In a sense, they know the price of the capacity in the market. Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    10. 10. Hurdle Rates vs. Optimal RatesTraditional RM But even oncounsels to skim dates for whichthe cream from sell out is notcongested dates expected, prices should none theand free-sell at less remainyour lowest rates rational withon low demand respect to thedates. market. Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    11. 11. Access to Competitor Data The Rise of the Internet… …driving Unprecedented Price Transparency Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    12. 12. The Assumptions of TraditionalRM Are ErodingTraditional RM worked best when:  Prices were pre-determined  Unconstrained demand was often larger than capacity  Booking classes were well-fenced (e.g., a B-class customer would never purchase a Q-class ticket)  Competition did not heavily influence demand Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 12
    13. 13. Yielding the sought after…. Are the outcomes desirable? RM systems tend to restrict the availability of “low rate” business, but this is often business that is heavily promoted by chains… …so having paid to obtain the demand, should hotels really be shutting it out? Instead of restricting the availability of low yield products, use price directly to “organically” lower demand Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    14. 14. Competitor Information is an AfterthoughtA typical example of a BAR RM process might provide users with two pieces of data…but there are two significant problems with this approach Arrival Date: Mar 17 LoS 1 LoS 2 LoS 3 LoS 4 LoS 5 LoS 6 LoS 7+ RMS BAR Recommendation $120 $140 $120 $110 $110 $110 $110 Competitor BAR Recommendation $98 $135 $160 $126 $119 $115 $98 RM is “blind” to the market It doesn’t solve the core problem • “RMS Recommendation” is prepared • It leaves the final pricing decision up without insight into competitor rates to the end user • Competitor intelligence is brought in • It can leave large & dangerous gaps for “evaluation”, after the fact between “RMS” and “Market” rates Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    15. 15. Complexity versus Usability A good revenue management process in today’s dynamic environment is one that can be interpreted and completed reliably by the end user. Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    16. 16. Price Sensitive Forecasting It is critical to understand that Demand is a Function of PricePromotions 25% 20%Pricing -8%Seasonal Lift Spring Peak Summer Peak Christmas Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    17. 17. Competitive Analytics Which competitors are your true competitors?How should you react to a competitor’s price changes? Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    18. 18. YM when Demand Exceeds Capacity Hotel RM systems work by By understanding the inventory predicting future demand, constraints, a RM algorithm decides based on booking history and which subset of the remaining bookings current booking trends we should “yield out”, or displace Excess Demand Hotel CapacityRooms Sold This process works well on nights when demand outstrips supply, but offers little insight on nights when it doesn’t Arrival Date Days Left to Arrival Date Legend: Observed Demand Unconstrained Demand Hotel Capacity Price Optimization recommends rates at which profits are maximized to achieve a more optimal return on perishable inventory and capital-intensive assets. Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 18
    19. 19. Finding the Right Price Capacity At a current reference price of 200 Seats $67, this OD has demand for 164 Price optimization identifies that seats, a revenue of $10,988 the optimal price is $9 higher than the reference price Seat Rate RevenueSeats Sold Price: $49 Price: $76 Price: $109 Dmd: 200 seats Dmd: 150 Seats Dmd: 80 Seats Rev: $9,800 Rev: $11,400 Rev: $8,784 $49 $67 $76 $109 Price Plan Reference Legend: Price Sensitive Demand Revenue Capacity Price Price Optimization recommends rates at which profits are maximized to achieve a more optimal return on perishable inventory and capital-intensive assets. Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 19
    20. 20. Elasticities and Price Optimization Elasticity values less than -1: Elasticity values between -1 & 0: Elastic, very price-sensitive. Inelastic, not price-sensitive. Optimizer wants to lower the Optimizer wants to raise the price price below market reference above market reference price price Elastic Market Segment: Inelastic Market Segment: Optimal Price to Left of Market Reference Price Optimal Price to Right of Market Reference Price 10 £600 6 £600 9 £500 5 £500 8 7 £400 4 £400 Revenue Demand RevenueDemand 6 5 £300 3 £300 4 £200 2 £200 3 2 £100 1 £100 1 0 £0 0 £0-1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 ( p - mktrefprice ) / mktrefprice ( p - mktrefprice ) / mktrefprice Demand Revenue Demand Revenue Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 20
    21. 21. Price Optimization Price Sensitivity Inventory Competitors’Price Sensitive Forecasts Information Optimization Optimal Price Recommendations Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL
    22. 22. Is Price Optimization for Everyone? Segmentation well-defined and well-fenced Unavailability of Competitor Data Low Consumer Visibility and B2B Demand Mostly Exceeds Capacity Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL 22
    23. 23. The EvolutionMaturity Price Optimization Competitive Analytics Price Price-Sensitive Forecasting Optimization Traditional Yield Management Inventory Optimization Inventory Management Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL Benefits 23
    24. 24. The Next Frontier? Customized Pricing Big Data Unstructured Data Customer Choice Real-time Pricing and Decision Making Copyright 2012 JDA Software Group, Inc. - CONFIDENTIAL Benefits 24
    25. 25. Thank YouFor more info, contact info@jda.com www.jda.com/revenuemanagement

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