Revenue Management: Evolution of the Discipline and Emerging

Revenue Management: Evolution of the Discipline and Emerging Trends H.G. Parsa University of Denver

Presentation Importance of revenue management Definition of revenue management Evolution of revenue management – Contributing factors Historical perspectives of Revenue management Introduction of Yield Management Technology and Revenue Management Emerging Trends Concluding remarks

Importance of Revenue Management Revenue Management has contributed millions to the bottom line, and it has educated our people to manage their business more effectively. When you focus on the bottom line, your company grows. — Bill Marriott Jr., Chairman and CEO, Marriott International Revenue Management as Music The truth is that . just as an orchestra generates rich harmony from a wildly diverse array of musicians and instruments, a hotel relies on a myriad of specific systems and teams to generate revenue and perpetuate a healthy operation. - Jean Francois Mourier, Founder & CEO, RevPar Guru Inc.

Importance of Revenue Management Operations keep the lights on, Strategy provides a light at the end of the tunnel, but Revenue Management is the engine that keeps the organization moving forward. - adopted from Joy Gumz

Definitions of Revenue Management “Revenue Management is the application of disciplined analytics that predict consumer behaviour at the micromarket level and optimize product availability and price to maximize revenue growth.” “Selling the Right Product to the Right Customer at the Right Moment at the Right Price on the Right Distribution Channel .” “Application of disciplined tactics that predict buyer response to prices, optimize product availability, and yield the greatest business income.”

Evolution of Revenue Management Selected Contributing Factors Excessive Inventory Perishability of products / services Forecasting challenges – Art and Science Need for creating new demand Revenues from non-peak seasons / times Exploring underserved customer segments New possibilities for mass customization Technologies, Internet and Big data

Academic Roots of Revenue Management Thought (Emerging Trends in Rev Mgmt. 2000s) Revenue Management Yield Management Operational Research (1980s) (1970s-80s) Channels of Distribution Forecasting (1970s-80s) (1960s- 70s) Long Range Planning Economics (1990s) (1940s-50s) (early 1900s) Public Administration and Policy (before 1900s)

Revenue Management and Forecasting Accuracy in forecasting is one of the primary impetus for revenue management. Forecasting models Quantitative models – dominant practice Qualitative models Programmed forecasting – robotic forecasting Forecasting – industry specific variables Forecasting and channels of distribution

Research in Forecasting (McGill and Ryzin 1999) 1958 Beckmann and Bobkowski 1961 Thompson 1962 Taylor 1967 Rothstein and Stone 1970 Lyle 1970 Martinez and Sanchez 1972 Lennon 1972 Littlewood 1976 Conrad 1977 Kanafani and Sadoulet 1978 Taneja 1982 Brenner 1982 Wang 1983 Harris and Marucci 1985 BenAkiva and Lerman 1986 L'Heureux 1987a,b Belobaba 1987 Adams and Michael 1987 Ben-Akiva 1988 Lee 1989 McGill 1990 Bohutinsky 1990 Lee 1990 Swan 1991 Weatherford 1993 Smith 1993a,b,c Swan 1993 Weatherford, Bodily and Pfeifer 1994 Hopperstad 1994 Nahmias 1994 Weatherford 1995 McGill 1996 Gallego 1997 Botimer 1996 Belobaba and Weatherford 1999 Belobaba and Farkas

Revenue Management and Channels of Distribution Revenue management also has roots in channels of distribution. Supply chain and logistics are the early adapters of revenue management principles. Channel Efficiency & Revenue Optimization Channel optimization in retailing - a form of revenue management It eventually lead to research on OTAs in hotels and airlines Similar trend continued in other industries also Jeuland and Shugan (1983) & Murthy (1987); Rai, Patnayakuni and Seth

Pricing and Revenue Management Marketing literature treats Revenue Management as a derivative of the pricing decision made by the firm. Price dictates the resultant revenues. Pricing is the driver that navigates revenue management Behavioral Pricing and Revenue Management: Dynamic pricing, - Reference price, - Price framing, Price discounts, - Price endings, - Price formatting, Channel pricing, - Price bundling; - Attributes pricing Capacity based Pricing, - Seasonality pricing etc.

Pricing and Revenue Management Quantitative Pricing Decisions Economic Models of Pricing Business Analytics - Discrete Choice Analysis Programmed pricing decisions Pricing under legal constraints Pricing and International commerce Pricing models for online channels – OTAs

Research in Behavioral Pricing Outi Somervuori (2015). Profiling behavioral pricing research in marketing A review of 613 articles on behavioral pricing Oxenfeldt, Miller, Schuchman and Winick(1961)- concept paper Monroe (1971) – pioneer of pricing research Grewal (1984) – reference price Gerard Tellis & Donald Lehman- Lifetime Pricing Research award winners Schindler (1980s-present) – price endings Kahneman and Tversky(1982)- cognition and heuristics Bitran and Caldenty (2003) – dynamic pricing & Rev Mgmt. in services Maglaras and Meissner (2006) – dynamic pricing

LAS VEGAS HOTEL CHOICE CONSIDER THE FOLLOWING ALTERNATIVES (SHOEMAKER, 2003): CHOICE A: Luxury suite room at 159; for an additional 30 you get a guaranteed room on a high floor with a Vegas Strip view. CHOICE B: Luxury suite room with a guaranteed room on a high floor with a Vegas Strip view for 189, or a similar room for 30 less elsewhere in the hotel. 13.6% chose to pay 189 20.6% chose to pay 189

Yield Management – Precursor of Revenue Management? Yield Management evolved to address inventory and capacity issues. It also allowed exploration of new avenues for revenues It has roots in the airline industry Then it expanded to auto rental, hotels, theme parks etc. Eventually most service industries including healthcare, financial, educational, actuarial (insurance) etc. have adapted some form of revenue management

Definitions of Yield Management "Yield management" can be defined as an intelligent approach to the dynamic reservation control and pricing of a perishable asset across customer types.” “Yield management is a human activity system(HAS) based on three interactive subsystems: people, forecasting and strategy.” “Prices established by paying attention to the different categories of consumers with the aim of being able to maximize yields" (Vails, 2009).

Selected Research in Yield Management Rothstein (1974, 1985) Ladani and Bedi (1977) Cross (1989) Kimes (1989, 2005) Bodily and Weatherford (1991) Belobaba (1987) & Lee (1989) dissertations on Yield Mgmt. – MIT Kevin Donaghy, Una McMahon, David McDowell (1995) Ian Yeoman and Anthony Ingold (1997) Schwartz (1998) – The Confusing Side of Yield Management: Myths, Errors, and Misconceptions - JHTR article Phillips (2005) Talluri and van Ryzin (2005)

Evolution of Revenue Management Forecasting accuracy has been the primary motivator of development of revenue management in the hotel industry. It allows for managers in all areas of the lodging operation to make important tactical decisions and policy decisions by the upper management. (Lim et al 2009) Airlines have traditionally been more successful in convincing consumers to accept the fact that different passengers will pay different fares for the same flight than hotels have been. (Ferguson and Smith 2014)

Definitions of Revenue Management “Revenue Management is the application of disciplined analytics that predict consumer behaviour at the micromarket level and optimize product availability and price to maximize revenue growth.” “Selling the Right Product to the Right Customer at the Right Moment at the Right Price on the Right Distribution Channel .” “Application of disciplined tactics that predict buyer response to prices, optimize product availability, and yield the greatest business income.”

Revenue Mgmt. in Non-Airline Industries Automobile rental - Broadcasting Cruise lines - Internet service providers Lodging and hospitality - Nonprofit sector – museums Passenger railways - Healthcare Education - Sports & Entertainment Manufacturing - Financial Markets Geraghty and Johnson (1997), Carol and Grimes (1995) Cross (1998)Kimes (1989), Ladany and Arbel (1991), Gallego and van Ryzin (1994)Nair, Bapna, and Brine (1997), Paschalidis and Tsitiklis (1998) Rothstein (1974), Ladany (1977), Liberman and Yechiali (1977, 1978), Kimes (1989), Bitran and Mondschein (1995), Feng and Gallego (1995), Bitran and Gilbert (1996)Metters and Vargas (1999) Kimes (1989), Strasser (1996), Ciancimino et al. (1999)

Research in Revenue Management (Wen-Chyuan Chiang, Jason C.H. Chen and Xiaojing Xu - 2006 ) Selected Review Articles in Revenue Management Weatherford and Bodily (1992) This paper reviews over 40 articles, proposes a 14-element taxonomy for revenue management, and classifies the published work using this taxonomy. McGill and van Ryzin (1999) This paper reviews the history of research on transportation revenue management, especially airline revenue management, and the development in forecasting, overbooking, and seat inventory control. This paper also includes a glossary of revenue management terminology and a bibliography of over 190 references. Pak and Piersma (2002) This paper presents a review of the variety of OR techniques for airline revenue management problems from over 30 articles. Bitran and Caldentey (2003) This paper reviews 88 papers that primarily focus on the research and results of dynamic pricing policies and their relation to revenue management.

Research in Revenue Management (Wen-Chyuan Chiang, Jason C.H. Chen and Xiaojing Xu - 2006 ) Selected Review Articles in Revenue Management Kimes (2003) This paper reviews her research in revenue management, including 11 articles published in Cornell Hotel and Restaurant Administration Quarterly and discusses areas for future research. Boyd and Bilegan (2003) This paper references over 110 articles to review the history of revenue management to illustrate a successful e-commerce model of dynamic, automated sales enabled by central reservation and revenue management systems. lmaghraby and Keskinocak (2003) This paper reviews over 80 articles and current practices in dynamic pricing in the presence of inventory considerations.

Titles in Revenue Management

Emerging Trends in Revenue Management

Emerging Trends in Revenue Management Corporate Social Responsibility CSR and Sustainable Revenue Management Socially responsible revenue management

Emerging Trends in Revenue Management Quantitative Models, Simulations and Big Data Discrete Choice Analysis Big Data and Revenue Management Dynamic Pricing – by Prime Time / by Day Part Dynamic Pricing – by the Hour / by the Minute Dynamic Pricing- for non-room services

Click icon to add picture Miracles in Numbers BIG DATA

Emerging Trends in Revenue Management Operational Innovations Priority Check-in at a Premium Green rooms for greater revenues Incentivized Early Check-outs Online Check-ins and Check-outs Dynamic Housekeeping Hotel GMs: 18 Hour House Keeping Schwartz: Why not 24 hours of house keeping

Emerging Trends in Revenue Management Shared Economies Revenue management in shared economies Collaborations between Shared Economies and hotels Airbnb – Collaborations with major hotel brands Ex: Hilton co-branded Airbnb Ex: Marriott approved Airbnb

Emerging Trends in Revenue Management Shared Competitive Advantage Collaborative revenue management practices Working with stakeholders for greater good

Emerging Trends in Revenue Management Human Side of Revenue Management Behavioral Pricing – Behavioral Economics – Revenue Mgmt. Revenue cycles – Channel Rotations Did we go too far in the quantitative path? Do NOT forget the Art of Revenue Management

Emerging Trends in Revenue Management Management Practices Integrated revenue management New Revenue Mgmt. Customer Resource Mgmt. (CRM) HR GIS Mapping in identifying new revenue sources Revenue Management as the core of a business

Bright Future Ahead SHARED VALUE CREATIO N THROUG H COLLABO RATION

Go Ahead – Get Ahead

Special thanks to my colleagues who commented on the earlier versions of this presentation: Henri Kuokkonen Jean Pierre van der Rest Scott Smith Hotel GMs

H.G. Parsa University of Denver [email protected]