Revenue Management Appendix 10 A Revenue Management is
- Slides: 6
Revenue Management Appendix 10 A • Revenue Management is the problem of the disappearing inventory. • Managers must be flexible to change their predicted sales by market segment as information arrives. • Airlines price discriminates between business and non-business travelers. If too few business travelers have booked tickets compared to the amount expected, then more non-business tickets should be released. 2005 South-Western Publishing Slide 1
• Managers may authorize reservation clerks to sell more seats ( or more rooms) than are available. • The greater the overbooking, the lower are the costs of spoilage. • Spoilage is an inventory NOT sold. If capacity is large, an airline or hotel will have high spoilage. • The greater the overbooking, the greater are the costs of spillage, making customers unhappy by finding that they have no seat or reservation. Slide 2
Spillage & Spoilage P • Figure 14 A. 1 on page 639 With Random Demand • Demand shifts between low and high • At each price, there Customer demand is a chance for distributions at each unsold capacity price known as spoilage if QLow occurs. • Or disappointed Low High Demand customers who Demand can’t be satisfied Mean Demand known as spillage Spoilage Spillage if QHigh occurs. QLow QMean QHigh Slide 3
Spillage • Spillage is the excess demand that cannot be met. • If the service industry has low capacity, the spillage will be great • Customers leave the hotel or airline unable to get a room or an airplane seat. • How do airlines handle times when they have overbooked a flight and everyone shows up? » Does it make sense that they ask for volunteers to wait for a later plane? » Does it make sense for them to give free tickets to those who are bumped? Slide 4
Cross-Functional Revenue Management • The optimal plan will Capacity Planning require pricing, marketing, demand forecasting, and capital budgeting – all Account cross-functional thinking Scheduling Management • The issue at the center is Order which orders to accept and Acceptance & Refusal refuse? Process • A larger capacity reduces spillage, but increases Pricing Customers spoilage Demand estimation • A lower price reduces & forecasting spoilage but increases spillage Figure 14 A. 2 page 641 Slide 5
Optimal Overbooking • Spillage and spoilage costs go in opposite directions, the sum of these costs has a minimum with the optimal amount of overbooking. • Since business travelers tend to a large extent to be repeat customers, the cost of spillage (oversells) may be very high. • The optimal amount of overbooking for this market segment may well be lower than for non-business clients. Figure 14. 7 Spillage Total Cost optimal Spoilage 100% 110% 120%. . . Percent Overbooked Slide 6
