1. Introduction to Revenue Management

2. What is Revenue?
Revenue The total amount of sales achieved in a specified time period. Revenue is calculated as:
Number of units sold x Unit Price
=Revenue

3. The Purpose of Business
Achieving Profits
Generating returns on investment
For whom?
Company-centric ⟶ Customer-centric

4. The Profit Fallacy The Profit Fallacy
Accountant’s Profit Formula Applying basic algebra, the accountant’s formula becomes:
Sales =
Cost + Profit
Profit =
Revenue - Expense

5. Buyers also seek profits
Three Business Propositions Related to a Ten-dollar Buyer/ Seller Transaction
Seller’s Proposition
Resulting Profit
Informed Buyer’s Willingness to Accept and Repeat the Trade
#1. Trade nine $1.00 bills for the buyer’s $10.00 bill.
$1.00 to the seller
Zero
#2. Trade ten $1.00 bills for the buyer’s $10.00 bill.
$ 0.00 to seller and buyer
Possible, but unlikely
#3. Trade eleven $1.00 bills for the buyer’s $ bill.
$1.00 to the buyer
Highly likely

6. The Profit Fallacy
In any rational business transaction, both the buyer and the seller seek a profit. Dual Entitlement Theory = consumers believe that (1) they are entitled to a reasonable price, and business are entitled to a reasonable profit.

7. The ROI Fallacy Economist’s Profit Formula Return on investment (ROI)
The Return on Investment Fallacy
Economist’s Profit Formula Return on investment (ROI)
Profit =
The reward for risk U
Owner’s return
Owner’s original investment
= Return on Investment

8. The Return on Investment Fallacy
The ROI Fallacy
The Return on Investment Fallacy
If an owner invests $ 800,000 in a business, and achieves $200,000 in investment returns (defined as revenue in excess of all expense), that owner’s ROI would be 25 percent.
$200,000 investment return
$800,000 original investment
= 25% ROI

9. The Return on Investment Fallacy
The ROI Fallacy
The Return on Investment Fallacy
The purpose of business is to create and keep a customer.
~Drucker
Businesses do so by ensuring that each customer transaction results in an increase in wealth for the customer.

10. What is Revenue Management?
To provide profits to its customers along with sellers
and to increase customers’ wealth in addition to the business’ wealth
Revenue Management (≈Yield MGMT)
The application of disciplined tactics that predict buyer response to prices, optimize product availability, and yield the greatest business income.
(Selling the RIGHT product to the RIGHT customer at the RIGHT time for the RIGHT price)

11. The Purpose of Revenue Management
Customer-centric revenue management
A revenue management philosophy that places customer gain ahead of short-term revenue maximization in revenue management decision making.
Revenue Manager Using customer-needs driven techniques, RM is responsible for ensuring that a company’s prices match a customer’s willingness to pay. => To make your company, its owners, and you prosper by FIRST making your customers prosper
Chapter 1: Introduction to Revenue Management

12. Why RM matters in service business?
Goods
Tangible
Homogeneous
Production/distribution consumption different
Can be kept in stock
Services
Intangibility
Heterogeneous (variability)
Production/distribution consumption the same (Inseparability)
Can’t be kept in stock (Perishability)
RM works in service biz because:
Capacity is fixed (constrained supply)
Inventory is perishable
Demand varies by day of the week, months, seasons; or leisure vs. business )

13. Services (vs. Products)
“I” of Service
Characteristic
Intangibility
A service cannot be touched or seen before it is purchased.
Variability
Uneven performance results from variations between the skills of those who are actually delivering the service.
Inseparability
It is often impossible to make a distinction between the individual delivering the service and the service itself.
Perishability
Unsold inventory vanishes if not sold.

14. Constraint management
Hotel/Resort example
# of rooms each day cannot vary (=constrained supply)
Demand for rooms varies, based on time of year (demand fluctuation)
Any room night not sold on a given day disappears forever at the end of that day (perishability)

15. RM Matrix

16. RM in service businesses
Airline industry
RM initially started (results of Deregulation Act of 1978)
“Pay more when demand is higher”
– not pay more for first class than coach
How many seats to make available at each of the listed fares, depending on time of year/week, remaining seats available, remaining time until departure (American Airlines) 30’10-38’32

17. RM in service businesses
Seat (Capacity)
Price/seat
Revenue
Fare type
Without Yield M
100
$ 100
$ 10,000
60days discount 20
$ 100
$ 2,000
60days discount 20
$ 200
$ 4,000
30days discount
With Yield M 20
$ 300
$ 6,000
15days discount 40
$ 400
$ 16,000
Full fare (Biz traveler)
100 (Total)
$ 28,000 (Total revenue)
Assuming that all seats sold out
Better job!!!! not YM($10,000) vs. YM ($28,000)
Separating four segments (20, 20, 20, 40) by demands
Business traveler = promising segment

18. RM in service businesses
Hotel industry
How much to charge for a room depending on the location, type of room, time of year, time of week, duration of stay
Restaurant industry
How much to charge for lunch vs. dinner
Golf industry
Variable pricing: time of day, day of week, season of year
Cruise industry
Variable pricing: time of year, type of cabin…
(Cruise pricing)

19. Misuse of RM
Fall 2000, Amazon conducted experiment to try to determine
price sensitivity of demand for DVDs
Depending on previous purchases, discounts between 20-40%
offered ($33.97, $27.97 or $25.29) – thanks to Cookies!
Customers who went back to Amazon saw the price
had jumped!
Furious response by customers and press,
suspecting Amazon varied price by loyalty
“Amazon apparently offers good discounts to new users,
then once they get the person hooked and coming back
to their site again and again, they play with the prices to make more money”

20. The Revenue Management Process
Step 2
Forecast Demand
Step 3
Manage Inventory
Step 4
Manage Distribution
Step 5
Evaluate
Results
Step 1
Establish Prices