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Revenue Management Appendix 14A

This article discusses the challenges of revenue management, including the disappearing inventory and the need for flexibility in predicting sales by market segment. It also explores the concept of overbooking and its impact on costs and customer satisfaction. Additionally, it examines the relationship between spillage and spoilage, and the importance of cross-functional revenue management in capacity planning. Finally, it presents the concept of optimal overbooking and the trade-off between spillage and spoilage costs.

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Revenue Management Appendix 14A

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  1. Revenue ManagementAppendix 14A • 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

  2. Should we Overbook? • 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. • Spoilageis 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.

  3. Spillage & Spoilage With Random Demand • Figure 14A.1 on page 639 • Demand shifts between low and high • At each price, there is a chance for unsold capacity known as spoilageif QLow occurs. • Or disappointed customers who can’t be satisfied known as spillage if QHigh occurs. Customer demand distributions at each price P Low Demand High Demand Mean Demand Spoilage Spillage QLowQMeanQHigh

  4. 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?

  5. Cross-Functional Revenue Management Capacity Planning • The optimal plan will require pricing, marketing, demand forecasting, and capital budgeting – all cross-functional thinking • The issue at the center is which orders to accept and refuse? • A larger capacity reduces spillage, but increases spoilage • A lower price reduces spoilage but increases spillage Account Management Scheduling Order Acceptance & Refusal Process Pricing Customers Demand estimation & forecasting Figure 14A.2 page 641

  6. Optimal Overbooking Figure 14.7 Spillage • Spillage and spoilage costsgo 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. Total Cost optimal Spoilage 100% 110% 120% ... Percent Overbooked

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