10Two Challenges:How do we make sure that the people who are willing to pay $750 will not buy the $250 ticket?How do we make sure that we have enough seats for those willing to pay $750?
11Two Answers: Create artificial hurdles: Advance purchase: 21 days, 14 days, 7days Use limitations: Saturday night stay, non-refundable ticketsRestrict the number of seats sold at the low price This requires a forecast of future booking by higher-paying customers and the discipline to forgo a “bird-in-hand.”Note 1: airlines do not change prices dynamically; they actually change capacity (classes) dynamicallyNote 2: freight can also displace passengers when RM is really optimized
12Why is This Important?American Airlines saved over $1.4B between“I believe that yield management is the single most important technical development in transportation management “ Robert Crandall, CEO AMR
13MarkdownsMarkdowns are one of the main levers that retailers have to influence results in-season. As such, it can be a very powerful driver of performance.Markdown Opportunity: • Markdowns may represent more than 30% of total sales• Short-cycle product can represent up to 80% of a retailer’s assortment• In some segments, short-cyce products may represent a smaller percentage of the assortment but still have a significant impact on gross margin (up to 40%)Goals / Trends:• Movement to more Localized pricing decisions• Growing realization of the true cost of left-over inventory• Greater emphasis on inventory productivity as store base growth slows
14Sales Rate-Based Discounting After initial sales rate (r0= i0/t0)Required sales rate: r1=i10-t1)%r required: (r1/ r0)-1Divide by εGet the % price change required
15Price Discrimination First degree: willingness to pay (rare) RR in late 1800-s, asking shippers for their income statement so they could determine their ability to payCollege financial aidTaxesSecond degree: artificial hurdles but openBuying process (coupons, advance purchase…)Cost to serve (volume discounts, risk adjustments, "set up" costs in travel industry…)Distribution channels (Internet, outlets, etc.)Markdowns (timing of purchase, product age, selection, etc.)Value of product (in many rail movements; regeltarifklassen)Commodity type (part of tariffs; in many rail movements)Use limitations (e.g., "final sale")Bundling ("menu" vs. "a-la-cart")Time of use (e.g., peak hour, congestion pricing)
16Price Discrimination First degree: willingness to pay (rare) Second degree: artificial hurdles but openThird degree: based on external factorsGeography (neighborhood, state)Gender (women's clothing)Age (senior/student discounts)Profession/affiliation (small/large business business; educational,medical…)
18Specific ExampleDimension® 8200 Series, Pentium® 4 Processor at 1.7 GHz128MB PC800 RDRAMNew Dell® Enhanced QuietKey KeyboardVideo Ready w/o Monitor32MB NVIDIA GeForce2 MX 4X AGP Graphics Card with TV-Out40GB Ultra ATA/100 Hard Drive3.5 in Floppy DriveMicrosoftR Windows® Millennium with WinXP Home Upgrade CouponMS IntelliMouse®10/100 PCI Fast Ethernet NIC56K Teephony Modem for Wndows-Sound Option48X Max Variable CD-ROMIntegrated Audio with Soundblaster Pro/16 CompatibilityHarman Kardon HK-395 SpeakersUpgrade to Microsoft® Office Small Business w/EducateU3 Year Ltd. Warranty, 3 Year At Home Service, Lifetime 24x7 Phone Support
19Specific Example User Base Price Home $1,378 Small business $1,238 Large business$1,338Student$1,327University$1,427
20When Does YM Work? Administration Product Discipline ! Economic conditionsDemand (LT with signaling; Governme conferenceSegmeNo arbitrageAdministrationAProductHigh fixPerishabilityDiscipline !
21MarketingMost schemes are based on 2nd degree discrimination – seems more fair (choice is available)Positioning the message: discounts are more acceptable than price increases, even if the result is the sameAvoid gauging"Profiteering" is not acceptableUse open communicationsSome forms of 3rd degree discrimination are illegal, but many are acceptable:student/senior citizen discountsprofession/use (Dell)
22Carrier Portfolio of Pricing Dynamic pricing with spot market shippersDynamic pricing with contracted shippersLong-term fixed-rate contractsLT fixed rate contracts with capacity commitments
23Rev. Management in TL Trucking Little opportunity during bid responseNo monopoly powerExceptions: good service history coupled with client strategy geared towards serviceValue-added servicesOnly opportunity in real-time (spot) marketThere are limited opportunities for local/temporary monopolies:Responses to shipper "dialing for diesels”Requests along "power lanes"
24Rev. Management in TL Trucking Remember the twin challenges:How do we make sure that the people who are willing to pay $750 will not buy the $250 ticket?How do we make sure that we have enough seats for those willing to pay $750?Comes down to one question:Should we take this load?Should capacity be committed to a particular load/shipper/contract?, or should we wait for a better-paying load?Depends on the forecast…
25Strategic Decisions Set the Limits for Tactical Decisions Size of fleetMarket focus – regions, industries, equipmentRelationships with O/Os, 3PLsPercent of business under long-term contractLong-term contract ratesBid-response strategiesCapacity commitmentsSeasonal PricingDemand booking and solicitationDynamic pricingProactive empty repositioningDriver assignment
26System Contribution of a Load Regional potential: the expected contribution of a truck in a region.P(A) - Potential of region AD(A-B) - Direct cost for moving a truck from A to BR(A-B) - Revenue for the move from A to B
27System Contribution of a Load S(A-B) = R(A-B) -D(A-B) + P(B) -P(A)Direct contribution System impactP(B) -the value of one more truck at region BP(A) -the value of one less truck at region AOrder acceptance:Take a load only if S(A-B) > 0Take the load with the highest S(A-B)
28Analysis of Movements Head haul: S(A-B) = R(A-B) -D(A-B) + P(B) -P(A) Back haul:
29YM in Manufacturing Reserve capacity to the highest paying customer Tie the pricing to the capacity commitmentUse pricing to manage component supply (in BTO)
30Final Observations RM involves the entire enterprise Customer serviceSalesReservationsSchedulingRM can be used to increase profits and serve customers betterBring in those who otherwise would not use the serviceProvide higher LOS to those who pay a lot by giving them more frequent service, higher probability of service, etc.Increase utilization by smoothing demand patternsThe essence of RM is the judicious management of capacity and pricing simultaneouslyThe trick: reserve capacity to the highest paying customers