Presentation on theme: "Yield/revenue management and a dynamic price model"— Presentation transcript:
1 Yield/revenue management and a dynamic price model Andrew GuzowskiManaging DirectorOnLine Systems
2 ‘Yield management’ definition Definition in Wikipedia ...‘Yield management, also known as revenue management (RM), is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations).’Definition in Wikipedia ...Yield management, also known as revenue management (RM), is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations).’
3 So the challenge is ... to sell the right resources to the right customerat the right timefor the right priceSo the challenge is:‘to sell the right resources to the right customer at the right time for the right price’
4 3 essential conditions for revenue management to be applicable fixed resources for saleresources sold are perishabledifferent customers willing to pay different prices3 essential conditions for revenue management to be applicable:1. a fixed amount of resources available for sale2. resources sold are perishable (there is a time limit to selling the resources, after which they cease to be of value)3. different customers are willing to pay a different price for using the same amount of resources- which can seemingly lead to price discrimination for different customers buying the same product
5 Yield Management originated in the airline industry discount airlines lead the way with dynamic pricingpromotional fares designed to stimulate purchasing2. Yield Management originated in the airline industryYield management has significantly altered the travel and hospitality industry since its inception in the mid 1980s. It has evolved from the system airlines invented as a response to deregulation and quickly spread to hotels.It requires analysts with detailed market knowledge and advanced computing systems who implement sophisticated mathematical techniques to analyze market behavior and capture revenue opportunities.Revenue managers typically claim 3% - 7% incremental revenue gains with revenue management. This can equate to over 100% increase in profits.In the Airline Industry initially there were essentially 2 classes – First and Economy, then Business class was introduced to further stimulate the more affluent market.2.1 Discount Airlines lead the way with dynamic pricingWith the emergence of discount Airlines, all airlines had to compete for passengers. Hence the introduction of the dynamic pricing by nearly all airlines, to stimulate bookings. By offering very cheap prices for a very limited number of seats a sense of urgency was created for passengers to make bookings. This in turn created a much greater interest in air travel.Finite number of seats – need to maximise revenue where some costs are fixed and some based on the number of passengers.The airlines have perfected this with very sophisticated systems which can monitor historically the supply and demand as well the dynamics of reservation inflow.2.2 Promotional fares designed to stimulate purchasingThis resulted in various levels of airfares for limited numbers of seats depending on fill rates or supply and demand.
6 Yield management in HOTELS simple discount levels and stop sellsfull dynamic rate model% discount off Best Available Rate (BAR)3. Yield management in HOTELSMany hotels for some years have realised the benefits of revenue management using dynamic pricing.Revenue management in hotels is selling rooms and services at the right price, at the right time, to the right people.Hotels use yield management systems to calculate rates, rooms and restrictions on sales, to maximize return.The systems measure constrained and unconstrained demand and pace, to gauge which restrictions eg length of stay, non refundable rate, or close to arrival.Also contributing to yield is a focus on cost control, the right distribution channels, and the right marketing mix.Simple discount levels and stop sellsSimplest hotel method has been to set the Rack rates (highest rates) for historically known seasons, then prepare several sets of discounted rates.Discounted rates are blocked and no longer available for sale, based on achieved occupancy levels and lead times.Management of this requires the availability of good and timely information as well as staff time to manage it.Full dynamic rate modelMore sophisticated hotels with full time revenue managers, monitor their rates on a daily basis.Some use sophisticated systems, which use historical information to allow managers to pitch rates at optimal levels to the right customer mix to maximise revenue.Percentage discount off Best Available Rate (BAR)These principles are generally applied to FIT guests. However, some Hotel Groups are now moving totally to a dynamic price model. This means they do not negotiate any fixed rates with their Corporate clients but simply guarantee to give a fixed % discount off the BAR (Best Available Rate).From a strategic perspective, dynamic rates are ideal for revenue management, it truly allows you to perform the art of matching supply and demand at all levels.Next slide shows a simple graph to illustrate the mechanics of dynamic pricing.
8 Yield management in HOSTELS you have a finite number of bedsthese are a ‘perishable’ commodityyou need dynamic daily rates4. Yield management in HOSTELSThe same principles apply to Backpacker hostels as for hotels:-you have a finite number of bedsthese are a ‘perishable’ commodityyou need to use dynamic daily ratesYou need to sell these in such a way so as to maximise your revenue!MAXIMUM revenue and thus profit from your finite resources is more important than 100% occupancy.To do this you need to use dynamic daily rates which will not only stimulate demand for the beds in your property but also, if applied well, will provide you with a higher revenue.You sell beds at discounted rates in low demand periods and at higher prices in high demand periods.These periods can be as finely defined as a single day (or for that matter part of the day if you change your rates during the day).If for each day you can get the maximum possible revenue then you will maximise your yield.
9 Who uses dynamic rates? Who uses dynamic rates in your property? How often do you monitor and change your rates?If you don’t do it what is the main reason?Who uses dynamic rates?Who uses dynamic rates in your property?How often do you monitor and change your rates?If you don’t do it what is the main reason?In order to be able to do this you must have the right information systems in place to monitor your occupancy and have the tools to be able to easily apply your discounted or inflated prices.
10 What are the constraints? harnessing and applying informationtechnical capabilitystaff skillsWhat are the constraints?Experience has shown that the main constraints in using Dynamic Pricing Models are:harnessing and applying informationHistorical information needs to be captured and trends analysed which requiresdata capture and analytical toolstechnical capabilitySophisticated programs have been developed with quite complex mathematical algorithmsIncorporating complex probability modelsstaff skillsData needs to be interpreted and decisions made by experienced marketing staff
11 What are the challenges? How to decide prices?How to monitor your occupancy?How to monitor competitor rates?How to easily apply dynamic rates?Training staffWhat are the challenges?How to decide prices?How to monitor your occupancy?How to monitor competitor rates?How to easily apply dynamic rates?Training staff
12 What tools are available? Pricing toolsSystem toolsWhat tools are available?Pricing toolsSystem tools
13 Pricing – How to decide prices Know the ‘break even’ bed sales requiredMonitor your competitors’ rates and availabilityPricing – How to decide pricesFirstly you must know the break even bed sales required.Secondly you must monitor your competitors’ rates and availability so that you set your rates to be competitive yet maximise potential.Sometimes you can set your rates below your cost to stimulate sales and treat the loss as a promotional cost; but you should aim to maximise revenue for each day!
14 How does Charts PMS assist with Yield Management? Macro level (seasonal)Micro level (daily)20 yield profilesDynamic market intelligenceVarious systems tackle this problem in various ways, so let me tell you how we have attempted to provide the tools to simplify this task for our clients.How does Charts assist with Yield Management?Charts gives you all the necessary tools to manage your rates at both a Macro level (seasonal) and Micro level (daily level).The revenue manager is provided with 20 yield profiles which can be set up to increase or decrease the price by a finite amount on any room type and any rate code.This means that by applying a yield profile to one day, you can automatically change your rates for each one of your room types and for each one of your rate levels – eg rack, walk in, web etc.It is as simple as pressing a couple of keys and the rates are changed and automatically updated to all the internet booking engines, your own web site and are also available for use by your reservation staff without having to issue memos, have meetings etc – they are instantly informed of the levels that you want to sell at.Dynamic market intelligenceHow do we facilitate our clients to know what their competitors are doing with respect to rates….A unique feature of Charts is the ability to provide you with dynamic market intelligence from the fully integrated “competitor interface” and instant rate override.I’ll have someone demonstrate this for you on his live site and show you how useful and easy to use it is.Essentially, you are able to set up 10 of your competitors, and compare their rates sold on the Internet, to your rates right down to a room type level.You can set trigger levels which when exceeded will bring up a pop up alert. These trigger levels can be set as a % lower than your rates and higher than your rates.With this facility you can monitor in real time not only if your competitors are discounting – so that you can maintain a lower price than them down to your preset minimum level. BUT Also you monitor if they are increasing their prices so that you can also increase yours but maintain a competitive edge – thus maximising your revenue and so profit!
15 Charts Backpacker yield management working in a real property Demonstration byDan Dumitrescu from The Times Hostel and Camden Place Hostel, in Dublin
16 firstname.lastname@example.org Skype: andrewgonline For more informationSkype: andrewgonline