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The Core Concepts of Revenue Management

The Core Concepts of Revenue Management. MIST 8990 University of Georgia Terry College of Business August 19, 2005. Presentation by: Robert G. Cross. Revenue Management Defined.

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The Core Concepts of Revenue Management

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  1. The Core Concepts of Revenue Management MIST 8990 University of Georgia Terry College of Business August 19, 2005 Presentation by: Robert G. Cross

  2. Revenue Management Defined “The application of disciplined tactics that predict consumer behaviour at the micromarket level and optimize product availability and price to maximize revenue growth.” Robert G. Cross Revenue Management: Hard-Core Tactics for Market Domination (c)2005 Robert G. Cross

  3. The Seven Core Concepts • Focus on price rather than costs when balancing supply and demand • Replace cost-based pricing with market-based pricing • Sell to segmented micromarkets, not mass markets • Save your products for your most valuable customers • Make decisions based on knowledge, not supposition • Exploit each products’ value cycle • Continually re-evaluate your revenue opportunities (c)2005 Robert G. Cross

  4. Core Concept #1 Focus on price rather than costs when balancing supply and demand

  5. Focus On Price When Balancing Supply and Demand • Equilibrium points: • Exist for each market segment and product • Identify where supply and demand produce optimal returns D Demand S Supply Price PE=$30 Equilibrium Point QE=100 Quantity (c)2005 Robert G. Cross

  6. Supply Chain Managementvs. Revenue Management (c)2005 Robert G. Cross

  7. Supply Response Time lag Transportation costs Difficult to fine-tune Disruptive adjustments Price Response Virtually instantaneous No transaction costs Precision friendly Seamless adjustments Response Effectiveness (c)2005 Robert G. Cross

  8. Core Concept #2 Replace cost-based pricing with market-based pricing

  9. Margin G & A Sales/Distribution Costs Manufacturing Costs R & D Costs Traditional Pricing (c)2005 Robert G. Cross

  10. Cost-Based Price Perceived Market Value Lost Profit Margin Lost Sale G & A Sales/Distribution Costs ? = Manufacturing Costs R & D Costs Market A Market B (c)2005 Robert G. Cross

  11. Core Concept #3 “Market Segmentation is the key to market-based pricing and revenue maximization.” Sell to segmented micromarkets, not mass markets Robert G. Cross Revenue Management: Hard-Core Tactics for Market Domination

  12. Micro Micro Mass Micro Micro Micro Micro Micro Versus Micro Micro Micro Micro Micro Micro Sell to Micro Markets (c)2005 Robert G. Cross

  13. $100 $50 PRICE $1 1 50 100 DEMAND Micro-Market Segmentation-- A Practical Application of Micro-Economic Theory (c)2005 Robert G. Cross

  14. Single Price Optimization $100 REVENUE = $2,500 $50 PRICE $1 1 50 100 DEMAND (c)2005 Robert G. Cross

  15. Price Differentiation - Multiple Prices $100 $80 REVENUE = $4,000 $60 PRICE $40 $20 $1 1 20 40 60 80 100 DEMAND (c)2005 Robert G. Cross

  16. Core Concept #4 “…you should find a way to predict which segments are willing to pay the most and save those products for them.” Save your products for your most valuable customers Robert G. Cross Revenue Management: Hard-Core Tactics for Market Domination

  17. First Come, First Servedvs.Revenue Optimization

  18. Saving Products/Capacity How do forecasts enable you to save products for your most valuable customer? • Quantify the price inelastic late booking market segment • Estimate the remaining demand • Use price rationing or capacity limitations to “save” products for higher profit customers (c)2005 Robert G. Cross

  19. Core Concept #5 Make decisions based on knowledge, not supposition

  20. Rocket Science ORBIT Velocity/Altitude Time (c)2005 Robert G. Cross

  21. Revenue Optimization Revenue Time (c)2005 Robert G. Cross

  22. Humans vis-à-vis Machines HUMANS: COMPUTERS: • Logical • Mindless • Physical Limits • Indifferent • Tireless • Intuitive • Creative • Cognitive Limits • Biased • Fatigue-Prone (c)2005 Robert G. Cross

  23. Core Concept #6 “Generate maximum revenue by understanding the value cycle and optimally timing the availability and price of the product to each micro-market segment.” Exploit each products’ value cycle Robert G. Cross Revenue Management: Hard-Core Tactics for Market Domination

  24. Exploiting the Value Cycle Retail Clothes Example VALUE TIME (c)2005 Robert G. Cross

  25. TIME Exploiting the Value Cycle Standard Markdown Response VALUE (c)2005 Robert G. Cross

  26. Exploiting the Value Cycle Robust Markdown Response VALUE TIME (c)2005 Robert G. Cross

  27. Core Concept Exploit Each Product’s Value Cycle VALUE TIME (c)2005 Robert G. Cross

  28. Core Concept Exploit Each Product’s Value Cycle VALUE TIME (c)2005 Robert G. Cross

  29. Core Concept #7 Continually re-evaluate your revenue opportunities

  30. Dynamically Recalibrate Customer Demand Price and Availability Results In: Long-Term Profit Maximization (c)2005 Robert G. Cross

  31. Revenue Management-Process Flow (Information) ? MarketSegmentation (Data) (Knowledge) Customer Demand Data Forecasters ! Constraints $ Optimization Market (Wisdom) Price and Availability Recommendations (c)2005 Robert G. Cross

  32. Questions??? (c)2005 Robert G. Cross

  33. The Core Concepts of Revenue Management MIST 8990 University of Georgia Terry College of Business August 19, 2005 Presentation by: Robert G. Cross

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