Rational Revenue Management
By Steven Pinchuk Lead Customer Intelligence & Revenue Management, IBM | October 18, 2015
The opinions in this article are my own and do not represent the opinions of my employer, IBM, where I am WW Lead Customer Intelligence and Revenue Management
At its inception, Revenue Management (RM) was a management science that created techniques which applied micro-economic theories. These micro-economic theories were implemented using advanced predictive analytics and robust optimization, that defined and optimized the availability and pricing of inventory. These economic theories created many slightly differentiated "products" for a company from their inventory. I believe RM is a true and noble management science that has become corrupted by predatory and baseless sales and booking rules that companies are masquerading as RM. To explain my position, we need to share some common vocabulary and understandings of the theories and implementations of RM.
RM is a blend of art and science. The same hotel room can become many different products, based on either the rules for its sale and/or the demand stream(s) allowed to buy the product(s). RM takes the hotel's inventory and creates many different products, like shades of gray, which can all be sold using the same inventory or hotel room. The difference between these products can be defined by many factors; such as market forces, geography, and time - or just by the "sales or booking rules" that define each product for the market from the company. These factors can be either utilized or created to define differentiated products for different market segments.
In RM, part of the theory is based on the concept of a demand continuum. Price sensitive demand is seen as falling on one end of the continuum and service sensitive demand on the other end of the continuum. Shades of grey, customers willing to make different tradeoffs between price and service, create many different demand segments along the continuum. RM leverages these differences. By taking the actions described above, RM techniques proactively implement microeconomic theories, which optimizes the profits a company could capture for the use of its inventory as defined by their products. Sales or booking rules can create natural market segmentations seen in the demand continuum or the company can create derived market segments by the company.
The application of traditional RM theories optimized revenues by predicting unconstrained demand and supply curves at the more natural and less purely predatory product/price/category levels, and proactively assured the demand that would pay more for a product, which could be sold at different prices, was protected for the forecasted higher revenue demand that would arrive later in the sales curve. The predictions were optimizing revenue by offsetting the timeline where lower revenue demand may materialize earlier than higher revenue demand.
The application of RM theories also increased revenues by assuring the utilization of the inventory of these products was optimally sold to avoid "breakage." If all rooms on a Wednesday night are sold as one night stays, in effect, you have allowed these one night guests to deny guests who want Wednesday night as part of a multi-nigh stay to be denied what they want. This would usually lead to nights during the week that would not sell because the demand for them included Wednesday night stays as part of the "product" these demand requests wanted. RM can proactively forecast all the demand patterns, for all combinations or products and their utilization of inventory, shared and discreet, and proactively set sales limits, by arrival date and booking duration, which select the optimal demand to optimally fill as much inventory as possible.