1. Revenue Management John Vande Vate Fall, 2002

2. Pricex 2001, Chicago 2 2 Managing Demand Reducing Uncertainty in Sourcing Reducing Bullwhip Effect in Ordering “We haven’t made a XYZ yet that we haven’t sold” Scientifically managing demand and margin

3. Pricex 2001, Chicago 3 3 Why Revenue Management? Pricing is a powerful tool to manage demand and margins CRM, and ERP systems now offer a goldmine of customer data

4. Consumer Goods Example Pocket Price Waterfall Competitive Discounts Sales Specials Exception Deals Quantity Shipment Allowance Terminal Allowance Direct Factory Shipment Discount Cash Discounts Annual Volume Bonus Product Bonus Co-op Advertising Special Promos Freight 8 2 2 2 2 3 2 Average “Pocket Discount” of 29% 3 1 Source:Client study 1 2 1 Key Dealer Price Invoice Price Pocket Price The Price Waterfall Source: Manugistics. Dr. Bob Philips

5. Pricex 2001, Chicago 5 5 One Product - Many Prices Discount to List Price Percent of Total Volume Consumer Goods Example

6. Pricex 2001, Chicago 6 6 Revenue Management Setting and updating prices with a wide variety of customers, products, or channels. Aligning prices with market conditions –Customer sensitivity –Competition’s pricing –Corporate objectives PRO applies the same rigorous approach that Supply Chain Management has established on the Operations side

7. Pricex 2001, Chicago 7 7 Impact? “AMR Research estimates that up to $95B in annual incremental operation margin could be generated with tools such as these in the U.S. manufacturing economy alone." Source: AMR Research, January 2001

8. Pricex 2001, Chicago 8 8 Types of Revenue Management

9. Pricex 2001, Chicago 9 9 Dynamic Pricing Issues Business Need Benefits Different prices for different customer segments and distribution channels at different times Market Segmentation Price vs product availability Price vs Market Share Price vs Time

10. Pricex 2001, Chicago 10 10 Dynamic Pricing is Standard Practice across Many Industries Automobile Apparel PC Airline Ticket Relative Price

11. Pricex 2001, Chicago 11 11 Price Elasticity and Revenue

12. Pricex 2001, Chicago 12 12 Price Elasticity by Location Competitive BSI Price Elasticities

13. Pricex 2001, Chicago 13 13 Dynamic Pricing Goofs Coca-Cola announces that it is considering vending machines that will boost prices during hot weather. “ Coca-Cola is a product whose utility varies from moment to moment. In a final summer championship, when people meet in a stadium to enjoy themselves, the utility of a chilled Coca-Cola is very high. So it is fair it should be more expensive. The machine will simply make this process automatic.” -Douglas Ivester Chairman and CEO

14. Pricex 2001, Chicago 14 14 Customer Perception NOW $5.00 ICE COLD SOFT DRINKS

15. Pricex 2001, Chicago 15 15 …and Public Reaction “a cynical ploy to exploit the thirst of faithful customers” -- San Francisco Chronicle “lunk-headed idea” -- Honolulu Star-Bulletin “Soda jerks” -- Miami Herald “Ticks me off” -- Edmonton Sun

16. Pricex 2001, Chicago 16 16 How not to do Dynamic Pricing, Revisited Amazon.com experiments with “Dynamic Pricing” of DVD’s. Loyal Customer Unknown Customer $26.24 $22.74

17. Pricex 2001, Chicago 17 17 The Customer Reaction “Amazon is over in my book.” “I will never buy another thing from those guys!!” “I am so offended by what they did that I’ll never buy another DVD from them again.” “Amazon is suck” (sic). Source: dvdtalk.com

18. Pricex 2001, Chicago 18 18 Price Perception Issues are Complex... More Acceptable Pricing –Product-Based –Open –Discretionary –Discounts and Promotions –Rewards Less Acceptable Pricing –Customer-Based –Hidden –Imposed –Surcharges –Penalties

19. Pricex 2001, Chicago 19 19...And Not Always “Rational”

20. Pricex 2001, Chicago 20 20 Discount Strategy “We never made a shoe we haven’t sold” –Discounting to clear stocked items

21. Pricex 2001, Chicago 21 21 The Situation Retailer with 2,000 units in inventory Full Retail Price $60 Discount Options 10%, 20% and 40% off Salvage Value of $25 (over 58% off) 16 week selling season No restocking

22. Pricex 2001, Chicago 22 22 How to Play

23. Pricex 2001, Chicago 23 23 Retail.xls Histories of 16 Seasons

24. Pricex 2001, Chicago 24 24 The Challenge Devise a discount strategy to earn maximum revenue We will compete in class Prepare a brief explanation of how to come up with a strategy –What data to collect –How to use that data to devise a strategy –Any observations about the strategy that results –For Discussion in Class Retailer.exe and Retail.xls available from class web page