Revenue Management

Revenue management was born in the airline business (formerly known as Yield Management) as a result of the 1970s deregulation. It deals with a particular economic issue that both airlines and hotels often face:

• Fixed Capacity: You can’t seat more passengers on a plane or book more rooms in a hotel just because demand is high today.
• Perishability: Because you lost your potential customers when that seat was left unsold or that room was left unbooked, it cannot be put on the shelf and sold tomorrow.
• Variable Demand: Business travelers want the flights on Monday mornings; leisure travelers the flights on Friday nights.

To solve this problem, revenue management replaces fixed prices with Dynamic Pricing. Prices vary depending upon real-time supply and demand. The goal is not just to sell 100% of the seats, but to sell them at the highest possible cumulative value.

Modern RM is too complex for human calculation. It’s done by a Revenue Management System (RMS) (e.g., IDeaS, Duetto, PROS). These systems use sophisticated algorithms to analyze three layers of data:

• Historical Data: What happened this time last year?
• Pacing (OTB): “On The Books” data. Are we booking faster/slower than normal for next month?
• Market Intelligence: What are the competitors charging now? (Rate Shopping).

Based on this, the RMS automatically adjusts rates and availability restrictions (like Minimum Length of Stay) thousands of times a day.

Successful RM is based on segmentation. The airline knows that a business traveler is willing to pay $500 for a last-minute seat, while a student is only willing to pay $100 for a seat booked months in advance. To prevent the business traveler from buying the cheap student ticket, RM uses Fences (Rate Fences):

• Physical Fences: First Class vs Economy (better product);
• Non-Physical Fences: Rules such as “Must purchase 21 days in advance” or “Non-refundable”.