Posts Tagged ‘Revenue Management’

Imagine that you are a service provider and you have two ways of reaching customers. One way has you selling directly to customer while the other goes through a middleman and requires paying a commission. If you have a limited capacity, how much should you allocate to one channel over the other? What if you have to sell though the channel requiring a commission first so you cannot easily reallocate capacity between the channels?

That is the challenge facing many restaurants who offer reservations through OpenTable. Many restauranteurs game the system and may be less than honest on OpenTable about available capacity. Here is how MainStreet explains the issue (How to Tell if the Restaurant Is Lying to You, Feb 10).

Longtime OpenTable user Marcy Schackne offers testimonial validation. She checked OpenTable to book at the Palm steakhouse in Bal Harbour, Fla; it showed up full, but when she called and asked for a table, she was promptly given a reservation.

Precisely the same happens at hundreds of restaurants every night.

What gives? Dennis Lombardi, executive vice president for food services strategies at retail consulting firm WD, said that for many restaurants, the $1 per diner they pay OpenTable for a booking – on top of a fixed monthly fee – “rankles.”

They think they can book diners more cheaply themselves,” he said.

Adi Bittan, CEO of feedback service OwnerListens, with many restaurant clients, added: “For times when they expect to be full based on past experience, they do not want or need to take the OpenTable reservation. They’re taking a gamble, because they could end up with empty tables — and then the diner will walk by and see it — but it’s a calculated gamble based on probability. Since most of us, restaurant managers included, are not economists or mathematicians, we understand this dynamic intuitively but will often get those exact probabilities wrong.”

Meaning the restaurant bets that it doesn’t need OpenTable, but the empty chairs it winds up with make a mockery of their inductive capabilities.

I’m not really an economist nor a mathematician, but I have thought about this problem. (more…)

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One of the most basic tools in yield management is overbooking. For any service provider, capacity is perishable. Having an airline seat, restaurant table, or doctor sit idle is expensive so if you cannot be certain that every scheduled passenger, diner, or patient is going to show up, overbooking reduces the chance that capacity goes unused. Indeed, we have had a number of posts on overbooking over the years.

Given the prevalence of overbooking, it is rather remarkable that JetBlue does not. They announce this right on their website. But as BusinessWeek note, one has to wonder why they don’t (JetBlue Never Bumps Passengers. Maybe It Should, Feb 5).

Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013, the latest period for which data are available. Virgin America, with a bump rating close to JetBlue’s, oversells only on certain flights and usually limits the number of seats directly to the number of no-shows it expects in coach, spokeswoman Jennifer Thomas said in an e-mail. On the other end of the spectrum, Southwest subsidiary AirTran Airways had the highest rate among U.S. non-regional airlines required to report oversales, with 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).

Several analysts expressed puzzlement over why JetBlue has avoided a common industry practice that can tip a particular flight’s financial performance from loss to profit. The airline also doesn’t advertise its practice, so most people are unaware that it doesn’t overbook—including at least one Wall Street analyst who covers the company. “It’s a bit of a head-scratcher,” says Seth Kaplan, managing partner of Airline Weekly, an industry journal. “It’s all about the extra few hundred dollars that can turn a flight profitable, especially when it’s relatively free money.”


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So what’s a good setting for applying revenue management? That’s always a fun discussion to have in class. The answers usually revolve around having some variation in demand (so the service isn’t always in high or low demand) as well as having a limited shelf life (so if we don’t sell it today we can’t sell it tomorrow) and relatively low variable costs (so there is significant room to adjust prices). Air travel, of course, fits this model and airlines have long been big users of revenue management techniques.

Restaurants, however, have rarely used much in the way of revenue management outside of, perhaps, early bird specials and prix fixe offerings. This despite the fact that restaurants have some fairly steep fixed costs and so should welcome a way to add more diners on what would otherwise be a slow night. According to the New York Times, that is now starting to change (When It Comes to Reservations, Time Is Money, Sep 5).

Mr. Mantica’s problem is one that all restaurants puzzle over. Costs (the staff, the food, the flowers, electricity) are pretty much the same whether there is a single diner or a full house.

While airlines and hotels have figured out how to vary prices to fill flights and rooms, restaurants’ methods have largely remained in the icebox age. Now, some restaurants are borrowing a tactic from other hospitality businesses and charging different prices for meals at different times.

The restaurants’ premise is that a dinner at 8 p.m. on Saturday should simply cost more than one at 5:30 on a Monday. “Restaurants are catching up,” said Sheryl E. Kimes, professor of operations management at Cornell’s school of hotel administration. They are betting that consumers, used to paying extra for holiday-weekend flights, V.I.P. seats at the theater or umbrellas on the street after the first raindrop hits, will also pay more for their Friday-night dinners out.

So how can firms do this without offending customers? (more…)

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A common complaint about the travel industry is that pricing is unfair. The guy in the seat next to you on the plane may have paid a hundred dollars less or a two hundred dollars more than you did. Airlines are well known to monkey with prices on a given route — and even on a given flight — very aggressively forcing travelers (particularly leisure travelers) to diligently watch prices. Indeed, this blog’s most popular post over the past year has been Gady’s post on why airfares are cheaper on Tuesdays.

These pricing mechanisms are broadly lumped together as revenue management systems. Airlines are not alone in this racket. Hotels and car rental firms have also long been practitioners of revenue management. See, for example, the well-known Interfaces article on how revenue management “saved” National Car Rental (Jan/Feb 1997). But it is hard to get around the fact that customers don’t particularly like them. Sure, a traveler may occasionally score a great bargain on an itinerary when the stars align but more often than not, they have to spend a lot of time and effort trying to find the best deal.

This obviously creates a business opportunity for firms that simplify the process of finding a good price. Travel websites like Kayak would be an example but these sites offer just a snap shot. That is, they can tell you the best current price but they cannot guarantee a better price in the future.  Bing Travel’s Price Predictor feature can estimate whether prices will go up or down but you would still have to come back at the right moment to get the better price.

That gets us to AutoSlash, a service featured in a recent New York Times article (A Rate Sleuth Making Rental Car Companies Squirm, Feb 18). Here’s how it works:

A little online booking engine called AutoSlash, however, offers the following promise: Book free on its site, and a couple of times a day until your travel date it will search for coupons or lower rates. If it succeeds, it rebooks you automatically. AutoSlash claims success 85 percent of the time, a statistic born out by my own experience using it for all of my own rentals.


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Why do firms dynamically modify their price? There several reasons, but the main goal of dynamic pricing is to allow for better allocation of products to customers according to their preferences while exploiting such differences to improve the overall profitability of the firm. (Prices may also reflect changes in the willingness to pay of customers or changes in the costs of providing the service).

The Wall Street Journal recently had an article (“Whatever You Do, Don’t Buy an Airline Ticket On … “) that made the case that one should not buy airline tickets over the weekend since these are consistently higher than the prices during the middle of the week, which, in my opinion, makes very little sense.  Don’t get me wrong: it’s not that I am saying that it does not happen. I am merely saying that it makes very little sense to alter the prices so frequently, in a manner that seems to add very little value to the airlines.  What kind of temporal differences does the airline exploit here?



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