Presentation on theme: "OPSM 405 Service Management"— Presentation transcript:
1OPSM 405 Service Management Koç UniversityOPSM 405 Service ManagementClass 12:Yield management: discount allocation and pricingZeynep Aksin
2Announcements Next group case assignment due next Monday (groups of 2-3)Instructions on last slideData on student CD of the textbook and handouts section of course webpageThere is no one right answer, though there are better answers..… groups will compete in class
3Yield Management System Reservation Systemcurrent demandcancellationsForecastingcancellation rate estimatesfuturedemandestimatesOverbooking Levelsoverbooking levelsDiscount Allocationfare class allocations
4The displacement cost method A general framework for allocation Attempt to evaluate the opportunity cost (displacement cost/bid prices) of using resources required to meet current demandAccept current request if ...Revenue > Displacement CostAdvantagesintuitiveconceptually simplesophisticated applicationsO-D control (airlines)multi-night stays (hotels)group evaluationsnear-optimal (provided “correct” displacement costs are used!)
5Generic procedure STEP 1: Forecast demand-to-come for each ... - product (e.g. fare-class/booking class)- resource (e.g. flight leg, day-of-week)STEP 2: Using forecast, determine best allocation of remaining capacity to products.STEP 3: Using the results of STEP 2, calculate the displacement cost of the capacity required by a new request to the revenue it brings in to evaluate accept/deny decisions.
6A rough-cut approach: Simple deterministic displacement AssumptionsForecast is perfectFuture demand for each resource (flight-leg, hotel room-day) is independentProcedure- Determine revenue (net contribution) of each demand class- Rank demand from highest revenue to lowest- Greedy allocation/displacement- allocation: highest revenue classes first- displacement: lowest revenue classes first
7Example: A reservation agent has a group that wants to book RemainingCapacity10070ABC1008570Forecast of LegDemand6015KEYA reservation agent has a group that wants to book20 seats from A to C at a rate of $80 per person.Should we accept the group?Discount$60Full Fare$100
8Analysis: Net Revenue = New Revenue - Total Displacement Cost 100B70C100208570Forecast of Demandto Come206015Forecasted revenuedisplacement:15 x $0 + 5 x $60 = $300Forecasted revenuedisplacement:10 x $ x $100 = $1600KEYDiscount$60Net Revenue = New Revenue - Total Displacement Cost= 20x$80 - $ $1600 = - $300==> DO NOT accept the group.Full Fare$100
9Result depends on remaining capacity.... 100B80C10020858020Forecast of Demandto Come6015Forecasted revenuedisplacement:15 x $0 + 5 x $60 = $300Forecasted revenuedisplacement:20 x $60 + 0x $100 = $1200KEYDiscount$60Net Revenue = New Revenue - Total Displacement Cost= 20x$ $ $1200 = $ 100==> DO accept the group.Full Fare$100
10and the forecast ....A100B80C10095208020Forecast of Demandto Come6015Forecasted revenuedisplacement:20 x $60 + 0x $100 = $1200Forecasted revenuedisplacement:5 x $ x $60 = $900KEYDiscount$60Net Revenue = New Revenue - Total Displacement Cost= 20x$ $ $1200 = - $500==> DO NOT accept the group.Full Fare$100
11Hedging against forecast error Assumptions:fare classesfull-fare discountrevenue r r2demand X X2Sequence of Events:discount demandarrivesaccept/reject discount res.S protection levelA2 = C-S1 discount allocationfull-fare demandarrives
12Analysis Approach 1: Deterministic Allocation If we knew demand for high fare with certainty,Approximation:
13Analysis Approach 2: Optimal Allocation Accept if $r1 $0 $r2 noS seats remaining:accept low fare?$0yes$r2Accept ifOptimal protection level is smallest value of S satisfyingthis condition.
14Example Demand for high fare uniformly distributed between 10 and 50. C=100 seatsr1=$250r2=$100Demand for low fare uniformlydistributed between 50 and 90.
15Example Reserve 34 seats for full fare demand. Allocate $250$100103450Reserve 34 seats for full fare demand. Allocate100-34=66 seats to discount fare demand.
17Set protection levels to satisfy …. Average fare of classes i and higherAggregate demand ofclasses i and higherF(z) standard normal dist.This is the heuristic used in many commercial systems.
18Weighted average fares and aggregate mean & variance .. Example:Class Fare Mean Variance1 $2 $3 $Weighted average fares and aggregate mean & variance ..1 $2 $3 $Set protection level 1:
19Set protection level 2 (for classes 1 & 2 combined): There is not protection level for the lowest class (class 3)#seats remainingAccept all threeclassesAccept class 1onlyAccept class 1 and 2only
20Allocation ProcedureAlternative: demand control chart based on historyDo not accept discount fare demandsDays before arrivaldemandsAccept discount fare demands
21Some complications in pricing Multiple products are more complexDiversion/demand shiftingOther productsCompetitor’s productsSame product on different dayEx: Peak load pricingCross-elasticity: demand for one product is affected by price of other available productsJoint capacity constraints often mean incremental sales of one product require reduction in sales of other products“shadow price” of joint capacity constraint is important to understand
22Competition often forces price matching (e.g. discount airline fares) As a result of all these factors, pricing is often done at an aggregate level considering long-term supply/demand balances and competitor’s actions. Capacity allocation is then used to manage short-run fluctuations.
23Example: Pricing interacts with capacity allocation Premium customer informationPriceDemandScenario 1: unlimited capacity, only premium customers
26Discount allocation example During the recent economic slump, Blackjack Airline discovered thatairplanes on its Los Angeles-to-Las Vegas route have been flying withmore empty seats than usual. To stimulate demand, it has decided tooffer a special, nonrefundable, 14-day advance-purchase “gamblers fare”for only $49 one-way based on a round-trip ticket. The regular full-farecoach ticket costs $69 one-way. The Boeing 737 used by Blackjack,has a capacity 95 in coach, and management wants to limit the numberof seats that are sold at the discount fare in order to sell full-fare ticketsto passengers who have not made advance travel plans. Consideringrecent experience, the demand for full-fare tickets appears to have anormal distribution, with a mean of 60 and a standard deviation of 15.Calculate the number of full-fare seats to reserve.
28Overbooking exampleA commuter airline overbooks all its flights by one passenger (i.e., the ticket agent will take seven reservations for an airplane that only has six seats). The no-show experience for the past 20 days is shown below:No-showsFrequencyUsing the critical fractile P(d<x) ≤ Co/(Co+Cs), find the maximum implied overbooking opportunity loss Cs if the revenue Co from a passenger is $20.
29SolutionNo ShowsFrequencyProbabilityP(d<x)60.300.00150.25240.200.5530.150.750.100.90If overbook by 1, then P(d<x) must be at least .30 and less than .55.P(d<x) ≤
30Summary: RM is a new twist on some old demand management ideas segmentationpeak-load pricingWith some new twists ...tactical application of these conceptsSmall differences matter!systematic/disciplined approachdata intensive/ IS intensive
31For MondayPrepare MotherLand Air at the end of chapter (9 in old edition)Analyze the information provided and develop a dynamic policy onPrice (select from list provided in the case)Overbooking levelSeat allocation (nested reservation limits)Inform me of your group’s policy at least 2 hours before class (for each of the “weeks away from takeoff” on Table 9.8) If you want to start out with a static policy, I just need one set of price, overbooking, discount allocation numbers.Bring printout of data to class for use during the gameWrite up a report describing your analysis and justifying your choice for the above tactics. Clearly state all of your assumptions and explain all of your work. Also articulate how you plan to react to demand announcements in class; i.e. what is your plan.In class we will play a game: I will announce demand realizations, you as a group can update/change your strategy
32Illustration of policy to be determined before class 2420161287654321PriceFull1000 Disc400 D. Disc100 Seat120 Allocation50 0