Revenue Management, Implementation and Preconditions - Article Example

Revenue Management     TABLE OF CONTENTS PAGE NUMBERS 1. INTRODUCTION -----------------------------------------3 1.1 Brief review of the evolution of revenue management --------- 3 2. LITERATURE REVIEW ---------------------------------------- 3 2.1 Aviation Industry -------------------------------------------------------------- 4 2.1.1. Preconditions---------------------------------------------------------6 2.1.2. Implementation Process-------------------------------------------- 6 2.1.2.1 Tactical Tools ---------------------------------------------8 2.1.3 SWOT Analysis-------------------------------------------------------9 2.2. Restaurant Industry-------------------------------------------------------------11 2.2.1. Preconditions---------------------------------------------------------11 2.2.2 Revenue models and Implementation process-----------------12 2.2.2.1 Tactical Tools----------------------------------------------14 2.2.3 SWOT Analysis ------------------------------------------------------15 3. CRITICAL COMPARISON----------------------------------------------------15 3.1. Critical comparison and reflection of two selected industries---15 4. CONCLUSION-------------------------------------------------------------------16 5. REFERENCE LIST. -------------------------------------------------------------17 1. INTRODUCTION 1.1. Brief review of the evolution of revenue management   Revenue management also known as yield management has its existence since the development of the supersavers in 1977. This involves with segmentation, framework and allotting the accessibility of seats over time. Gradually from 1980s it became prominent in the academic and business circles. Consequently it spread among the researchers, airlines, consulting firms and other organizations to develop and to yield profit from this area (Ben-Yosef, 2005, pp. 213-214). According to the American Airlines, RM intend at maximizing the revenue by selling the right seats to the right customers at the right time and at right price. Studies have cited that the RM has evolved over 30 years ago, in the early 70s Littlewood and Rothstein has explored the revenue management practice in the airlines and hotels. In 1978, during the deregulation in airline industry the importance of RM was ascertained as implementation of it can increase the revenue above 5%. Therefore the scope of RM was restricted to capacity scheduling and distribution. (Ng, 2008, pp.113-114) After illustrating the definition and the evolution of Revenue management the chapter will move on to the literature review. The report will address the various tools of revenue management in the traditional and non-traditional industries and the importance of such tools in efficient management system. At the end the study will comprise of the critical comparison and reflection with respect to both the industries and a summary of the entire project addressing the recommendation.     2. LITERATURE REVIEW The report works on the yield management system and its implementation in both the aviation and the restaurant industries. Initially it looks at the preconditions and the implementation process. Then it will take a deeper review of the implementation of YM through models and the impacts of the external factors and SWOT analysis of such system within the two different industries.  2.1 Aviation Industry After the American Deregulation Act that loosened the price restriction in USA, the airline companies had stated to plan their own prices. The main objective of Airline industry is to maximize profit by regularizing pricing and availability of its single perishable commodity like seats. RM is immensely profitable for airlines because it can generate high profits. The process of revenue management covers fare setting and seat inventory management. The management involves taking decision on the number of seats to be reserved for late booking. Then it decides on the number of seats to reserve for late booking high fare passengers on a flight and trying to pack up the other seats with discount fare passengers that can further be illustrated in two ways to obtain better profit by increasing in yields or load factor. For instance, due to increase in discounts seats more loads will increase. The main aim of the seat inventory is to find a favorable transaction involving the standard price and load factor balancing the numbers of discounts and full fare passengers for a flight. To control the seat accessibility an airline might have 3 to 26 distinct booking classes that will comprise of as 21 day advance procurement, Saturday night stay –cover or cancellation penalty. To assist in taking better decision a model had been developed known as Airline Marketing Assistant (AMA). This system involves neutral network anticipation, seat inventory optimization module, a regional record and an advanced GUI (graphical user interface). The computerized system allows them to review before the departure and at the time the flights are reviewing the booking history and the other information are used to forecast about the booking class that is used to allocate the remaining seats among the booking class. (Yu, 1998) RM is generally used in airline industries as the implementation can increase the performance as airlines measures revenue per available seat-mile (RPSM) (Kimes, 2011, p.17). RM has primarily become a business discipline that involves a Revenue Management Solution, an IT based that captures current booked traveler cargo, ascertain future unrestrained travelers demand, include anticipated no-shows and cancellations and implement this data using a mathematical algorithm. It optimizes stock control to maximize the airline profit. RM is applicable any business that encloses consumable items such as seat hotel room, a care rental or ship cabin. 2.1.1 Precondition The precondition of the airline industry is that they were able to predict the surplus seats available and would prevent the solvent customers in availing those seats. (Schubert, Petersen and Blumenthal, 2009, p.4) Other preconditions involve seasonal demand such as a failure of selling a seat can result in loss forever, for instance if the Jet fails to sell the seats in the morning then the seat is vacant for the day. Another condition is the high fixed costs that result in relatively low marginal cost of selling one extra unit. For instance the cost of a Boeing 737-500 is expensive while Jet’s fare per seat is quite low in the morning hours. Fixed capacity involves the fixed amount of seats available in a particular flight in all routes and all flights as the capacity in these industries is restricted and therefore cannot be increased. High fixed cost and low variable cost because the cost of capacity in an airplane is too high that cannot be adjusted and the cost of additional customer in the unoccupied space is expensive. Another condition is the time-varied demand that can be controlled by uncertainty of arrivals and durations and taking decision about the reductions of duration capacity can facilitate management to understand the capacity requirements. A further condition is advance purchase of service that means pre-booking of flights will always be entertained. (Ingold and Beattie, 2000, p.207) 2.1.2. Revenue Management model and Implementation Processes The models of RM can help in understanding the implementation of the system in traditional and non-traditional industry. Pricing model- Dynamic pricing models represent the demand as a controllable deterministic point process with intense dependence on the price (Smith, Hearn & Lawephongpanich, 2006, p.48). In modern times, prices are adjusted every second. On one hand a matching strategy (matching prices with those of competitors) is followed while on the other hand, skimming strategy is pursued (‘”skim” the market of well-paying customers’) (Wittmer, Bieger and Muller, 2011, p.152). The generic revenue management data model involves set of network demand, network resources, resource bundles, resource bundles to demand links and set of structure demands. The pricing models are gaining among the airline and the retail sectors. Pricing is a significant variable that managers manipulate to persuade and discourage demand in the short run. One of the models under pricing strategies is generic model that involves supply that involves considering a  market player having a initial capacity to satisfy the price- perceptive demand as H and model this capacity as an m-dimensional vector C0= (c1(0),…,cm(0) and Ck is the initial amount of resources,. From the pricing prospective, there are two attributes like flexibility and perish ability. Flexibility refers to the ability to manufacture and offer diverse products at initial capacity and perish ability is the lack of ability to conserve the capacity over time. Next is collection of available resources i.e., the products where matrix A =aij} where i represent resources used to produce one unit of product j. Next is the information system capacity of gathering the correct information and implementing it for decision making. On the prospect of demand potential customers are divided into various segments having own set of attributes, needs, budget and pricing strategies. A dimensional stochastic process can be defined as N (t, Ht)= (N1(t, Ht)) where N(t, Ht) is a potential demand up to time ‘t ‘ from family  ‘j’  with the available information Ht. Price strategies comprises of  finite set of prices, maximum number of price changes, Markdowns, Markups, and Promotions, Joint Price Constraints and Cost-Based Pricing. Revenue management formulation includes the possible capacity C0,  the demand process N(t),  the available products M,  and admissible policies P, the seller’s objective is to find a pricing strategy Pt  that maximizes the total revenue collected from selling the products to the customers. (Caldentey, & Britan, 2003, pp.203-13) 2.1.2.1 Tactical Tools The success of revenue management depends on the accuracy of another forecasting, pricing, capacity management, or duration control. Forecasting the main function of revenue management as it predicts customer’s behavior and decides about the actions to be taken to maximize revenue. For a good forecast right level of detail and appropriate amount of data must be analyzed and recurrent reforecast must occur (Cross, 1999, p.175). Future demand can be made on the basis of the past sales and upcoming events and expecting the size of different market segments and the price at which they will accept. Capacity management involves limiting or shifting the availability of a certain products according to customer needs. Price management is a main objective of an airline industry as offering different prices to different customer segments according to changes in demand (Dorn, Owusu &Voudouris,2008, p.114) The advancement of technology presents great opportunities for researchers to conquer the hindrance faced in application of RM. Internet and e-commerce had also started playing significant role in RM in this era of internet and computes ,customers are able to compare prices of the competitors and decide among the best service. With the system of MIS, availability of data is very easy and an airlines industry can use this system to better analyze and interpret data. 2.1.3. SWOT Analysis of the RM implementation in Airlines industry There are major drivers that shape the future of revenue management as a whole that combines demographic, climate conditions, globalization and political interest that enhance the demand for revenue management performance and can amend new variables and data structure. Controlling or managing the supply of scare resources is also a critical area in revenue management as the world is becoming more populated and to ensure that proper medical facilities and treatment are available. RM also improved the management of disaster relief. In a writing by Garnett Hardin (1968) about the’ Tragedy of the Commons’ he addressed that due to population rise the freedom and rights are becoming commoditized (Raeside,2007, pp. 269-270). A SWOT analysis describe the external factors that effect the implementation of RM in the aviation industry are better underline in the diagram below:- Strengths Weakness Growing Tourism Rising Income Levels Flexibility Revenue Leakage Perish ability   Opportunity Threats Expecting Investment Expecting market size Increase in terrorism Expensive   One of the strength of the airline industry is due to growing tourism passengers are traveling through flights to different location. People are flying to the countries like UK to escape from the hot continental climates. People are more responsive to the climate change and prefer to go to these counties that have favorable weather (WTO, 2008, p.119). Rising income levels of the countries also benefited the aviation industries as people nowadays travel by air to nearby countries. Flexibility is one of the advantages in application of the RM in such industries as it permits the seller to distribute the limited resources effectively based on the observed demand. (Caldentey, & Britan, 2003, p.206) Weaknesses comprise of revenue leakage that is the break between the sales generated by the airline industry and the amount actually received by them. Another is the perish ability problem of revenue management as it involves making the capacity a time dependent quantity. (Caldentey, & Britan, 2003, p.208) A threat in the aviation industry is the increase of terrorism as the British transport authority in UK had cautioned the aviation industry from a future terrorism attack by the Al-Queda. (Home Office, 2009, p. 107) Another threat is high rate of the fare in the aviation industry that had decreased the passengers traveling by airplane. The above two threat can affect the revenue management as it will minimize the profits earned and lowers the satisfaction and faith in the industry. Opportunity of the industry includes increase in market size and investment as Easy Jet had recently stated that they are expecting to grow the market size because their rivals have lost their presence (Mayer, 2007, p.3).     2.2 Restaurant Industry  The characteristics of the restaurant encourage implementation of RM strategies in areas like time-variable demand, cost structure, demand inventory, segment able customer etc. For a non traditional industry like restaurant the mangers use Rev PASH as an implementation process of revenue management When the operation is measured by revenue per available seat-hour (Rev PASH), managers analyze operations and menus to develop the statistic. Rev PASH also allows the managers to captivate the performance better in their analysis than the other methods like average check or labor cost percentage (Kimes, 2011, p.32). Rev PASH can also be used to estimate the efficiency of an operation’s servers and managers. The technique is also used to compute competitors Rev PASH to recognize the performance of the chain, region and restaurant. There are 5 steps in RM of a restaurant that comprise of establishing a baseline that involves collection of in depth information on arrival patterns, meal times, Rev PASH outline and customers favorites, second step involves analyses of the collected data by the mangers that influence the meal duration and using of tools such as process analysis, service blueprints can be beneficial to identify the flaws in the meal duration. Thirdly, after identifying the problems, managers try to make recommendation on the solutions of the problem and to analyze potential return on investment on every recommendation. In the fourth stage, to better understanding of RM purposes and practice, proper training is given to employees. At the end, the success of application of Rev PASH is measured by figuring out the recommendation, baseline and implementation of RM (Kimes, 2010, pp.17-21). 2.2.1. Precondition Various preconditions of non-traditional industries for successful RM are relative fixed capacity as the capacity is controlled that can be reconfiguration of the seating in restaurant or theatre. Predictable demand been another condition that involves reserved and unreserved seats and to manage its both forms of demand. Perishable inventory adds to complexity in computing the optimal revenue of the cruises involving offering services. Appropriate cost and pricing is another condition in RM applies for all the service industry that is capital intensive because of high fixed costs. Time variable demand is another condition that involves variation of time by year, week and day. Elastic pricing for time varied demand helps the business to make decisions for peak and off-peak time (Yeoman & Beattie, 2004, 156-157). 2.2.2 Revenue Management and Implementation Revenue management models were initially adopted by the traditional industries but later a service design methodology has been combined with the revenue management technique for non traditional industries such as restaurant. Thus a combination of service design procedure and revenue management approach can help in establishment of a revenue model for the new services and assist in enhancing profitability. Service concepts such as Software-as-a-Service (SaaS) and Product-Service Systems (PSS) have been effective in the restaurant industry. In such service oriented revenue models, no defined approach towards analysis is noticed (Watanabe, Yamagishi, Akasaka and Shimomura, 2010, p. 251). For instance optimization of seat occupancy can be one criterion on which service design depends and so does revenue management. In fact, selling the suitable seat to the appropriate customer and at the right price for the appropriate time span speaks a lot about revenue management at restaurants. Revenue per available sat hour (RevPash) model can be used to determine the optimum yield or revenue management. The strategic switches used to manage revenue are essentially price and meal duration. Some price manipulations include “day-part pricing, day-of-week pricing and price premiums or discounts for different types of party sizes, tables and customers” (Kimes, 1999, p. 17) Meal duration is a little more complex to deal with. Comprehending the arrival of customers and strategizing ways of affecting their meal duration are other means of revenue management in restaurants (Kimes, 1999, p. 18). Thomson (2002) has implemented a Table mix model that can replicate the customer’s movement through a restaurant and also focus on the table resources. This very model has input variables providing the performance measures. The parameters of the model includes the figure and duration of the peak dining periods and the intervals of customers at 15 minutes interval, different-size of parties, dining duration and the waiting customers and the table assignment rule. The model is used to evaluate a particular restaurant configuration or can also be used to search for the best configuration in reference to the number of seats and the position of the table and the combination with the other table. The outcome of the model falls into 3 categories like resource use, customers’ satisfaction and aggregate measures involves the average waiting time by party size, the value of the customers served/lost and the actual use of each size table and actual seat used at 15 minutes periods. (Thomson, 2002, p.49-50) The figure below illustrated the utilization of seats and tables for a particular restaurant using table mix model. Time(15 mins period) Utilization % 4- tops 6-tops seats 5pm 45 15 35 6pm 95 70 60 7pm 98 90 65 8pm 90 80 60 9pm 75 55 45 (Verma & Boyer, 2010, p.347-350) From the above chart of a mid-scale restaurant, it can be highlighted the number of seats and tables occupied at different time intervals. It can be noted that 7pm-8pm is the peak hours of a customers and before 5pm and 9pm are the dip hours in the restaurant according to study.(Verma & Boyer, 2010, p.347-350) 2.2.2.1 Tactical tools  Some of the tactical tools which can help the management perceive the factors responsible for operational disturbances include “service blue prints, process analysis and fishbone diagrams” (Kimes, Barrash and Alexander, 1999, p. 24) Apart form this the service aspects like table management, interactions with food runners, and suggestive selling techniques help in proper revenue management strategy development apart from the RevPash formulation. 2.2.3. SWOT of a restaurant industry in implementation of RM are stated below- Strengths Weakness Measure efficiency of operators Identify the flaws in meal duration Bussing table Greet time Threats Opportunity Substitutes Economic Slowdown Identify the flaws and rectify them Strengths of RM in a restaurant industry are that it facilitates in gauging the efficiency of the operators, servers and the managers. RM also helps in identifying the error in the time period of meal supply (Kimes, 2010, pp.17-21). Greet time is a weakness of a restaurant as the time to take a order may vary a lot may be because of the servers’ inattentiveness or he/she is engaged in a different activity. Bussing time involves delay in resetting the table (Campbell and Samuel, 1812, p.298). When the previous host has left, there are waiting customers and the time taken to greet them towards table is high because of clearing of the tables by the waiters, as the server may be pre-occupied in a different work. Threats encompass that due to economic slowdown, such industries will be affected in future. These industries have an opportunity through RM implementation that can identify the imperfection and take measures to rectify them to function efficiently. 3. CRITICAL COMPARISON 3.1. Critical comparison and reflection of two selected industries This part of the report encompasses the critical review of the traditional with comparison with the non-traditional industry in respect to the implementation process, precondition and the models use in the revenue management. The implementation process of the restaurant and the aviation industry is different for these industries. The aviation industry implement gauge through revenue per available seat-mile (RPSM) and the restaurant industry measure through revenue per available seat-hour (Rev PASH).The main concern for aviation is price or cost and for the non-traditional industry main concern is the total table and seats occupied by customers. The preconditions of both the industries are similar as they both have fixed capacity and the stocks are consumable. In a broader view, airline industry is huge compared to the restaurant industry and the management decision can be better adopted in traditional industry. Most of the large scale restaurant industries accomplish RM but small restaurants are not familiar with the RM tools. Implementation of pricing model in aviation industry depends on the price or cost factor in airlines as it helps the industry in forecasting the demand of the customers and adjust the price accordingly. It facilitates the industry to incur better profit maximizing the customers’ benefit. Revenue management model in restaurants depends on the parties in the current period and parties expected to arise in future. It also identifies the maximum cost incurred for the waiting parties and proper implementation can minimize the cost by providing better service. Both the industries after implementing the yield management system has benefited in their services by utilizing the resources properly and reducing the cost. Both the industry used forecasting tools to predict their future sales so that they can get an interpretation of the future customers and their preferences. The restaurant industry’s revenue management depends a lot on the efficiency of allocation at every single moment. Allocation of seats and serving meals take place throughout the day and any moment’s lapse of attention might lead to loss in revenue. The pricing patterns ad selling the right dish to the right customer takes place tactfully and depends on the people skills of the waiters and the manger. For airlines the fares declared change every moment to reap the highest possible revenue and grab the optimum market share. This is comparatively more obvious as the customer buys a ticket in printed form and the price changes are revealed. Both industries follow the demand pattern but the aviation industry is more transparent about it. A seat is booked for an entire trip for aviation but for restaurants, the seat occupancy changes almost every hour. The restaurant industry does not sell the seats but the meals and hence the dishes and orders takes also matter. For Airlines, seats are sold and revenues directly depend on this. Food items are sold in flights to the passengers but this depends on the customers’ demand and the selling tactics of the stewards and hostesses. Both the industries depend a lot on service design and hence human resource is the key to the revenue management. Proper training and employee satisfaction must be guaranteed in order to perform well. The restaurant industry’s resources are mostly perishable and hence this industry faces more risk compared to airlines industry. Resource management should be done effectively for the restaurant industry. The latter however have the pressure of selling all the seats and hence they need to design the price policy effectively. Both industries depend on short term forecasting and service designs. Hence the strength and vulnerability rest with the human resources for both the industries. 4. CONCLUSION The report encompasses the implementation, precondition ad the illustration of the models of different industries. Both the traditional like airline, hotels and non-traditional industries like restaurant are taken while carrying out the analysis. On the first part of the report contains the definition, the evolution of the revenue management, demonstrating about the pricing strategize, capacity management, SWOT analysis and the other essential study of yield management. The subsequent part of the report demonstrates the various revenue models implemented in the industries and a reflection of the two industries in terms of implementation processes, preconditions, RM models and tactical tools. The above report stated the implementation of the revenue management in the industries and the benefit they are ascertaining from the implementation. The Yield Management users observed that the use of YM has high influence on growing effectiveness and sales generation, productivity, profitability, competitive advantage, capacity utilization and on minimizing costs (Yousef, 2007, p.6). It also envisages the application of the revenue management model can maximize the profit and can also yield better results in an industry.   REFERENCES     1. Beattie, U. M. & Ingold, A. (2000), Yield management, London: Cengage Learning  2. Ben-Yosef, E. (2005) the evolution of the US airline industry: theory, strategy and policy, Netherlands: Springer 3. Bertsimas, D. & Romy, S. (2003) Restaurant Revenue Management, Operations Research 51 (3) pp. 472–486 4. Bertsimas, D. & Romy, S. (2003) Restaurant Revenue Management, Operations Research 51 (3) pp. 472–486 5. 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