REVENUE

MANAGEMENT
NUR RAHMAWATI, ST., MT.
 DEFINITION

Revenue management (RM) refers to strategy and tactics used by number of industries- notably the
passanger airlines to manage the allocation of their capacity to different classes over time in order
to maximize revenue
 RM APPLICABLE UNDER FOLLOWING
CONDITIONS

• The seller is selling a fix stock of perishable capacity

• Customers book capacity prior to departure
• The seller manages a set of fare classes, each of which has fix price (at least in the short run)
• The seller can change the availability of fare classes over time
• Rm can be considered a special case of pricing with constrained supply
• Rm is not based on setting and updating prices but on setting and updating the availability of fare classes (where
each fare class has an associated fare (price) that remains constant through the booking period
• The passanger airlines that pioneered rm in the 1980s needed to utilize the capabilities they had at hand
• They using booking controls embedded in their reservation systems as a primary mechanism for controlling the
fare displayed to customers at any time
• Following the success of airlines, rm has been adopted by number of industries, including hotels, rental cars,
freight transportation, and cruise lines and many of whom use the similar reservation systems as the passanger
airlines
 LEVELS OF RM

• Succesful rm requires consistent execution at three levels

• Rm strategy is the identification of customer segments and the establishment of products and
prices targeted at those segments
• Once products and prices has been established, rm tactics require setting and updating limits on
how much particular product can be sold at a particular fare to each segment for some period of
time-say a day or a week
• Booking control is the moment to moment determination of which booking request should be
accepted and which should be rejected
LEVELS OF RM

LEVEL DESCRIPTION FREQUENCY

TRATEGIC SEGMENT MARKET AND QUARTERLY OR
DIFFERENTIATE PRICES ANNUALLY
TACTICAL CALCULATE AND UPDATE DAILY OR WEEKLY
BOOKING LIMIT
BOOKING CONTROL DETERMINE WHICH BOOKINGS REAL TIME
TO ACCEPT AND WHICH TO
REJECT

TACTICAL rm is the “brain” of the process. It’s where future demand is forcast, optimization algorithm run,
booking limits set and updated
 RM STRATEGY

• Rm strategy concists of the identification of customer segments and the establishment of

products targeted at those segments
• A fundamental element of rm strategy is distinction between leisure customer and bussines
costomers
• The airlines used these characteristics to segment their marketand create virtual products oriented
toward the different segments
 CHARACTERISTICS OF THE TWO SEGMENTS

LEISURE BUSINESS
HIGHLY PRICE SENSITIVE LESS PRICE SENSITIVE
BOOK EARLIER BOOK LATER
MORE FLEXIBLE TO DEPARTURE AND LESS FLEXIBLE
ARRIVAL TIMES
MORE ACCEPRING OF RESTRICTIONS SUCH LESS ACCEPTING OF RESTRICTIONS
AS SATURDAY NIGHT STAY OVER

THE LEISURE PRODUCTS HAVE VARIOUS RESTRICTIONS (EARLY PURCHASE, SATURDAY NIGHT
STAY) THAT MAKE THEM UNATTRACTIVE OR UNAVAILABLE TO MANY BUSINESS TRAVELERS
 TYPICAL AIRLINE MARKET SEGMENTS

SEGMENTS
BUSSINES ORIENTED LEISURE ORIENTED
PRICE LOW MODERATE SENSITIVE MODERATE VERY HIGH
SENSITIVITY
SCHEDULE NEED IMPORTANT SOMEWHAT PREFERS VERY FLEXIBLE
FLEXIBILITY
INVENTORY LAST SEAT SOMEWHAT RESTRICTED RESTRICTED VERY LIMITED
RESTRICTED
PRODUCT UNRESTRICTE CORPORATE DISCOUNT REGULAR SALE FARES
D
BUSSINES DISCOUNT BUSSINES LEISURE WEB ONLYWEB
ONLY
(PRICELINE.CO
M)
 TYPICAL AIRLINE MARKET SEGMENTS

• INTERNATIONAL AIRLINE ARE GREAT BELIEVERS IN REGIONAL PRICING

• THEY WILL SELL THE SAME TICKETS FOR DIFFERENT PRICES IN DIFFERENT
COUNTRIES (EVEN AFTER ADJUSTING FOR EXCHANGE RATES) IN ORDER TO
EXPLOIT DIFFERENCES IN PRICE SENSITIVITY
• AIRLINES ARE ALSO ENTHUSIASTIC CHANNEL PRICES; TICKET PRICES ON
INTERNET AR OFTEN CHEAPER THAN THROUGH TRAVEL AGENTS
• OTHER RM COMPANIES FOLLOWED THE AIRLINES IN SEGMENTING TEIR MARKET,
CREATING VIRTUAL PRODUCTS, AND ESTABLISHING WIDE RANGE OF PRICES
BOOKING CONTROL

• IS THE HEART OF THE RM SYSTEM

• THE FUNCTION OF BOOKING CONTROL IS TO DETERMINE WETHER OR NOT EACH BOOKING REQUEST RECEIVED SHOULD
BE ACCEPTED OR REJECTED
• WITHIN A VERY SHORT TIME ( TYPICALLY LESS THAN 200 MILLISECONDS) THE RESERVATION SYSTEMS NEED TO SEND A
MASSAGE WETHER OR NOT THAT REQUEST CAN BE ACCEPTED
• WHEN BOOKING REQUEST IS RECEIVED-SAY, FOR A SEAT FOR FUTURE FLIGHT OR HOTEL ROOM FOR SOME FUTURE
DATES- THE REQUEST IS ASSIGNED TO A FARE CLASS
• THIS ASSIGNHMENT MAY BE BASED ON THE TIME AND THE CHARACTERISTIC OF THE REQUEST (WHETHER IT MEETS THE
QUALIFICATION FOR A DEEP DISCOUNT), THE CHANNEL THROUGH WHICH THE REQUEST WAS RECEIVED (WEBSITE OR
TRAVEL AGTS), THE MARKET SEGMENTS OF THE CUSTOMER (GROUP VS INDIVIDUAL), OR COMBINATION OF ALL OF
THESE
• THE FARE CLASSES ARE TYPICALLY ASSIGNED LETTERS, SO WE CAN SPEAK OF B-CLASS OR M-CLASS BOOKING REQUEST
• THE RESERVATION SYSTEM INCLUDES A BOOKING LIMIT FOR EACH FARE CLASS ON ECAH PRODUCT
• WHEN A BOOKING REQUEST IS RECEIVED, THE RESERVATION SYSTEM CHECKS THE BOOKING LIMIT FOR THE
ASSOCIATED FARE CLASS
• IF THERE IS SUFFICIENT AVAILABILITY, THE REQUEST WILL BE ACCEPTED; IF NOT REJECTED
 BOOKING CONTROL EXP.

AN AIRLINE RECEIVES A b-CLASS REQUEST FOR 3 SEATS ON FLIGHT 137 FROM

HOUSTON TO MIAMI, DEPARTING IN TWO WEEKS. THE CURRENT B-CLASS BOOKING
LIMIT FOR THIS FLIGHT IS 2. BECAUSE THERE IS INSUFFICIENT AVAILABILITY, THE
REQUEST IS REJECTED.
 BOOKING CONTROL (ALLOTMENTS)

• ALLOTMENTS APPROACH IS AN OBVIOUS WAY TO MANAGE BOOKINGS WOULD

BE TO DEVIDE THE AVAILABLE CAPACITY IN TO DISCRETE CHUNKS AND
ALLOCATE EACH CHUNK TO A FARE CLASS
• THE SIZE OF THE CHUNK ALLOCATED TO EACH FARE CLASS IS CALLED “ ITS
ALLOTMENT”
• UNDER THIS APPROACH, BOOKINGS ARE ACCEPTED IN A CLASS UNTIL THE
ALLOTMENT FOR THAT CLASS IS EXHAUSTED
 BOOKING CONTROL (ALLOTMENTS) EXP.

• A 100 SEAT AIRCRAFT IS BEING MANAGE USING ALLOTMENTS

• 30 SEATS HAVE BEEN ALLOTED TO DEEP DISCOUNT BOOKING (B-CLASS) WITH A $125 FARE
• 45 SEATS HAVE BEEN ALLOTED TO FULL FARE COACH (M-CLASS) WITH A $200 FARE
• 25 SEATS HAVE BEEN ALLOTED TO BUSINESS CLASS (Y-CLASS) WITH A $560 FARE
• TWO WEEKS BEFORE DEPARTURE, 25 b-CLASS BOOKINGS, 45 m-Class bookings, and 10 Y-class bookings
have been accepted
• The remaining allotments are 5 seat for b-class, no seat for M-class, and 15 seats for Y-class
• Once M-class allotment closed, the airline would be accepting customers paying $125 while rejecting $200 bookings
 BOOKING CONTROL (ALLOTMENTS)

• Allotment approach is easy to understand, it has major drawback: it doesn’t work very well
• It can result in high-fare class being rejected while lower class are still being accepted
• We cant maximize revenue by rejecting high fare customer in order to save seats for low fare
customer
• Therefore most of revenue management companies “nest” their inventory so that high-fare
customer have acces to all of the inventory available to lower –fare customer
 BOOKING CONTROL (NESTING)

• Nesting
  was developed to avoid the situation in which high-fare bookings were rejected in favor
of low fare bookings
• To describe nesting, we number fare class so that 1 is the highest fare class and n is the lowest
• We define as the booking limits for class i
• With nested booking controls, booking limits are always nondecreasing; that is,
(1)
Every fare class has acces to all of the inventory available to lower fare classes
 BOOKING CONTROL (NESTING)
y2= Seats protected for class 1 and 2

y1= Seats protected for class 1

b1= Booking limit for class 3

b2= Booking limit for class 2

• We
  can also describe nesting in “protection levels”
• The protection level for clas i is the total number of seats available to class i and all higher classes
• Let be the protection level for class
for (2)
 DYNAMIC NESTED BOOKING CONTROL

• What happens when we accept booking when limit are nested?

• One approach is to decrement all nonzero booking limits by one every time we book a seat
• Once a booking limits for a class reches zero it remains there, at least until the next
reoptimization
 DYNAMIC NESTED BOOKING CONTROL (EXP.)

•  flight has a total booking limit of 100 and 5 fare classes with b ooking limits of . Note that this
A
flight is currently not accepting any bookings from class 5. Any booking class with a limit of 0 is
said to be closed. We can derive the corresponding protection level using equation 2;
Using Eq. 2 we can calculate the protection level so that:
No Booking Limits Protection Levels Request Action
1 2 3 4 5 1 2 3 4 5
1 100 73 12 4 0 27 88 96 100 100 2 Seats in Class 5 Reject
2 100 73 12 4 0 27 88 96 100 100 5 Seats in Class 2 Accept
3 95 68 7 0 0 27 88 95 95 95 1 Seat in Class 2 Accept
4 94 67 6 0 0 27 88 94 94 94 1 Seat in Class 4
5 3 Seats in Class 3
6 4 Seats in Class 3
7 2 Seats in Class 3
8 4 Seats in Class 3
9 1 Seats in Class 3
10 8 Seats in Class 2
11 10 Seats in Class 2
Terima Kasih