Revenue Management

1
Revenue Management

• John Vande Vate
• Fall, 2002

2
Managing Demand

• Reducing Uncertainty in Sourcing
• Reducing Bullwhip Effect in Ordering
• We havent made a XYZ yet that we havent sold
• Scientifically managing demand and margin

3
Why Revenue Management?

• Pricing is a powerful tool to manage demand and
  margins
• CRM, and ERP systems now offer a goldmine of
  customer data

4
The Price Waterfall
Consumer Goods Example
Pocket Price Waterfall
8
3
1
2
2
Competitive Discounts
Sales Specials
2
Exception Deals
2
3
Quantity Shipment Allowance
1
Terminal Allowance
2
Direct Factory Shipment Discount
2
Average Pocket Discount of 29
Cash Discounts
1
Annual Volume Bonus
Product Bonus
Co-op Advertising

• Special
• Promos

Freight
KeyDealer Price
Invoice Price
Pocket Price
Source Manugistics. Dr. Bob Philips
Source Client study
5
One Product - Many Prices
Percent of Total Volume
Consumer Goods Example
Discount to List Price
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Revenue Management

• Setting and updating prices with a wide variety
  of customers, products, or channels.
• Aligning prices with market conditions
• Customer sensitivity
• Competitions pricing
• Corporate objectives
• PRO applies the same rigorous approach that
  Supply Chain Management has established on the
  Operations side

7
Impact?

• AMR Research estimates that up to 95B in annual
  incremental operation margin could be generated
  with tools such as these in the U.S.
  manufacturing economy alone."
• Source AMR Research, January 2001

8
Types of Revenue Management
9
Dynamic Pricing
Issues
Business Need
Different prices for different customer segments
and distribution channels at different times

• Market Segmentation
• Price vs product availability
• Price vs Market Share
• Price vs Time

Benefits
10
Dynamic Pricing is Standard Practice across Many
Industries
Relative Price
11
Price Elasticity and Revenue
12
Price Elasticity by Location
Competitive BSI Price Elasticities
13
Dynamic Pricing Goofs

• Coca-Cola announces that it is considering
  vending machines that will boost prices during
  hot weather.
• Coca-Cola is a product whose utility varies from
  moment to moment. In a final summer
  championship, when people meet in a stadium to
  enjoy themselves, the utility of a chilled
  Coca-Cola is very high. So it is fair it should
  be more expensive. The machine will simply make
  this process automatic.
• -Douglas Ivester Chairman and CEO

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Customer Perception
ICE COLD SOFT DRINKS
NOW 5.00
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and Public Reaction

• a cynical ploy to exploit the thirst of faithful
  customers
• -- San Francisco Chronicle
• lunk-headed idea
• -- Honolulu Star-Bulletin
• Soda jerks
• -- Miami Herald
• Ticks me off
• -- Edmonton Sun

16
How not to do Dynamic Pricing,Revisited

• Amazon.com experiments with Dynamic Pricing of
  DVDs.

26.24
22.74
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The Customer Reaction

• Amazon is over in my book.
• I will never buy another thing from those
  guys!!
• I am so offended by what they did that Ill
  never buy another DVD from them again.
• Amazon is suck (sic).
• Source dvdtalk.com

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Price Perception Issues are Complex...

• More Acceptable Pricing
• Product-Based
• Open
• Discretionary
• Discounts and Promotions
• Rewards

• Less Acceptable Pricing
• Customer-Based
• Hidden
• Imposed
• Surcharges
• Penalties

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...And Not Always Rational
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Discount Strategy

• We never made a shoe we havent sold
• Discounting to clear stocked items

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The Situation

• Retailer with 2,000 units in inventory
• Full Retail Price 60
• Discount Options 10, 20 and 40 off
• Salvage Value of 25 (over 58 off)
• 16 week selling season
• No restocking

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How to Play
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Retail.xls

• Histories of 16 Seasons

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The Challenge

• Devise a discount strategy to earn maximum
  revenue
• We will compete in class
• Prepare a brief explanation of how to come up
  with a strategy
• What data to collect
• How to use that data to devise a strategy
• Any observations about the strategy that results
• For Discussion in Class
• Retailer.exe and Retail.xls available from class
  web page