Core Concepts

The Core Concepts of Revenue Management

Presentation by:

Robert G. Cross

MIST 8990

University of Georgia

Terry College of Business

August 19, 2005

(c)2005 Robert G. Cross

Revenue Management Defined

“The application of disciplined tactics that predict consumer behaviour at the micromarket

level and optimize product availability and price to maximize revenue growth.”

Robert G. CrossRevenue Management:

Hard-Core Tactics for Market Domination

(c)2005 Robert G. Cross

The Seven Core Concepts

• Focus on price rather than costs when balancing supply and demand

• Replace cost-based pricing with market-based pricing

• Sell to segmented micromarkets, not mass markets

• Save your products for your most valuable customers

• Make decisions based on knowledge, not supposition

• Exploit each products’ value cycle

• Continually re-evaluate your revenue opportunities

Core Concept #1

Focus on price rather than costs when balancing supply and demand

(c)2005 Robert G. Cross

D

PE=$30

QuantityQE=100

S

EquilibriumPoint

Pric

e

SupplyDemand

• Equilibrium points:– Exist for each market segment and product– Identify where supply and demand produce optimal returns

Focus On Price When Balancing Supply and Demand

(c)2005 Robert G. Cross

Supply Chain Managementvs.

Revenue Management

(c)2005 Robert G. Cross

Response Effectiveness

Supply Response

• Time lag

• Transportation costs

• Difficult to fine-tune

• Disruptive adjustments

Price Response

• Virtually instantaneous

• No transaction costs

• Precision friendly

• Seamless adjustments

Core Concept #2

Replace cost-based pricing with market-based pricing

(c)2005 Robert G. Cross

Traditional Pricing

R & D Costs

Manufacturing Costs

Sales/Distribution Costs

G & A

Margin

(c)2005 Robert G. Cross

R & D Costs

Manufacturing Costs

Sales/Distribution Costs

G & A

Margin

?=

Cost-Based Price

Perceived Market Value

Market A Market B

Lost Sale

Lost Profit

Core Concept #3

Sell to segmented micromarkets, not mass markets

“Market Segmentation is the key to market-based pricing and revenue maximization.”

Robert G. CrossRevenue Management:

Hard-Core Tactics for Market Domination

(c)2005 Robert G. Cross

Sell to Micro Markets

Micro

Micro

Micro

MicroMicro

Micro

VersusMassMicro Micro

Micro

Micro

Micro

Micro

Micro

(c)2005 Robert G. Cross

Micro-Market Segmentation-- A Practical Application of Micro-Economic Theory

DEMAND

$100

$50

$1

1 50 100

PR

ICE

(c)2005 Robert G. Cross

Single Price Optimization

DEMAND

$100

$50

$1

1 50 100

PR

ICE REVENUE = $2,500

(c)2005 Robert G. Cross

Price Differentiation - Multiple Prices

PR

ICE

DEMAND

$100

$80

$60

$40

$20

$1

1 20 40 60 80 100

REVENUE = $4,000

Core Concept #4

Save your products for your most valuable customers

“…you should find a way to predict which segments are willing to pay the most and save

those products for them.”

Robert G. CrossRevenue Management:

Hard-Core Tactics for Market Domination

First Come, First Servedvs.

Revenue Optimization

(c)2005 Robert G. Cross

Saving Products/Capacity

How do forecasts enable you to save products for your most valuable customer?

– Quantify the price inelastic late booking market segment

– Estimate the remaining demand

– Use price rationing or capacity limitations to “save” products for higher profit customers

Core Concept #5

Make decisions based on knowledge, not supposition

(c)2005 Robert G. Cross

Rocket Science

Time

Ve

loc

ity

/Alt

itu

de

ORBIT

(c)2005 Robert G. Cross

Re

ve

nu

e

Revenue Optimization

Time

(c)2005 Robert G. Cross

• Intuitive

• Creative

• Cognitive Limits

• Biased

• Fatigue-Prone

• Logical

• Mindless

• Physical Limits

• Indifferent

• Tireless

HUMANS: COMPUTERS:

Humans vis-à-vis Machines

Core Concept #6

Exploit each products’ value cycle

“Generate maximum revenue by understanding the value cycle and optimally timing the availability

and price of the product to each micro-market segment.”

Robert G. CrossRevenue Management:

Hard-Core Tactics for Market Domination

(c)2005 Robert G. Cross

Exploiting the Value Cycle

TIME

VALUE

Retail Clothes Example

(c)2005 Robert G. Cross

Exploiting the Value Cycle

TIME

VALUE

Standard Markdown Response

(c)2005 Robert G. Cross

Exploiting the Value Cycle

VALUE

TIME

Robust Markdown Response

(c)2005 Robert G. Cross

Exploit Each Product’s Value Cycle

VALUE

TIME

Core Concept

(c)2005 Robert G. Cross

Exploit Each Product’s Value Cycle

VALUE

TIME

Core Concept

Core Concept #7

Continually re-evaluate your revenue opportunities

(c)2005 Robert G. Cross

Dynamically Recalibrate

Customer Demand

Price and Availability

Results In: Long-Term Profit Maximization

(c)2005 Robert G. Cross

Revenue Management-Process Flow

Customer Demand Data Forecasters

Optimization

Price and Availability Recommendations

MarketSegmentation

Constraints

?

$Market !

(Data)(Information)

(Knowledge)

(Wisdom)

(c)2005 Robert G. Cross

Questions???

The Core Concepts of Revenue Management

Presentation by:

Robert G. Cross

MIST 8990

University of Georgia

Terry College of Business

August 19, 2005