pricing and revenue management - panama logistics...
TRANSCRIPT
Pelin Pekgün, Ph.D.
H. Milton Stewart School of Industrial and Systems Engineering
Georgia Institute of Technology
10 April 2012
Panama Marriott Hotel
Breakfast & Learn Series
Pricing and Revenue Management
Background
� Ph.D. (2007), Industrial and Systems Engineering, Georgia Inst. of Technology
� Concentration: Supply Chain Management & Logistics
� 2008 INFORMS George B. Dantzig Dissertation Award -Honorable Mention
� 2005-2011, Manager, Analytical Services, JDA Software Group
� Pricing and Revenue Management in Retail, Hospitality, Passenger Travel, Leisure Industries
� 2012 INFORMS Franz Edelman Award Finalist (w/ JDA and Carlson Rezidor Hotel Group)
� 2011-2012, Visiting Professor, Industrial and Systems Engineering, Georgia Inst. of Technology
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1. Revenue Management (RM) Core Concepts
2. Price Sensitive Demand Forecasting
3. Price Optimization
4. Any Questions?
Table of Contents
3
What is Revenue Management?
The process of maximizing revenue using data and analytics to predict customer behavior and optimize
price and availability of products
Selling the right product
to the right customer
at the right time
for the right price
through the right channel
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The birth of Revenue Management
� The Champion – American Airlines
� The Challenger – People Express• Product - Low cost, no-frills
• Fare Structure -Rock-bottom
• Average Cost - 5¢ per Available Seat Mile
• Average Yield - 7.2¢ per Revenue Passenger Mile
• Product- Full-service network carrier
• Fare Structure - Regulated oligopoly
• Average Cost - 8.9¢ per Available Seat Mile
• Average Yield - 12.3¢ per Revenue Passenger Mile
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The birth of Revenue Management
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• one price sells 102 economy seats• $6,300 revenue
• six prices sell 126 economy seats• $9,420 revenue
People Express
Fare $60
American Airlines
Fare $40
Fare $50
Fare $60
Fare $80
Fare $100
Fare $120
$0
$20
$40$60
AA Extra Revenue
30 SpoiledSeats } passengers
unwilling to pay even $60
1986: RM Kills People Express
Don Burr, CEO, People Express, 15 Sep 1986 bankruptcy announcement
“[T]he day…American came at us with Ultimate Super Savers…was the end of our run � because they were able to underprice us at will…
� all they needed to take away from us was that marginal traffic above breakeven…
� All you have to do is take away a few seats on every flight and the guy's dead.”
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a. Sell to micro markets.
b. Exploit product value cycles.
c. Save products for the most valuable customers.
d. Focus on market-based pricing.
e. Focus on price rather than costs when balancing supply and demand.
f. Make decisions based on knowledge, not supposition.
g. Continually re-evaluate revenue opportunities.
Revenue Management Core Concepts
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10
MicroMicro
Micro
MicroMicro
Micro
vs.Mass
Mass Market Attributes:
� Sell to Large Customer Groups
� Creates and Sells a Single Product
a. Sell to Micro Markets
Micro Market Attributes:
� Sell to Small Customer Groups
� Creates Products for each Customer Group
100P
RIC
E
$100
$80
$60
$40
$20
$11 20 40 60 80
DEMAND
� one price� maximum achievable
revenue of $2,500.
� four prices� produces $4,000 in revenue
100
PR
ICE
DEMAND
$100
$50
$11 50
DILUTED DEMAND
UNACCOMMODATED DEMAND
a. Sell to Micro Markets
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� Product value cycles represent the value of a product at any given time
� Different customers (market segments) value different things
� Value may increase or decrease over time
ex: food, technology ex: antiques, last room availability
� Knowing the product value cycle tells you what customers are willing to pay for your product at any given time.
Time
Value Increases Over Time
Time
Value Decreases Over Time
b. Exploit Product Value Cycles
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Revenue Management proposes you:
� Match demand forecasts with customer purchase behavior, in order to predict
� Who wants a given product
� When the request is made for the product
� Save products through:
� Inventory availability controls that save products for price inelastic market segments
� Price breakpoints (discounts) to stimulate demand from price elastic market segments
c. Save Products for Valuable Customers
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d. Focus on Market Based Pricing
� Cost-based pricing� Focuses on recovering costs
� Sets product prices based on what companies expect customers to pay for their goods and services
� Does not consider customer price elasticity
� Market-based pricing:
� Cost to create product is not primary driver
� Sets products prices based on what customers are willing to pay
� Requires information on price elasticity by market segment and product
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Demand is less elastic when:� Fewer acceptable options are available
� Product is perceived as inexpensive
� Limited time available to select a product
Demand is more elastic when:� More acceptable options are available
� Product is perceived as expensive
� Unlimited time available to select a product
Price elasticity can also be represented as a win/lose probability
Pold=$30
Quantity
Pnew=$45
Qnew
D
Qold
Pold=$30
Quantity
Pnew=$45
Qnew
D
Qold
d. Focus on Market Based Pricing
Price Elasticity = % change in demand / % change in price
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“American offered cheaper fares to stimulate demand in a controlled manner on low demand flights while maintaining higher profits on
popular flights by limiting the number of super-saver fares offered.”Barry C. Smith, American Airlines Decision Technologies, 1990
SUPPLY
DEMAND
e. Focus On Price When Balancing Supply and Demand
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Revenue Management proposes you:
� Practice price optimization:
� Use equilibrium points from multiple products and market segments to set prices that will maximize revenue
� Set prices that consumers will accept
� Use prices to shift demand and utilize excess capacity:
� When demand is high, increase prices
� When demand drops, offer discounts to sell products/services that would otherwise go unsold.
e. Focus On Price When Balancing Supply and Demand
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Human Forecasters
� Intentional or unintentional biases
� Hopeful
� Focus on recent events
� Use most accessible information
Forecasting Systems
� Based on customer transaction data
� Use internal and external environmental factors
� Predict customer behavior
� Utilize sophisticated mathematical algorithms
f. Make Decisions Based On Knowledge
Revenue Management proposes you:
� Ensure quality data inputs
� Use judgment and experience when using the data outputs
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f. Make Decisions Based on Knowledge
MeasurePerformance
DRMSystem
Accept, Rejector Modify
Distribution System
Calibrate and/or Forecast
Reports
Prices
HistoricalData
Review, Adjust
CapacityUserInfluences
RecommendationReview
ParametersRecentTrends
CurrentData
Sample Revenue Management System
Optimize
Recommend
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� Markets are always changing; therefore, revenue opportunities are always changing
� Critical speed is replacing critical mass in capturing marketing opportunities
� No time for “up-the-ladder” decision making
� Revenue Management proposes you:
� Re-calibrate and/or re-forecast as often as necessary based on new data
� Establish “auto-pilot” guidelines for recommendations that fall within acceptable bounds, focus on exception management
� Empower front-line workers to increase decision speed
g. Continually Re-evaluate Revenue Opportunities
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a. Sell to micro markets.
b. Exploit product value cycles.
c. Save products for the most valuable customers.
d. Focus on market-based pricing.
e. Focus on price rather than costs when balancing supply and demand.
f. Make decisions based on knowledge, not supposition.
g. Continually re-evaluate revenue opportunities.
Revenue Management Core Concepts
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1. Revenue Management (RM) Core Concepts
2. Price Sensitive Demand Forecasting
3. Price Optimization
4. Any Questions?
Table of Contents
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Understanding what shaped the past gives better visibility of future demand
Promotions
SeasonalLift
-8%
20%
SpringPeak
SummerPeak Christmas
25%
Pricing
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Constructing Baseline Demand
0
50
100
150
200
250
300
Nov-01 Feb-02 May-02 Sep-02 Dec-02 Mar-03 Jun-03 Oct-03 Jan-04
0
50
100
150
200
250
300
Nov-01 Feb-02 May-02 Sep-02 Dec-02 Mar-03 Jun-03 Oct-03 Jan-040
10
20
30
40
50
60
70
Nov-01 Feb-02 May-02 Sep-02 Dec-02 Mar-03 Jun-03 Oct-03 Jan-04
Total History
Promotional HistoryBaseline History
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Retail (Seasonal Apparel) Example
Price elasticity: -1.31
0
50
100
150
200
250
300
350
1/15
/200
6
1/29
/200
6
2/12
/200
6
2/26
/200
6
3/12
/200
6
3/26
/200
6
4/9/
2006
4/23
/200
6
5/7/
2006
5/21
/200
6
6/4/
2006
6/18
/200
6
7/2/
2006
7/16
/200
6
7/30
/200
6
8/13
/200
6
8/27
/200
6
9/10
/200
6
9/24
/200
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Price Impact
Total Sales
Baseline Sales
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Unconstraining Demand
� Identify periods when sales history was constrained� User controls in place
� Insufficient capacity
� Use statistical methods to “repair” history� Estimates lost sales due to capacity shortages
Observed Demand
Capacity
Purchase Requests
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time
dem
and
Baseline Forecast (Demand Planning)
Price-Sensitive Demand Forecast (Price Optimization)
Price Influenced Forecast
Baseline Forecast
Integrated Demand Planning
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1. Revenue Management (RM) Core Concepts
2. Price Sensitive Demand Forecasting
3. Price Optimization
4. Any Questions?
Table of Contents
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Price Optimization Concept
Price Sensitive Unconstrained Demand
Revenue CapacityLegend:
Price Sensitive Demand Model
Price
Dem
and
Reven
ue
CapacityAt what price will we make the most money?
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Base Price (before tax & shipping): $149.99
On the average, the customer expects to pay $135.91 rather than $149.99.
Price Transparency via the Internet
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* http://fastfood.freedomblogging.com/mcdonalds-vs-starbucks-espresso-prices/ (Prices taken in Anaheim, CA)
Price Competition is Everywhere…
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How do you respond?
� Which competitors are your true competitors?
� At what price do they become more competitive?
� What price do you charge?
Market / Competition
$100
$120
$140
$160
$180
Sun
Mon Tu
e
Wed Th
u Fri
Sat
Day of Week
PriceMarket / Competition
$100
$120
$140
$160
$180
Sun
Mon Tu
e
Wed Th
u Fri
Sat
Day of Week
Price
Understanding dynamic nature of competitor prices over time, and choosing the optimal price w.r.t. to customers’ reference price is critical…
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1. Revenue Management (RM) Core Concepts
2. Price Sensitive Demand Forecasting
3. Price Optimization
4. Any Questions?
Table of Contents
34
Any Questions?Contact Information:
Pelin Pekgün
Visiting Professor
H. Milton Stewart School of
Industrial and Systems Engineering
765 Ferst Drive, Atlanta, GA, 30332
Office Phone: 404-894-3037
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