the future of revenue management, visions from different perspectives why do we do rm? how do we do...

THE FUTURE OF REVENUE MANAGEMENT,VISIONS FROM DIFFERENT PERSPECTIVES

WHY DO WE DO RM?

HOW DO WE DO RM?

HOW COULDWE DO RM

IN THE FUTURE?

THINK FUTURE… TOGETHERAGENDA

• TOUR DE TABLE : INTRODUCTION OF THE PARTICIPANTS

• INTRODUCTION TO RM : WHY WE DO RM IN THE AIRLINES INDUSTRY

• INTRODUCTION TO MAJOR TYPES OF RM SOLUTIONS• DISCUSSION ABOUT +/- OF EACH TYPE OF SOLUTION• IMAGINE A RM SOLUTION OF THE FUTURE FOR A REGIONAL CARRIER

• BREAK

• RM OF THE FUTURE FOR A REGIONAL CARRIER: DEBRIEFING

• INTRODUCTION TO ANCILLARY REVENUE MANAGEMENT• DISCUSSION : HOW DYNAMIC PRICING FOR ANCILLARIES CAN BE EFFICIENT? • YIELD AND ANCILLARY MANAGEMENT, 1 OR 2 SYSTEMS, 1 OR 2 TEAMS?

• YOUR CONCLUSION

INTRODUCTIONTOUR DE TABLE

• INTRODUCE BRIEFLY YOURSELF

• WHAT DO YOU EXPECT FROM THE WORKSHOP?

INTRODUCTIONYIELDIN

• CLUB MED : RM OnD SYSTEM FOR A TO• MBA EM LYON / HEC MONTREAL• CLOSE BROTHERS : M&A• CESAR RITZ COLLEGES : RM LECTURER• BABOO : RM & NETWORK DIRECTOR• DARWIN : RM DIRECTOR• YIELDIN : CREATIVE CEO

• ENGINEER EPFL LAUSANNE• RESEARCH FIELD : FLEET OPTIMISATION• BABOO : BI ANALYST• DARWIN : BI MANAGER• YIELDIN : CREATIVE DEVELOPPER

INTRODUCTION YIELDIN STRATEGIC COMITY

• STRATEGIC COMITY• BUILDING A SCIENTIFIC COMITY• APPLYING FOR THE JEI STATUS ( YOUNG

INNOVATIVE COMPANY)

INTRODUCTION YIELDIN WHAT WE DO

INTRODUCTION TO RM WHY DO WE DO RM ?

HOW TO BALANCE OFFER AND DEMAND ?

BY PRODUCING

MORE

BY STORING

BY ADAPTING PRICE

HOW TO BALANCE OFFER AND DEMAND ?SOME INDUSTRIES LIKE AIRLINES, HOTELS, CAR RENTAL, ETC:

CAN’T PRODUCE MORE!

THEIR RESOURCES ARE

LIMITED!

CAN’T STORE!

THEIR RESOURCES ARE

PERISHABLE!

INTRODUCTION TO RM WHY DO WE DO RM ?

HOW TO BALANCE OFFER AND DEMAND ?

• MUST BALANCE DEMAND AND OFFER BY ADJUSTING DYNAMICALLY PRICES!

• RM SYSTEMS SET THE RIGHT PRICE!

SOME INDUSTRIES LIKE AIRLINES, HOTELS, CAR RENTAL, ETC:

INTRODUCTION TO RM WHY DO WE DO RM ?

• CAN SOMEONE TELL US WHEN RM IS BORN?

• WHAT WAS US LEAGCY CARRIERS PROBLEM ?

• WHAT DID THEY DO ?

• WHAT IS PRICE DIFFERENTIATION ?

INTRODUCTION TO RMRM HISTORY

• RM IS AN ART ?

• RM IS A SCIENCE ?

INTRODUCTION TO RMRM DEFINITION

• RM IS THE ART OF CREATING PRICE DIFFERENTIATION BY CREATING THE RIGHT OFFERS FOR THE RIGHT CUSTOMERS => MARKETING

• RM IS THE SCIENCE OF FORECASTING DEMAND AND OPTIMISING REVENUE ACCORDING TO DEMAND LEVEL, FARES AND CAPACITY CUNSTRAINTS => MATHEMATICS

• SET THE RIGHT … FOR THE RIGHT … FOR THE RIGHT … AT THE RIGHT …..

HOW TO GENERATE PRICE DIFFERENTIATION?RM CONCEPTS

• BY PLAYING WITH CUSTOMERS NEEDS AND EXPECTATIONS

REVENUE MANAGEMENT, HOW?

HOW TO GENERATE PRICE DIFFERENTIATION?RM CONCEPTS

• FARE CLASSES STORED IN INVENTORY BUCKETS• ADVANCE PURCHASE=> PRICE MOVES UP WITH TIME BECAUSE THE BUCKET IS FULLY BOOKED OR TIME LIMIT IS REACHED (AP)

REVENUE MANAGEMENT, HOW?

• BY CREATING ARTIFICIAL DIFFERENTIATIONS

• ACCORDING TO FLIGHT DATE DEMAND “SEASONALITY”

• ARTIFICIAL DIFFERENTIATIONS MUST BE PERCEIVED AS FAIR BY CUSTOMERS

• IS LAST MINUTE FAIR ? EFFICIENT ? SHORT TERM ? LONG TERM ?

A

B

C

TIME

PR

ICE

A

B

C

LOW SEASON

PR

ICE

B

C

D

HIGH SEASON

HOW TO SET THE RIGHT PRICE?

RM CONCEPTS

• BY MIXING PAST SALES, PAST PRICES AND PAST INVENTORIES,

• RM SYSTEMS FORECAST DEMAND.

FORECAST

• CONSIDERING PAST IS REPRESENTATIVE OF THE FUTURE,

REVENUE MANAGEMENT, HOW?

HOW TO SET THE RIGHT PRICE?

RM CONCEPTS

• RM SYSTEMS SET THE RIGHT PRICE, OPTIMISE REVENUE

• WHAT IF, IN A VERY FAST MOVING ENVIRONMENT WE WOULD CONSIDER PAST IS NOT ALWAYS REPRESENTATIVE OF THE FUTURE?

?

REVENUE MANAGEMENT, HOW?

• BY MIXING DEMAND FORECAST, CURRENT SALES, CURRENT PRICES AND CURRENT INVENTORIES,

INVENTORY OR OPTIMISATION BASED?

RM SYSTEMSREVENUE MANAGEMENT SYSTEMS

• SOME RM SYSTEMS ARE IN FACT ONLY INVENTORY SYSTEMS. THEY RELY A LOT ON USER “FEELINGS” AND THEIR INITIAL PROGRAMMING

• OTHERS USE MATHEMATICAL OPTIMISATIONS AND ARE SUPPOSED MORE SCIENTIFIC

INVENTORY BASEDREVENUE MANAGEMENT SYSTEMS

• LOW SEASONS : LOW REVENUE EXPECATIONS : A LOT OF SEATS IN LOWER FARE CLASSES!

• PEAK SEASONS : HIGH REVENUE EXPECATIONS : A FEW SEATS IN LOWER FARE CLASSES!

OPTIMISATION BASED

REVENUE MANAGEMENT SYSTEMS

Paris

Flight 1

New York

Flight 2

Lyon

ForecastedFull

ForecastedNot full

OnD systems can optimise complex network

LYS-PAR is closed except if there is a fare available above .. ?LYS-PAR is closed provided there is reliable demand on …. ?

HOW TO SET THE RIGHT PRICE?

RM CONCEPTS

BY MATHEMATICAL OPTIMISATION

WHAT IF FORECAST IS NOT RELIABLE? COULD YOU BE IN THE RED?

WOULD YOU KNOW IT?

IS THE PRICE REALLY OPTIMAL?

1. FORECAST DEMAND 2. OPTIMISATION ACCORDING TO INVENTORIES AND PRICES=> THE PRICE SET IS THEORETICALLY OPTIMAL!

WHAT IS THE ORANGE?THE RED?

PROS & CONSRMS DISCUSSION

INCREASE REVENUE

MEASUREEFFICIENCY

LOGIC

DYNAMISM

FLEXIBILITY

HR & COLLABORATIVEWORK

OnD BASED INVENTORY BASED

• WHAT ARE THE PROS AND CONS OF EACH RMS TYPE ?

PROS AND CONSRMS ANALYSIS

If Demand > Offer : A little. If aggressive competition orDemand < Offer: Not at all.

If Demand > Offer : A lot. If aggressive competition or

Demand < Offer: Not so much.

Ability to measure efficiency based on a concept,

“Unconstrained Demand” that can’t be challenged.

Not possible to challenge system and user efficiency.

Optimization relies on Math and forecast quality. Not useful if past

data too limited or not stable.

Relies to much on initial settings entered by users.

Do not adapt fast to environment changes.

Do not adapt at all to environment changes. 

Do not adapt to strategic or tactic changes.

 Adaptation to strategic or tactic changes requires time consuming

human actions.  

Black box, difficult to understand. Fit better engineers than business

experts. Do not support transversal collaborative work.

Easy to understand. Fit better business experts than engineers. Do not really support transversal

collaborative work.

INCREASE REVENUE

MEASUREEFFICIENCY

LOGIC

DYNAMISM

FLEXIBILITY

HR & COLLABORATIVEWORK

OnD BASED INVENTORY BASED

9

• WHAT ARE THE PROS AND CONS OF EACH RMS TYPE ?

RMS SELECTIONRMS DISCUSSION

BIG LOW COST AIRLINE

BIG LECAGY CARRIER WITH HUGE NETWORK

SMALL LEGACY CARRIER WITH LOW NETWORK

EFFECT

CHALLENGER AIRLINE (XL AIRWAYS, BABOO, ETC)

OnD BASED INVENTORY BASED

• WHAT RM SYSTEM IS ADAPTED ?

RMS DESIGNIMAGINE A NEW SOLUTION

• TAKING INTO ACCOUNT THAT BECAUSE OF INTERNET REVOLUTION : PRICE IS MORE AND MORE TRANSPARENT CUSTOMERS CAN SHOP AROUND AND ARE THEREFORE LESS AND LESS FAITHFUL SOME PLAYERS ARE SOMETIMES VERY AGGRESSIVE? HYSTERIC, PROPOSE VERY LOW PRICES

MARKETDATA

AIRLINEDATA

• IMAGINE A RM SYSTEM FOR A MEDIUM SIZED REGIONAL CARRIER WHICH SELLS A LOT ON THE WEB, AND THAT WOULD : DEPEND LESS ON PAST HISTORICAL DATA AND FORECAST, WOULD BE VERY REACTIVE WOULD TAKE INTO ACCOUNT MARKET INFORMATION SUCH AS COMPETITIVE PRICES NOT BE A BLACK BOX AND THEREFORE WOULD BE MORE BUSINESS ORIENTED TAKE INTO ACCOUNT SOME INFORMATION FROM YOUR WEB BOOKING ENGINE

RM DESIGN

BY MATHEMATICAL OPTIMISATION

• Demand Forecast• Revenue optimization / prices and remaining inventory.• Price is theoretically optimal• Systems based on optimization depend too much on

forecast reliability• Users may think they are in the target heart, while they

are aside!

CLUE : HOW COULD YOU DETECT DILUTION AND SPILL EVIDENCES

• Spill: Sales too low, price too high • Dilution : Sales too fast, prices to low

Right Price

Optimal Price

Dilution

Spill

IMAGINE A NEW SOLUTION

RM DESIGN

CLUE: WHAT CAN WE LEARN FROM OTHER INDUSTRIESPRICING SUPPORT TOOL FOR PRINTERS

IMAGINE A NEW SOLUTION

PERFORMANCE = CONVERSION RATE X % MARGIN

YIELDIN CONCEPTS GLOBAL MICRO VISION

YOUR FLIGHT SALES, YOUR DEMAND, YOUR COMPETITIVE PRICE GAP ON THE SAME GRAPH

THE RIGHT PRICE

CURRENTSALES

SALES SPEED

TIME TO

DEPARTURE WEB DEMAND

INVENTORY COMPETITOR PRICES

FLIGHT DATE SEASON

PROFILE +/- Agressive +/- Revenue, +/- Volume

IMAGINE A NEW SOLUTIONRM FUTURE

HOW TO SET THE RIGHT PRICE?

RMS DESIGNYIELDIN CONCEPTS

• DESIGN OF A BUSINESS ORIENTED SOLUTION …

• RED :This is a SPECIAL “season” flight, which is late (bookings-), does not catch up (speed -), is more expensive (price +) and gets a bad web conversion rate (demand -).

RMS DESIGNYIELDIN CONCEPTS

• DESIGN OF A BUSINESS ORIENTED SOLUTION … ABLE TO AVOID DILUTION

• This Special flight seems to be very late and its lowest price is 59 $ more than competitor’s.

• However speed and conversion rates are good.

• What would you do?

RMS DESIGNYIELDIN CONCEPTS

• WHAT THE SYSTEM SHOULD DO FOR A FLIGHT DATE ?

• IF TACTIC IS LF?• IF TACTIC IS YIELD?• IF TACTIC IS STANDARD?

• IS THE SAME KIND OF INFORMATION AT MACRO LEVEL USEFUL?

YIELDIN CONCEPTS GLOBAL MACRO VISION

YOUR FLIGHT SEASON SALES, YOUR DEMAND, YOUR COMPETITIVE PRICE GAP ON THE SAME GRAPH

YIELDIN CONCEPTS GLOBAL MACRO VISION

YOUR FLIGHT SEASON SALES, YOUR DEMAND, YOUR COMPETITIVE PRICE GAP ON THE SAME GRAPH

YIELDIN CONCEPTS GLOBAL MACRO VISION

PRICE EFFICIENCY : SELECT OPTIMAL PRICE GAPS, EARLY BOOKING LOW FLIGHTS

YOU’D RATHER STAY QUIET WHEN YOU COMPETITOR IS SUCH AGRESSIVE?

YIELDIN CONCEPTS GLOBAL MACRO VISION

PRICE EFFICIENCY : SELECT OPTIMAL PRICE GAPS, LATE BOOKING LOW FLIGHTS

YOU COULD BE MORE AGRESSIVE WHEN YOUR COMPETITOR STARTS TO BE MORE EXPENSIVE

YIELDIN CONCEPTS GLOBAL MACRO VISION

PRICE EFFICIENCY : SELECT OPTIMAL PRICE GAPS, EARLY BOOKING PEAK FLIGHTS

YOU ARE TOO CHEAP

YIELDIN CONCEPTS GLOBAL MACRO VISION

PRICE EFFICIENCY : SELECT OPTIMAL PRICE GAPS, LATE BOOKING PEAK FLIGHTS

YOU MAY HURT YOUR COMPETITOR BY TAKING AWAY SOME VERY CONTRIBUTIVE CUSTOMERS

YIELDIN VISIONRM FUTURE

ANCILLARIES MANAGEMENTSCOPE

• ALL AIRLINES WILL GO FOR ANCILLARIES SERVICES AND REVENUES

• AIRLINES SEE ANCILLARIES AS POTENTIAL REVENUE

• CUSTOMERS SEE THEM NOT ONLY AS SERVICES BUT ALSO AS COSTS

• HOW TO MANAGE ANCILLARIES REVENUE

• WOULD IT MAKE SENSE TO CHANGE ANCILLARY PRICES AS RM CHANGE DYNAMICALLY FARES?

ANCILLARIES MANAGEMENT HOW TO MANAGEANCILLARIES

REVENUE

• SET OBJECTIVES!

• DETECTION, ALERTS!

• REACT?

• ANCILLARY REVENUE PERFORMANCE DEPENDS ON? PAX VOLUME APS (AVERAGE PER SEAT SOLD) WHICH DEPENDS ON

% TAKEUP & AVERAGE PRICE

ANCILLARIES

KPI

• WHEN LATE WITH YOUR BAG REVENUE, WHAT WOULD YOU DO?• WOULD DECREASING YOUR PRICE BE EFFICIENT ?

ANCILLARIES MANAGEMENT

ANCILLARIES MANAGEMENT ANCILLARIESELASTICITIES

• ELASTICITIES : HIGH, MEDIUM, LOW?

BAGS SEATS ELS MEALS

• WHY IS ELASTICITY SO LOW FOR BAGS TAKEUP?

BUSINESS SINGLE COUPLES FAMILIES

BAG TAKEUP

• ANCILLARY TAKEUP RELIES A LOT ON TYPE OF CUSTOMER (PARTY TYPE) AND WHY THEY ARE TRAVELLING FOR (BUSINESS, LEISURE, LOS, ETC…)?

e ee eee eeee

ALERTS AND CUSTOMISATION

• DOES IT MAKE SENSE TO DETECT GAPS AT FLIGHT DATE OR AT ROUTE MONTH LEVEL?

ANCILLARIES MANAGEMENT

ALERTS AND CUSTOMISATION

• IN ORDER TO TAKE THE RIGHT ACTION PLAN, YOU MAY BE ABLE TO DETECT PERFORMANCE AT WHATEVER LEVEL OF AGGREGATION YOU WANT FOR ALL ANCILLARIES, ORIGINS, DESTINATIONS, MONTHS ….

ANCILLARIES MANAGEMENT

HOW TO REACT

• HOW TO FILL THE GAP IN YOUR BAG OR MEAL ANCILLARY REVENUE

• DECREASE PRICE FOR ALL CUSTOMERS?

• INCREASE PRICE FOR ALL CUSTOMERS?

• DESIGN SPECIAL OFFERS FOR COUPLES LIKE Second luggage at -50% One cup of Champagne offered for each meal purchased.

• DESIGN SPECIAL OFFERS FOR FAMILIES AND COUPLES LIKE Third luggage at -50% 4 meals for 3

• AIRLINES MAY LEARN FROM LARGE RETAILERS, WORK ON THEIR OFFERS SCOPE (RIGHT ROUTES, PERIOD), DESIGN AND MARKETING.

ANCILLARIES MANAGEMENT

ANCILLARY OPTION

SET ANCILLARIES OBJECTIVES

DETECT GAPS,ALERT

ANCILLARIES MANAGEMENT

ALERT CUSTOMISATION

RIGHT SPECIAL OFFERS FOR THE RIGHT ROUTES, PERIOD,

AND CUSTOMER TYPE

CUSTOMERISATION

TIME TIME

?

DEPARTU

RE DATE

• WHAT COULD YOU DO BETWEEN PURCHASE AND DEPARTURE DATE?

• YOUR CRM INFORMATION MAY BE GOLDMINE => BOTH REVENUE AND CUSTOMER SATISFACTION.

• RM BASIC DATA MAY SHIFT FROM INVENTORY TO PNR’s

• IN ORDER TO MANAGE YOUR REVENUE, ONE OR TWO SYSTEMS, ONE OR TWO TEAMS?

PUSH: ONE TO FEW, ONE TO ONE OFFERS

ONE OR TWO SYSTEMS

RM & ANCILLARIES MANAGEMENT

• IN ORDER TO MANAGE YOUR REVENUE, ONE OR TWO SYSTEMS, ONE OR TWO TEAMS?

• SCENARIO : YOU WORK FOR A LOW COST AIRLINES YOUR FLIGHT YMQ YQB IS A LOW FLIGHT AND WILL NOT REACH NEITHER

YIELD REVENUE NOR ANCILLARIES OBEJCTIVES. YOUR COMPETITOR FARE IS 20 €, YOURS IS 21€? DO YOU LOSE ONLY 21€ WHEN A PROSPECT GOES TO COMPETITION?

• YOU LOSE THE 20€ + THE OPTION TO SELL ANCILLARIES.

• ONE SYSTEM, ONE TEAM? IF NOT AT LEAST RM AND ANCILLARIES MANAGEMENT TEAMS SHOULD COLLABORATE CLOSELY!

ANYTHING ELSE YOU WANT TO KNOW ABOUT

RM & DYNAMIC PRICING?

QUESTIONS