Revenue management

THE BASICS OF REVENUE MANAGEMENT

IDeaS
© 2005 Integrated Decisions and Systems, Inc. ID-MK-100102-v1-YMBasic

The Basics of Revenue Management by IDeaS

TABLE OF CONTENTS
TABLE OF CONTENTS ..................................................................................................................2 WHAT IS REVENUE MANAGEMENT?........................................................................................4 When Is Its Use Appropriate? ......................................................................................................4 Segmented Markets ...............................................................................................................5 FixedCapacity.......................................................................................................................5 Perishable Inventory...............................................................................................................5 Low Marginal Servicing Costs................................................................................................5 Advance Sales.......................................................................................................................5 Uncertain Demand Forecasts..................................................................................................5 Some Industries That Meet Criteria for Application of Revenue Management ................................7 How Does It Work?..................................................................................................................10 Market Segment Pricing .......................................................................................................10 Peak/Off-Peak Pricing .........................................................................................................11 Forecasting Demand............................................................................................................11 Inventory Allocation Basics ..................................................................................................12 ESTIMATING EXPECTED REVENUE .........................................................................................13 Applying the Expected Marginal Revenue Principal.....................................................................14 Rate Management......................................................................................................................16 Pricing .................................................................................................................................16 Contract/Promotion Evaluation .............................................................................................17 SampleContract/Program Effectiveness Statement................................................................19 COMMON COMPLICATING FACTORS ...................................................................................20 Network Effects.........................................................................................................................20 Multiple Unit Orders..................................................................................................................23 Marginal Cost Considerations .....................................................................................................24 Ancillary Revenue and profit Considerations ...............................................................................24 Reflecting Subjective Value........................................................................................................25 Multiple Rate Categories ............................................................................................................25 Multiple Product Categories .......................................................................................................26 Ability To Fine Tune Capacity...