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Pricing is about deciding your market position whereas revenue management is the strategic and tactical decisions firms take in order to optimize revenues and profits. This book offers insights into research, theories, applications and innovations and how to makes these work in different industries.

Inhaltsverzeichnis

Frontmatter

Introduction: How to do it?

Introduction: How to do it?

Abstract
Any business must know its customers, specifically you need to know how much your customers will pay for a product and device appropriate strategies. This is not about offering the lowest price in order to fill capacity. It’s about knowing your market segment, how much they will pay when they will purchase and what distribution channels they will use. Pricing is about deciding your market position, that is, premium or low cost, whereas Revenue Management is the strategic and tactical decisions firms take in order to optimize revenues and profits. Since the publication of Peter Belobaba’s PhD thesis work. Air Travel Demand and Airline Seat Inventory Management (1987), which was a defining moment in the management of complexity, capacity allocation and real-time inventory solutions, Revenue Management has come of age, fuelled by superior management science models and greater accessibility to technology in addition to the acceptance of the guiding principle of Revenue Management in enhancing the bottom line. At the same time, society has shifted from manufacturing to a service industries economy where the unit of inventory is time, in which the consumer year on year is more price sensitive. Today, in the age of the Internet, the management time slots as inventory along with instant purchase is the foundation of many consumer products and services. Hence, Revenue Management has spawned across many industries and applications.
Ian Yeoman, Una McMahon-Beattie

Revenue Management Theory and Issues

Frontmatter

1. The Applications of Revenue Management and Pricing

Abstract
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.
Catherine Cleophas, Ian Yeoman, Una McMahon-Beattie, Emre Veral

2. The Role of Space in Revenue Management

Abstract
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).
Sheryl E. Kimes, Leo M. Renaghan

3. Pricing and Revenue Optimization: Maximizing Staff Effectiveness

Abstract
Given the significant impacts that pricing 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 1/4 percent and perhaps as much as 3/4 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.
Warren H. Lieberman

4. The Era of Convergence in Revenue Management

Abstract
In the last 45 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.
Ramesh Venkat

5. Does the Customer Trust You?

Abstract
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.
Una McMahon-Beattie, Adrian Palmer, Ian Yeoman

6. The Changing Meaning of Luxury

Abstract
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 luxurincation 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.
Ian Yeoman, Una McMahon-Beattie

7. The Future of Airline Distribution and Revenue Management

Abstract
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.
Ben Vinod

8. Global Distribution Systems (GDS) Capabilities, Origin and Destination (OD) Control and Dynamic Pricing

Abstract
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.
Karl Isler

9. B2B Price Optimization Analytics

Abstract
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.
Jon A. Higbie

10. Fencing in the Practice of Revenue Management

Abstract
Market segmentation, as a key strategic element in the practice of Revenue Management, will generally increase revenues and profits but the price difference between the markets segments will motivate some customers to try to switch segments. For example, a customer might visit a retail store to “touch and feel” a product but then goes home and buys it online at a lower price. Once a market segmentation structure has been put in place, firms use various conditions and restrictions to maintain separation of the price categories. Devices such as less information, prolonged purchase processes and advanced purchase and refund penalties “fence” customers into different market segments and make it difficult or time consuming for the customer to migrate from one market segment to another.
Michael Zhang

Applications

Frontmatter

11. Search Engine Advertising: An Overview from a Revenue Management Angle

Abstract
After having been used by the military and the academia for several years, the Internet became mainstream in the early 1990s. Ever since then, Internet use has been spreading globally in leaps and bounds. The number of global Internet users was only around 16 million in 1995 and that figure has reached around 1.75 billion in 2008.1 Of course, it didn’t take too long for advertisers to notice this new medium that has the potential of reaching millions in a brand new way. In fact, online advertising (which we will use interchangeably with Internet advertising in this chapter) has been around since 1994. One of the first of such advertising efforts was in the form of banner ads — a few pioneer examples of this were the result of an advertising agreement between Hotwire and AT&T, and appeared online in October 1994.
Özgür Özlük

12. Revenue Management and Air Cargo

Abstract
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.
Raja Kasilingam

13. Practical Pricing for the Hotel Industry

Abstract
As illustrated in the following example, pricing decisions can exert extraordinary, but easily overlooked leverage on a hotel’s profitability. Consider a hotel with 300 rooms; we’ll call it Veritec Lodge. Veritec Lodge generally has an annual occupancy percentage of 65 percent. As shown in Table 13.1, small increases in occupancy percentage have a relatively modest effect on the hotel’s annual revenue; increasing the occupancy percentage from 65 percent to 66 percent, an increase of almost 1100 room nights, results in a revenue gain of about 1.5 percent.
Warren H. Lieberman

14. Practical Pricing and the Airline Industry

Abstract
Airline pricing and Revenue Management has a long history starting with the deregulation of the airline markets in the late 1970s. This chapter focuses on practical aspects from a traditional carrier’s point of view. Beside the basic concepts of market segmentation, demand forecasting, overbooking and availability optimization two main developments, from leg- to network-based Revenue Management and from independent to dependent demand structures are also described. As an example of airline-specific challenges some restrictions of legacy systems used in global distribution channels are mentioned. It is pointed out that most Revenue Management developments can be seen in the light of removing or relaxing wrong assumptions on which the first leg optimization methods have been based on.
Stefan Poelt

15. Setting Optimal Rents for Apartment Firms

Abstract
Everyday apartment operators have to set rental rates for apartment units. How the rents are determined will have a significant impact on an apartment firm’s value, revenue and profits. In this chapter, we introduce an approach to setting the optimal rents based on the theory of Revenue Management. The chapter is organized as follows. We start with an introduction of basic concepts in the apartment industry, followed by a description of a methodology by which the optimal rents can be derived. We then outline the procedure for setting optimal rents, followed by an illustration of a case study. Finally, we conclude this chapter with the implication of this procedure in the practical application of Revenue Management for apartment operators.
Jian Wang

16. Practical Pricing and the Restaurant Industry: Application of Revenue Management Principles to Pricing Menus and Services

Abstract
Pricing is an important strategic lever for a firm’s profitability. The bottom line impact of pricing is well demonstrated by the fact that a mere 1 percent increase in price can lead to 15–20 percent increase in the bottom line when no increase in cost and no decrease in demand can be assumed. For example, for a product the current price of which is $10.00 and profit margin is 5 percent ($0.50), when the price of this product increases 1 percent from $10.00 to $10.10, the price increase of $0.10 goes directly to the profit since no cost increase is assumed. This 1 percent increase in price results in an increase in profit by 20 percent ($0.10/$0.50).
Sunmee Choi

17. Practical Pricing for the Car Park Industry

Abstract
Revenue Management is about trying to sell the correct inventory units, to the appropriate customer, at the most opportune time. In this chapter a new application of Revenue Management is proposed that helps to manage the inventory units of car parks, that is, the parking spaces. An application model is suggested and, based on occupation data, a forecast is made of likely future drivers. The forecasts are then used to distribute the car parks’ available capacity. For this, the model is divided into different categories, using different time slot rates. It also takes into account different promotional offers to drivers, which would mean lower prices for these services and a reduction of parking uncertainty. In addition, a pattern of behaviour in the sales of the car parks is provided and, for this, various heuristics for allocating inventory is simulated based on the arrival of the drivers. This approach is introduced in a series of problems and the results obtained are shown, measured in terms of incomes, efficiency and occupation.
José Guadix

18. Golf Course Revenue Management

Abstract
Golf is one of the greatest sports of the world and is played in many countries. It is enthusiastically followed by millions more on television who, though they have never teed off nor sunk a putt themselves, can still appreciate the game from the comfort of their home.
Lila Rasekh, Yihua Li

Backmatter

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