Revenue Management Concept

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Content has been extracted from different sources for training purpose. © Smriti Singh 2010

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Revenue Management Concept

  1. 1. MODULE 1 - Chapter 1 INTRODUCTION
  2. 2. Topics <ul><li>Revenue Management (RM) Introduction </li></ul><ul><li>History and Origins </li></ul><ul><li>Objectives of Revenue Management </li></ul><ul><li>Application </li></ul><ul><ul><li>Business conditions </li></ul></ul><ul><li>Revenue Management systems </li></ul>
  3. 3. RM Introduction <ul><li>Uncertainty involved in decisions </li></ul><ul><li>Product value </li></ul><ul><li>Satisfaction with the decisions </li></ul><ul><li>Complex selling decisions </li></ul><ul><ul><li>Examples </li></ul></ul>
  4. 4. RM Introduction <ul><li>E.g. of complex selling decisions </li></ul><ul><ul><ul><ul><ul><li>Conditions & terms of trade </li></ul></ul></ul></ul></ul>Segment buyers Buying behavior and willingness to pay Design products Segments and channels
  5. 5. Decision Base Determine Price Same channels Seasonal Factors Demand to each date Customer segments Short supply and allocation of products Complementary products
  6. 6. Synonyms <ul><li>Yield management </li></ul><ul><ul><li>Traditional airline term </li></ul></ul><ul><li>Pricing and revenue management </li></ul><ul><li>Pricing and revenue optimization </li></ul><ul><li>Demand management </li></ul><ul><li>Demand- chain management </li></ul>
  7. 7. RM Concerns <ul><li>Demand management decisions </li></ul><ul><ul><li>Structural decisions </li></ul></ul><ul><ul><ul><li>Selling format </li></ul></ul></ul><ul><ul><ul><li>Segmentation or differentiation mechanism </li></ul></ul></ul><ul><ul><ul><li>Terms of trade </li></ul></ul></ul><ul><ul><ul><li>Product bundling </li></ul></ul></ul><ul><ul><ul><li>E.g. Advertising prices in advance </li></ul></ul></ul>
  8. 8. <ul><li>Demand management decisions </li></ul><ul><ul><li>Price decisions </li></ul></ul><ul><ul><ul><li>Set prices </li></ul></ul></ul><ul><ul><ul><li>Product categories </li></ul></ul></ul><ul><ul><ul><li>Time </li></ul></ul></ul><ul><ul><ul><li>Discount </li></ul></ul></ul>RM Concerns
  9. 9. RM Concerns <ul><li>Demand management decisions </li></ul><ul><ul><li>Quantity decisions </li></ul></ul><ul><ul><ul><li>Accept/ reject offer </li></ul></ul></ul><ul><ul><ul><li>Capacity allocation </li></ul></ul></ul><ul><ul><ul><li>Products, segments and channels </li></ul></ul></ul><ul><ul><ul><li>Reserve </li></ul></ul></ul><ul><ul><ul><li>E.g. Airline seat, ticket types </li></ul></ul></ul>
  10. 10. RM Concerns <ul><li>Methodology and systems </li></ul><ul><li>Firm’s interface </li></ul><ul><li>Revenue increment </li></ul>
  11. 11. RM Concerns <ul><li>Most airlines </li></ul><ul><ul><li>Fixed prices </li></ul></ul><ul><ul><li>Seat allocation tactical </li></ul></ul><ul><li>Low- cost carriers </li></ul><ul><ul><li>Price, primary tactical variable </li></ul></ul>
  12. 12. RM Concerns <ul><li>Price or quantity recourse decisions </li></ul><ul><ul><li>Reserve </li></ul></ul><ul><ul><li>Movable partition in airlines </li></ul></ul><ul><ul><li>Demand driven dispatch </li></ul></ul><ul><ul><ul><li>Size </li></ul></ul></ul><ul><ul><ul><li>Demand fluctuation </li></ul></ul></ul><ul><ul><li>Car rentals </li></ul></ul>
  13. 13. RM Concerns <ul><li>Firm’s flexibility </li></ul><ul><ul><li>Online channels </li></ul></ul><ul><ul><li>Advertising product without price </li></ul></ul>
  14. 14. <ul><li>Old idea </li></ul><ul><li>Invisible hand of Adam Smith </li></ul><ul><ul><li>Market economics </li></ul></ul><ul><ul><li>Pricing, bundling, segmentation & optimizing </li></ul></ul>What’s new about RM? Forces of supply and demand Price formation
  15. 15. <ul><li>How ? </li></ul><ul><li>Decision making methods </li></ul><ul><li>Operational approach </li></ul><ul><ul><li>Demand management decision </li></ul></ul>What’s new about RM?
  16. 16. Complementary forces <ul><li>Advances in economics </li></ul><ul><ul><li>Model </li></ul></ul><ul><ul><li>Quantify </li></ul></ul><ul><ul><li>Estimate & forecast </li></ul></ul><ul><ul><li>Uses </li></ul></ul><ul><ul><ul><li>Demand models </li></ul></ul></ul><ul><ul><ul><li>Forecasting methods </li></ul></ul></ul><ul><ul><ul><li>Optimization algorithm </li></ul></ul></ul>
  17. 17. <ul><li>Advances in technology </li></ul><ul><ul><li>Automate </li></ul></ul><ul><ul><li>Capture & store </li></ul></ul><ul><ul><li>Implement & manage </li></ul></ul><ul><ul><li>Uses </li></ul></ul><ul><ul><ul><li>Large database </li></ul></ul></ul><ul><ul><ul><li>PC </li></ul></ul></ul><ul><ul><ul><li>Internet </li></ul></ul></ul>Complementary forces
  18. 18. Consequence <ul><li>Scale & complexity </li></ul><ul><ul><li>E.g. Airline </li></ul></ul><ul><ul><ul><li>No. of flights a day </li></ul></ul></ul><ul><ul><ul><li>Origin destination pairs </li></ul></ul></ul><ul><ul><ul><li>Dozens of prices </li></ul></ul></ul><ul><ul><li>Retail chains </li></ul></ul>
  19. 19. <ul><li>Possibility to improve </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Risk & rewards </li></ul></ul><ul><ul><li>Pricing economies </li></ul></ul><ul><ul><li>Accuracy </li></ul></ul><ul><ul><li>Timely reaction </li></ul></ul><ul><ul><li>Consistent real time decisions </li></ul></ul><ul><ul><li>Optimizing </li></ul></ul>Consequence
  20. 20. Human ability <ul><li>Higher level analysis </li></ul><ul><li>Extraordinary conditions </li></ul><ul><li>Reason through consequences </li></ul><ul><ul><li>Demand shock </li></ul></ul><ul><ul><li>New technologies </li></ul></ul><ul><ul><li>Sudden shift in consumer preference </li></ul></ul><ul><ul><li>Surprise price war of competitor </li></ul></ul>
  21. 21. Modern RM <ul><li>Science and technology </li></ul><ul><li>Disciplined processes and systems </li></ul><ul><li>Human intervention </li></ul>
  22. 22. RM origins- Airline History <ul><li>Airline price </li></ul><ul><li>CRS and GDS </li></ul><ul><li>Charter airlines </li></ul><ul><li>Low cost carriers </li></ul><ul><li>Peoples express </li></ul><ul><li>American Airlines </li></ul>
  23. 23. RM origins- Airline History <ul><li>Low cost carriers </li></ul><ul><ul><li>Lower labor cost </li></ul></ul><ul><ul><li>Point to point operations </li></ul></ul><ul><ul><li>No- frills service </li></ul></ul><ul><ul><li>New market </li></ul></ul><ul><ul><ul><li>Family holiday </li></ul></ul></ul><ul><ul><ul><li>Weekend travel </li></ul></ul></ul><ul><ul><ul><li>Students </li></ul></ul></ul>
  24. 24. People- Express <ul><li>Cost efficient operation </li></ul><ul><li>50- 70% lower fares </li></ul><ul><li>Highest profits </li></ul><ul><li>Migration </li></ul><ul><ul><li>Price sensitive discretionary travelers </li></ul></ul><ul><ul><li>Low cost </li></ul></ul>
  25. 25. Comparison <ul><li>Major airlines </li></ul><ul><ul><li>Frequent schedules </li></ul></ul><ul><ul><li>More cities </li></ul></ul><ul><ul><li>Established brand </li></ul></ul><ul><ul><li>Reputation </li></ul></ul><ul><ul><li>Schedule convenience </li></ul></ul><ul><ul><li>Service </li></ul></ul><ul><li>Low cost </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><li>Lesser threat </li></ul></ul>
  26. 26. American Airlines <ul><li>Recognized fixed cost </li></ul><ul><li>Compete on cost </li></ul><ul><ul><li>Purchase restriction and capacity controlled fares </li></ul></ul>
  27. 27. <ul><li>Purchase restriction </li></ul><ul><ul><li>Business travelers </li></ul></ul><ul><ul><li>Discounts </li></ul></ul><ul><ul><ul><li>30 days in advance </li></ul></ul></ul><ul><ul><ul><li>Nonrefundable </li></ul></ul></ul><ul><ul><ul><li>Min. stay </li></ul></ul></ul>American Airlines
  28. 28. <ul><li>Capacity Controlled </li></ul><ul><ul><li>Limited no. of discount seats </li></ul></ul><ul><ul><li>Compete on price </li></ul></ul><ul><ul><li>Business traveler revenue </li></ul></ul>American Airlines
  29. 29. <ul><li>Problems faced </li></ul><ul><ul><li>Super saver fares </li></ul></ul><ul><ul><li>Demand variation on diff. flights </li></ul></ul><ul><li>Intelligent approach </li></ul><ul><ul><li>DINAMO (Dynamic Inventory Allocation and Maintenance Optimizer System) </li></ul></ul><ul><ul><ul><li>First RM system </li></ul></ul></ul>American Airlines
  30. 30. Consequences of the Airline History <ul><li>Blessing </li></ul><ul><ul><li>Pervasive </li></ul></ul><ul><ul><li>Highly developed </li></ul></ul><ul><ul><li>Enormously effective </li></ul></ul><ul><ul><li>Profitability without RM </li></ul></ul><ul><ul><li>Revenue gains 4-5% of total </li></ul></ul><ul><ul><li>Airlines success </li></ul></ul>
  31. 31. <ul><li>Curse </li></ul><ul><ul><li>Airline specific terms </li></ul></ul><ul><ul><li>Bad reputation among customers </li></ul></ul><ul><ul><ul><li>Low fares </li></ul></ul></ul><ul><ul><ul><li>Dynamically changing fares structure </li></ul></ul></ul><ul><ul><ul><li>Reluctance to RM practices </li></ul></ul></ul>Consequences of the Airline History
  32. 32. RM involvement <ul><li>Changes </li></ul><ul><ul><li>Pricing structure </li></ul></ul><ul><ul><li>Sales practices </li></ul></ul><ul><li>Intelligent decisions </li></ul>
  33. 33. Framework for RM <ul><li>Application </li></ul><ul><ul><li>Tactical demand management </li></ul></ul><ul><ul><li>Culture to implement </li></ul></ul><ul><li>Where and when ? </li></ul>
  34. 34. <ul><li>Multidimensional nature of Demand </li></ul><ul><ul><li>Product </li></ul></ul><ul><ul><li>Customer </li></ul></ul><ul><ul><li>Time </li></ul></ul><ul><li>Decisions </li></ul><ul><ul><li>Structural </li></ul></ul><ul><ul><li>Price </li></ul></ul><ul><ul><li>Timing </li></ul></ul><ul><ul><li>Quantity </li></ul></ul>Framework for RM
  35. 35. Business Conditions <ul><li>Customer Heterogeneity </li></ul><ul><ul><li>Value of product </li></ul></ul><ul><ul><li>Purchase behavior </li></ul></ul><ul><ul><li>Willingness to pay </li></ul></ul><ul><ul><li>E.g. Hotel and Airline Industry </li></ul></ul>Heterogeneity Revenue
  36. 36. <ul><li>Demand Variability and Uncertainty </li></ul><ul><ul><li>Variation (seasonality, shock etc) </li></ul></ul><ul><ul><li>Bad decision </li></ul></ul><ul><ul><li>Require sophisticated tools </li></ul></ul><ul><ul><li>E.g. Air Travel </li></ul></ul><ul><ul><ul><li>Season, time of day, day of week, holidays </li></ul></ul></ul>Business Conditions Demand Variation Uncertainty
  37. 37. Business Conditions <ul><li>Production Inflexibility </li></ul><ul><ul><li>Complex demand management decisions </li></ul></ul><ul><ul><li>Supply and demand </li></ul></ul><ul><ul><li>Match demand variation </li></ul></ul><ul><ul><ul><li>Inflexible production  delays, producing units </li></ul></ul></ul><ul><ul><ul><li>Fixed costs  switch over costs </li></ul></ul></ul><ul><ul><ul><li>Capacity constraints  difficult & costly </li></ul></ul></ul>
  38. 38. Business Conditions <ul><li>Production Inflexibility </li></ul><ul><ul><li>Leads to more interaction </li></ul></ul><ul><ul><ul><li>Different segments of customer </li></ul></ul></ul><ul><ul><ul><li>Different products of product line </li></ul></ul></ul><ul><ul><ul><li>Different channels of distribution </li></ul></ul></ul><ul><ul><li>RM more beneficial </li></ul></ul>
  39. 39. Business Conditions <ul><li>Production Inflexibility </li></ul><ul><ul><li>Airline Industry </li></ul></ul><ul><ul><ul><li>Flight A  B </li></ul></ul></ul><ul><ul><ul><ul><li>Number of seats </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Total cost of output </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Independent of customer number </li></ul></ul></ul></ul><ul><ul><ul><li>Volume of sales & capacity constraint </li></ul></ul></ul><ul><ul><ul><li>Perishable product </li></ul></ul></ul>
  40. 40. Business Conditions <ul><li>Price as a signal of quality </li></ul><ul><ul><li>Key feature </li></ul></ul><ul><ul><li>Status symbols </li></ul></ul><ul><ul><li>Risk damaging status </li></ul></ul><ul><ul><li>Quality to consumers </li></ul></ul><ul><ul><li>RM  Price </li></ul></ul><ul><ul><ul><li>Not a status symbol </li></ul></ul></ul><ul><ul><ul><li>Not a signal of value </li></ul></ul></ul>
  41. 41. Business Conditions <ul><li>Price as a signal of quality </li></ul><ul><ul><li>Airlines </li></ul></ul><ul><ul><li>Price & quality </li></ul></ul><ul><ul><li>No frills & full- service carriers </li></ul></ul><ul><ul><li>No strong quality preference </li></ul></ul><ul><ul><li>Small difference in schedule & price </li></ul></ul><ul><ul><li>Brand loyalty </li></ul></ul>
  42. 42. Business Conditions <ul><li>Data and Information systems infrastructure </li></ul><ul><ul><li>RM requires data </li></ul></ul><ul><ul><ul><li>Accurately characterize </li></ul></ul></ul><ul><ul><ul><li>Collect & store </li></ul></ul></ul><ul><ul><ul><li>Implement & monitor </li></ul></ul></ul>
  43. 43. Business Conditions <ul><li>Data and Information systems infrastructure </li></ul><ul><ul><li>RM, time consuming, expensive & risky </li></ul></ul><ul><ul><ul><li>No database or transaction systems </li></ul></ul></ul><ul><ul><li>RM, beneficial </li></ul></ul><ul><ul><ul><li>transaction processing systems </li></ul></ul></ul>
  44. 44. Business Conditions <ul><li>Data and Information systems infrastructure </li></ul><ul><ul><li>Airline Industry </li></ul></ul><ul><ul><ul><li>GDS </li></ul></ul></ul><ul><ul><ul><li>Electronic selling & distribution </li></ul></ul></ul><ul><ul><ul><li>Automated business process </li></ul></ul></ul><ul><ul><ul><li>RM implementation </li></ul></ul></ul>
  45. 45. Business Conditions <ul><li>Management culture </li></ul><ul><ul><li>RM implementation </li></ul></ul><ul><ul><ul><li>Technically complex </li></ul></ul></ul><ul><ul><ul><li>Demanding practice </li></ul></ul></ul><ul><ul><ul><li>Sufficient familiarity </li></ul></ul></ul><ul><ul><ul><li>Receptive to innovation </li></ul></ul></ul><ul><ul><ul><li>Industry culture </li></ul></ul></ul>
  46. 46. Business Conditions <ul><li>Management culture </li></ul><ul><ul><li>Modern Airlines </li></ul></ul><ul><ul><ul><li>Scientific methods </li></ul></ul></ul><ul><ul><ul><li>Information systems </li></ul></ul></ul><ul><ul><ul><ul><li>Ticketing & reservations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Scheduling crews & aircrafts </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Handling baggage </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Planning meals </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Operational control </li></ul></ul></ul></ul>
  47. 47. Industry Adopters beyond Airlines <ul><li>Hotels </li></ul><ul><li>Cruise ship lines </li></ul><ul><li>Car rentals </li></ul><ul><li>Theatres & sporting venues </li></ul><ul><li>Radio/ TV broadcast </li></ul><ul><li>Retailers </li></ul><ul><li>Manufacturers </li></ul>
  48. 48. Overview of RM System <ul><li>Information flows, controls & design </li></ul><ul><li>Four Steps: </li></ul><ul><ul><li>Data collection </li></ul></ul><ul><ul><li>Estimation & Forecasting </li></ul></ul><ul><ul><li>Optimization </li></ul></ul><ul><ul><li>Control </li></ul></ul>
  49. 49. Overview of RM System <ul><li>Process: </li></ul><ul><ul><li>Factors </li></ul></ul><ul><ul><ul><li>Volume of data </li></ul></ul></ul><ul><ul><ul><li>Speed of change </li></ul></ul></ul><ul><ul><ul><li>Forecasting & optimization methods </li></ul></ul></ul><ul><ul><ul><li>Resulting decision </li></ul></ul></ul>
  50. 50. Overview of RM System <ul><li>Airline Cycle: </li></ul><ul><ul><li>Data Collection Points (DCP) </li></ul></ul><ul><ul><li>Reforecast </li></ul></ul><ul><ul><li>Re-optimize </li></ul></ul><ul><ul><li>Active last few days </li></ul></ul>
  51. 51. State of RM Profession <ul><li>Users </li></ul><ul><ul><li>Firms & individual </li></ul></ul><ul><ul><li>Manage business </li></ul></ul><ul><li>Vendors </li></ul><ul><ul><li>Develop & supply </li></ul></ul><ul><ul><li>Technology & consulting services </li></ul></ul>
  52. 52. State of RM Profession <ul><li>Airline Industry </li></ul><ul><ul><li>Components to RM system </li></ul></ul><ul><ul><li>Research & development organizations </li></ul></ul>
  53. 53. State of RM Profession <ul><li>Research & development staffs </li></ul><ul><ul><li>In-house technology advisors </li></ul></ul><ul><ul><li>Evaluate new technologies </li></ul></ul><ul><ul><li>Training & supervision </li></ul></ul><ul><ul><li>Pricing & capacity controls </li></ul></ul><ul><ul><li>Oversee automated systems </li></ul></ul><ul><ul><li>Intervene </li></ul></ul>
  54. 54. State of RM Profession <ul><li>Airline Industry </li></ul><ul><ul><li>Own systems </li></ul></ul><ul><ul><li>Scientific staffs </li></ul></ul><ul><ul><li>IT & software staffs </li></ul></ul><ul><ul><li>Consulting staff </li></ul></ul>
  55. 55. State of RM Profession
  56. 56. THANK YOU

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