1. Pricing and Revenue Management in a Supply Chain16
Pricing and Revenue Management in a Supply Chain

2. Learning Objectives
Understand the role of revenue management in a supply chain
Identify conditions under which revenue management tactics can be effective
Describe trade-offs that must be considered when making revenue management decisions

3. The Role of Pricing and Revenue Management in the Supply Chain
Revenue management is the use of pricing to increase the profit generated from a limited supply of supply chain assets
Supply assets exist in two forms – capacity and inventory
Revenue management may also be defined as the use of differential pricing based on customer segment, time of use, and product or capacity availability to increase supply chain profits

4. The Role of Pricing and Revenue Management in the Supply Chain
Revenue management has a significant impact on supply chain profitability when one or more of the following four conditions exist
The value of the product varies in different market segments
The product is highly perishable or product waste occurs
Demand has seasonal and other peaks
The product is sold both in bulk and on the spot market

5. Pricing and Revenue Management for Multiple Customer Segments
Differential pricing increases total profits for a firm
Two fundamental issues must be handled in practice
How can the firm differentiate between the two segments and structure its pricing to make one segment pay more than the other?
How can the firm control demand such that the lower- paying segment does not utilize the entire availability of the asset?

6. Pricing and Revenue Management for Multiple Customer Segments
Figure 16-1

7. Pricing and Revenue Management for Multiple Customer Segments
Figure 16-2

8. Pricing to Multiple Segments
Subject to
For capacity constrained by Q

9. Pricing to Multiple Segments

10. Pricing to Multiple Segments
Same price to both segments

11. Pricing to Multiple Segments
Total production capacity is limited to 4,000 units
Subject to

12. Pricing to Multiple Segments
Figure 16-3

13. Allocating Capacity to a Segment Under Uncertainty
Basic trade-off is between committing to an order from a lower-price buyer or waiting for a higher-price buyer to arrive
Spoilage
Spill

14. Allocating Capacity to a Segment Under Uncertainty
Effective use of revenue management increases firm profits and improves service for the more valuable customer segment
Create different versions of a product targeted at different segments
Tactics for multiple customer segments
Price based on the value assigned by each segment
Use different prices for each segment
Forecast at the segment level

15. Allocating Capacity to Multiple Segments
Revenue from segment A, pA = $3.50 per cubic foot Revenue from segment B, pB = $2.00 per cubic foot Mean demand for segment A, DA = 3,000 cubic feet Standard deviation of demand for A, sA = 1,000 cubic feet

16. Pricing and Revenue Management for Perishable Assets
Any asset that loses value over time is perishable
Two basic approaches
Vary price dynamically over time to maximize expected revenue
Overbook sales of the asset to account for cancellations

17. Dynamic Pricing
Effective differential pricing increases the level of product availability for the consumer willing to pay full price and total profits for the retailer
Subject to

18. Dynamic Pricing
Effective differential pricing increases the level of product availability for the consumer willing to pay full price and total profits for the retailer
d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3
Subject to

19. Dynamic Pricing
Figure 16-4

20. Dynamic Pricing
Figure 16-5

21. Evaluating Quantity with Dynamic Pricing
d1 = 300 – p1, d2 = 300 – 1.3p2, and d3 = 300 – 1.8p3
Subject to

22. Evaluating Quantity with Dynamic Pricing
Figure 16-6

23. Overbooking
Basic trade-off is between having wasted capacity because of excessive cancellations or having a shortage of capacity because of few cancellations requiring expensive backup

24. Overbooking
Cost of wasted capacity, Cw = $10 per dress Cost of capacity shortage, Cs = $5 per dress

25. Pricing and Revenue Management for Seasonal Demand
Seasonal peaks of demand common in many supply chains
Off-peak discounting can shift demand from peak to non-peak periods
Charge higher price during peak periods and a lower price during off-peak periods
increases profits for the owner of assets, decreases the price paid by a fraction of customers, and brings in new customers during the off-peak discount period

26. Pricing and Revenue Management for Bulk and Spot Contracts
Problems constructing a portfolio of long-term bulk contracts and short-term spot market contracts
Decide what fraction of the asset to sell in bulk and what fraction of the asset to save for the spot market
The amount reserved for the spot market should be such that the expected marginal revenue from the spot market equals the current revenue from a bulk sale

27. Pricing and Revenue Management for Bulk and Spot Contracts

28. Long-Term Bulk Contracts versus the Spot Market
Bulk contract cost, cB = $10,000 per million units Spot market cost, cS = $12,500 per million units

29. Using Pricing and Revenue Management in Practice
Evaluate your market carefully
Quantify the benefits of revenue management
Implement a forecasting process
Keep it simple
Involve both sales and operations
Understand and inform the customer
Integrate supply planning with revenue management

30. Summary of Learning Objectives
Understand the role of revenue management in a supply chain
Identify conditions under which revenue management tactics can be effective
Describe trade-offs that must be considered when making revenue management decisions

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Printed in the United States of America.