606-022-1 INSEAI This case introduces the concept of Revenue Management as a too
ID: 427717 • Letter: 6
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606-022-1 INSEAI This case introduces the concept of Revenue Management as a tool to maximize profits and provide competitive advantage to firms in diverse industries. The objective of the exercise is to build intuition on how basic revenue management techniques work and under what circumstances they are most effective. You are the revenue manager in charge of selling seats in the economy cabin of an airplane for the highest profits. Customers' demand is uncertain, with high paying customers typically arriving closer to the flight departure than discount fare engers Your task is to devise a sales strategy for capturing the maximum rent from the market, and test your strategy in the accompanying simulator. Revenue Management - A Brief Overview Revenue (or yield) management (RM) first emerged in the post-deregulation US airline industry, and hit the jackpot in the mid-199os, with American Airlines RM reporting annual incremental revenues of US$1 billion (almost 100% profit). The rategy reformed the entire transportation and tourism industry, and rapidly emerging in new markets such as telecommunications, broadcasting, ticke dimensions, with Internet companies practicing dynamic and targeted pricing ealthcare, fashion, manufacturing, etc. Recently, RM evolved to new products and services. The Wall Street Journal identifies RM as "the number one emerging business strategy, a practice poised to explode Any business that sells a limited inventory of a product or service is a good candidate for revenue management, as long as customers vary in their willingness to pay, and the firm can segment the market accordingly. When multiple offers compete for the same scarce resources, the challenge is to capitalize on the most profitable offers. For example, Delta Airlines estimated that selling just one seat per flight at the full, rather than the discounted fare, can add over US$5o million to its annual revenues. The RM paradigm is to sell the right product to the right customer at the right price and at the right time. RM models maximize profits by optimally tailoring supply to capture demand at the best prices, thereby extracting as much as possible of the "economic rent" in a market A unique aspect of RM applications is the condition of relatively inflexible inventory at least in the short term. Increasing the number of seats in an airplane requires either a restructuring of the airline's entire flight schedule or a costly investment in new aircraft. Similarly, hotels, cruise lines, entertainment venues, hospitals, sports facilities, rental companies and telecom providers are inherently ca pacity constrained. But RM also works in non-capacitated industries, when firms face short term supply constraints. Manufacturers like Dell or Zara typically face bottlenecks in their production, that create inventory constraints (e.g., long lead times or expensiv ). Retailers, from Carrefour to Amazon, operate under limited shelf and pace. Television, radio networks and Internet companies sell advertising pace that is (fortunately) limited by regulations. All these industries, and more, are candidates for RMExplanation / Answer
1.Key risk that the revenue management attempts to manage are:
Risk that revenue management cannot manage are:
2. Demand conditions in which RM is most effective are
Demand variability can affect the RM practice and results as revenue management entirely depends on demand assumption before devising the strategy of Optimisation. Hence any change in demand will require a modified strategy for revenue management.
3. Difference in prices effects RM effectiveness because of various perception of the prices. For example higher price reflects quality and the target market shift to category with better lifestyle where is lower prices would attract the customers who are willing to save a penny and compromise with quality of service. Industries that would most benefit from revenue management strategy are hospitality industry and airlines. Service provided for different class of people is different and prices are decided accordingly in both the industry.
4. Other applications of revenue management could be in education industry where additional material and better quality of notes could be provided for additional cost which would help in generating more revenue from the existing customer base. Impact on Profit can be estimated by the forecast of demand for the product. Market can be segmented based on high income group and low income group. Higher income group would tend to invest more in education as compared to lower income group who may not be able to afford better quality education.
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