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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