translating pricing theory into reality
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Theory to Practice: Translating Pricing Theory into Reality
Suresh Acharya, VP of Product Management
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
• Overview of RM• Media Industry• Ratecard Optimization• Dynamic Placement• Questions
Agenda
2
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL 3
Overview of RM Systems:Perishable Inventory
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Overview of RM Systems:Demand Shaping
4
Uni
ts S
old
Service Date
Observed Demand Unconstrained Demand CapacityLegend:
Excess Demand
Days Left
Uni
ts S
old
Capacity
RM systems work by predicting future demand, based on booking history and current booking trends
By understanding the inventory constraints, an RM algorithm decides which subject of the remaining bookings should yield out or displace
RM systems work by predicting future demand, based on booking history and current booking trends
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
• 1 Price• Maximum achievable revenue of
$2,500
100
PRIC
E
DEMAND
$100
$50
$11 50
DILUTED DEMAND
UNACCOMMODATED DEMAND
100PR
ICE
$100
$80
$60
$40
$20
$11 20 40 60 80
DEMAND• 4 Prices• Broader market segments can be
addressed• Produces $4,000 in revenue
Overview of RM Systems:Customer Segmentation
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Price & Inventory Optimization
6
Inventory
Price Sensitive Forecasts
Willingness to pay
CompetitiveData
Optimal Price Recommendations
Optimization
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Similarities:Media and Other Industries
Perishable inventory Segmentation for efficient inventory usage Fixed or inflexible inventory Purchase date vs. service date Competition affects rates Integration with transactional systems
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Distinctions:Special Considerations in the Media Industry
What is being directly purchased is not what the buyer is buying
Stochastic nature of yield Small number of buyers Different delivery vehicles can
be used to satisfy shortages Splitting of inventory for Sales
and Promotions Pre-emptibility
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Challenges in Media:
Constant changes in the selling vehicles
Rotational buyers vs. “cherry-picking” buyers
Changing delivery platforms Imbalance of revenues
between delivery platforms Ever increasing number of
selling items
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Ratecard Building
The basis of selling is to determine at what price can something be sold to make the most revenue.
There are many groups that have a vested interest:o Finance: Here are our budget targetso Programming: Here is what we have to sello Research: Here is the data behind the inventoryo Sales: Here is how we should sell ito Revenue Planning / Management: Here are the statistical
trends
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Ratecard Modification
Once rates are set, the next set of questions begins:o Should I change the rates?o Which rate(s) should I change? o For all time periods and by how much?o What relationships should be maintained between different
selling vehicles?o What is the overall revenue impact?o What are different scenarios that need to be considered?
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Ratecard Optimization
12
Inventory
Demand Forecasts
Stewardship / ADU Req
Business Rules
OptimizationJDA Media Rate Optimizer generates optimal ratecards based on a
holistic evaluation of forecasts, remaining inventory and business rules
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL 13
Media RM ProblemMatching Demand and Supply
Demand Supply
In addition to the optimal assignment of requests of spots, there are many complicating rules in media that make the problem very difficult
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
Demand Advertisers buy eyeballs;
i.e., the attention of audience
The size of audience depends on program, week, and target demographics
Demand is price-sensitive Demand comes with
complex and many times conflicting restrictions
Supply Network sells advertising
time The value of advertising
time depends on program and week
Network is limited by capacity and level of sale objectives
Opportunity to transfer inventory between Sales and On-Air Promotions
Media RM Placement ProblemMatching demand and supply
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL 15
Dynamic Placement:Optimal Utilization of Inventory
Many problems include those in transportation involve the assignment of space against available capacity to maximize overall value
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL
ManualPlacement
Lost Impressions
Improved Efficiency
More Units &ImpressionsRemaining
OptimalPlacement
Dynamic Placement: Under the HoodMinimize opportunity cost of
placement subject to …– Audience requirements– Daypart Mix– Flighting– Program quality constraints– Program inclusions/exclusions– Program/time block availability– Demand– Frequency– Category conflicts– Spot length mix– “Sellability”
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL 17
Dynamic Placement:Different Realities
In certain media industries, it is possible to reassign spots on a periodic basis.
In other industries, each proposal must be assigned with little to no opportunity to re-assign.
JDA Commercial Proposal Optimization solution enables the optimalassignment of ad requests to spots to maximize overall profitability
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL 18
Dynamic Placement:Heuristic vs. Optimization
Rule of Thumb-based solve methodologies are known to produce inferior recommendations –costing companies millions of dollars.
Media RM problems are often categorized as difficult combinatorial problems.These types of problems require sophisticated optimization technology.
Copyright 2013 JDA Software Group, Inc. - CONFIDENTIAL 19
Selling the right productto the right customerat the right time
for the right pricethrough the right channel
RM is a process of maximizing revenue from a “perishable” product through a combination of
pricing and inventory control.
How can you go WRONG with Revenue Management?
Theory to Practice: Translating Pricing Theory into Reality
More Info: www.jda.com/revenuemanagement
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