Download rev_hero_priyam_akanza_mandeep

2012
APPLICATION OF REVENUE
MANAGEMENT FOR SALES OF HERO
MOTOCORP LTD
TEAM MEMBERS
AKANXA (27061)
MANDEEP KAUR (27022)
PRIYAM DUTTA (27102)
3/27/2012
TABLE OF CONTENT
S.NO
TOPIC
OVERVIEW
PAGE
4
Background of the company
4
Revenue objectives of the company ( mention in second
paragraph any other objectives for the company)
5
What are the Important factors that contribute to revenue
6
Revenue Variable and capacity constraints
6
Auxillaries
6
FORECASTING
The need to forecast and the level to forecast
7
Seasonality and other factors that influence forecast
7
Current Forecasting Methods if any
8
Your Proposed forecasting methods and Forecast error
8
PRICING
Strategies
9
Types of prices
10
Price revision methods and frequencies
10
Price elasticity and its impact
11
REVENUE CLASS
Defining a revenue class for your problem
12
Protections and how they maximize revenue
12
Explain how maximum revenue is achieved by optimising
13
OPTIMIZATION
Objective function and defining the problem
Solving the problem and EMSRS
Assumptions
16
Optimal demand that maximizes revenue
17
Other revenue maximisation methods ( Over booking,
upgrading etc)
18
Your recommendations and rules for maximising revenue
18
How to measure the effectiveness of the revenue management
process
18
OVERVIEW
We have taken Sales of Hero MotoCorp for our study to apply Revenue Management
Techniques in order to maximize the revenue. The project involves understanding the existing
system of forecasting, pricing, capacities, timings & varieties offered and exploring the
possibility of increasing the revenue by using different forecasting techniques, new pricing
strategies, introducing new product varieties, protecting the seats, optimization etc.
BACKGROUND OF COMPANY
Hero MotoCorp Ltd. (Formerly Hero Honda Motors Ltd.) is the world's largest manufacturer of
two - wheelers, based in India.
In 2001, the company achieved the coveted position of being the largest two-wheeler
manufacturing company in India and also, the 'World No.1' two-wheeler company in terms of
unit volume sales in a calendar year. Hero MotoCorp Ltd. continues to maintain this position till
date.
Hero MotoCorp offers wide range of two wheeler products that include motorcycles and
scooters, and has set the industry standards across all the market segments. Hero MotoCorp two
wheelers are manufactured across three globally benchmarked manufacturing facilities. Two of
these are based at Gurgaon and Dharuhera which are located in the state of Haryana in northern
India. The third and the latest manufacturing plant is based at Haridwar, in the hill state of
Uttrakhand.
The Company's growth in the two wheeler market in India is the result of an intrinsic ability to
increase reach in new geographies and growth markets. Hero MotoCorp's extensive sales and
service network now spans over to 5000 customer touch points. These comprise a mix of
authorized dealerships, service & spare parts outlets , and dealer-appointed outlets across the
country.
The new Hero is rising and is poised to shine on the global arena. Company's new identity "Hero
MotoCorp Ltd." is truly reflective of its vision to strengthen focus on mobility and technology
and creating global footprint. Building and promoting new brand identity will be central to all its
initiatives, utilizing every opportunity and leveraging its strong presence across sports,
entertainment and ground- level activation.
Vision
The story of Hero Honda began with a simple vision - the vision of a mobile and an empowered
India, powered by its bikes. Hero MotoCorp Ltd., company's new identity, reflects its
commitment towards providing world class mobility solutions with renewed focus on expanding
company's footprint in the global arena.
Mission
Hero MotoCorp's mission is to become a global enterprise fulfilling its customers' needs and
aspirations for mobility, setting benchmarks in technology, styling and quality so that it converts
its customers into its brand advocates. The company will provide an engaging environment for
its people to perform to their true potential. It will continue its focus on value creation and
enduring relationships with its partners.
Strategy
Hero MotoCorp's key strategies are to build a robust product portfolio across categories, explore
growth opportunities globally, continuously improve its operational efficiency, aggressively
expand its reach to customers, continue to invest in brand building activities and ensure customer
and shareholder delight.
REVENUE OBJECTIVES OF THE COMPANY
To maximize the Revenue for a given capacity for a financial year by

Introduction of sales by channel (internet, dealer and company) with different price
points

Varying price based on Prior Booking and Days Prior Delivery (within 2-3 days,4-10
days,11-15 days, etc) for different sales channels

Varying price during peak and non peak seasons

Opening and Closing of inventory based on actual demand

Pricing differentially for individual and group booking(e.g. corporate booking)
IMPORTANT FACTORS THAT CONTRIBUTE TO REVENUE
COMPETITION
PRICES
COST
SEASONALITY
RAW MATERIAL
NEW
ENTRANTS
DISTRIBUTION COST
INVENTORY COST
SUBSTITUTES
TAXES(PLACES)
AVERAGE
REVENUE
PER BIKE
PER
QUARTER
FUEL PRICES
ECONOMIC CONDITION
SEASONALITY
PROMOTION
DEMAND
GEOGRAPHICAL
CONDITION
(LOCATION/POPULATION
DENSITY/TERRAIN)
REVENUE VARIABLE AND CAPACITY CONSTRAINTS
Revenue Variable:
Average Revenue Per Motorcycle Per Quarter
Constraint:
Plant Capacity: 6 crore units
Continuous Production throughout the year
AUXILLIARIES




1 Year of free servicing with replacement warranty for essential parts
Special Seasonal/ Festival Offers and Gift Vouchers(e.g. Scratch Cards)
3 litres of free petrol at the time of delivery of vehicle
Accessories availability at different channel points
FORECASTING
Forecasting is the process of estimating future scenarios in unknown situations. An important
field in forecasting is business forecasting whereby future economical and business scenarios are
analyzed. Business forecasting is a combination of judgmental, casual and time series
(univariate) forecasting methods. Risk and uncertainty are central to business forecasting and
accompany forecasting as tools for evaluating the probability of future scenarios and for decision
making (e.g. inventory planning, capacity expansion, investments, risk analysis). This is
especially so in case of forecasting for the demand levels of motorcycle sales in a region.
According to a global research body, 38 percent of producers all over the world complain that
one of their main problems is inaccurate demand planning. This is because poor planning has a
negative effect on the ability to deliver, on inventory management, on purchasing, and on
capacity utilization. In case of motorcycle sales, the need to provide prompt delivery to
customers, and yet maintain the accurate level of inventory without adding to the cost, is
tantamount.
Identifying supply chain lead times and consumer lead times is hugely important in cases of
uncertain demand and in case the supply chain lead-time is greater than the customer required
lead-time, one may have to order or provide for stock or resources in anticipation of an order.
Forecasting is therefore essential in these cases.
A major problem for motorcycle business can be when customers want things at a faster rate than
one’s capacity to cope with. One should have the ability to forecast peak demand and their
average capacity in advance, so that they can cope with the demand and make the sales when it
are required to do so. If they want to give high service to their clients, then they need to be able
to match their peak demand with peak capacity.
LEVEL TO FORECAST
The level to forecast is at per motorcycle level.
Seasonality:
The business of motorcycle sales is highly seasonal based on a number of factors, like the turn of
festivals, the level of income available at a person’s disposal, consensus among family members
regarding the kind of vehicle being bought, etc. Especially so in India, when the third and fourth
quarter of the year augur the best for motorcycle sales. This is the period that overlaps with
important festivals like durga puja, diwali, Christmas, Id, and new year. In addition to that,
Indians have a tendency to buy goods on new year. So, that factor plays a role too.
Other Factors:
Other factors include, marketing promotions, or various sales promotion incentives, that may be
initiated from time to time, to improve upon sales. Other marketing strategies may include
discounts, promotions, competitors strengths, suppliers efficiency, etc.
Current Forecasting Method
Current forecasting method is a moving average time series method, with exponential smoothing.
Exponential smoothing ascribes, exponentially decreasing weight over time.
Proposed Forecasting Method
The forecasting method used is trend line analysis. This is the practice of collecting information
and attempting to spot a pattern, or trend, in the information. In trend analysis, a forecast is
calculated by inserting a time value into the regression equation. The regression equation is
determined from the time-serieas data using the “least squares method” .
PRICING
PRICING STRATEGIES
Price discrimination:
Price discrimination or price differentiation exists when sales of identical goods or services
are transacted at different prices from the same provider. In a theoretical market with perfect
information, perfect substitutes, and no transaction costs or prohibition on secondary exchange
(or re-selling) to prevent arbitrage, price discrimination can only be a feature of monopolistic and
oligopolistic markets, where market power can be exercised. Otherwise, the moment the seller
tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling
to the consumer buying at the higher price but with a tiny discount. However, product
heterogeneity, market frictions or high fixed costs (which make marginal-cost pricing
unsustainable in the long run) can allow for some degree of differential pricing to different
consumers, even in fully competitive retail or industrial markets. Price discrimination also occurs
when the same price is charged to customers which have different supply costs.
The effects of price discrimination on social efficiency are unclear; typically such behavior leads
to lower prices for some consumers and higher prices for others. Output can be expanded when
price discrimination is very efficient, but output can also decline when discrimination is more
effective at extracting surplus from high-valued users than expanding sales to low valued users.
Even if output remains constant, price discrimination can reduce efficiency by misallocating
output among consumers.
Price discrimination requires market segmentation and some means to discourage discount
customers from becoming resellers and, by extension, competitors. This usually entails using one
or more means of preventing any resale, keeping the different price groups separate, making
price comparisons difficult, or restricting pricing information. The boundary set up by the
marketer to keep segments separate is referred to as a rate fence. Price discrimination is thus
very common in services where resale is not possible; an example is student discounts at
museums.
Time based pricing:
Time-based pricing refers to a type offer or contract by a provider of a service or supplier of a
commodity, in which the price depends on the time when the service is provided or the
commodity is delivered. The rational background of time-based pricing is expected or observed
change of the supply and demand balance during time. Time-based pricing includes fixed time-of
use rates for electricity and public transport, dynamic pricing reflecting current supply-demand
situation or differentiated offers for delivery of a commodity depending on the date of delivery
(futures contract). Most often time-based pricing refers to a specific practice of a supplier.
Time-based pricing is the standard method of pricing in the tourist industry. Higher prices are
charged during the peak season, or during special-event periods. In the off-season, hotels may
charge only the operating costs of the establishment, whereas investments and any profit are
gained during the high season. (This is the basic principle of the long run marginal cost (LRMC)
pricing, see also Long run). Time based pricing is occasionally used by transportation service
providers, whereby higher prices are charged during rush-hours, or, alternatively, some types of
reduced-rate tickets are invalid at that time.
Time-based pricing is recommendable for utilities both in regulated or market based
environment. The use of time-based pricing is limited in case of low difference between peakand off-peak demand , unavailability of adequate time-of-use metering. Also, customer response
to time-based pricing should be considered (see: Demand response).
A regulated utility will develop a time-based pricing schedule on analysis of its cost on a longrun basis, including both operation and investment costs. A utility operating in a market
environment, where electricity (or other service) is auctioned on a competitive market, timebased pricing will reflect the price variations on the market. Such variations include both regular
oscillations due to the demand pattern of users, supply issues (such as availability of intermittent
natural resources: water flow, wind), and occasional exceptional price peaks.
Price peaks reflect strained conditions on the market (possibly augmented by market
manipulation, see: California electricity crisis) and convey possible lack of investment.
TYPES OF PRICES
Prior Booking through Dealer: The prices will be floated as based on the trend analysis of
historical data of previous year and for different seasons.
Internet Booking: The prices will be at 5% discount than that done through dealers.
On the Spot purchase: The price will be at 10% premium than the booking done through
dealers.
PRICE REVISION METHODS AND FREQUENCIES
Price revision methods which we have opted are very dynamic in order to maximize the revenue.
For optimization of the revenue the inventory is opened and closed at various intervals and
artificial demand is created thereby giving an opportunity to increase the average revenue for the
same product across:
Quarterly/Seasonal: The demand during first quarter is not high and remains more or less same
for the next i.e. April to September. Hence to artificially increase the demand the price is reduced
and special offers are provided. The demand through internet booking is increased during these
two quarters .But the last two quarters sees a drastic increase in demand due festival seasons like
Diwali, Christmas, New Year, Pongal, Holi etc. Since the demand is high during these quarters
so price is increased.
Days Prior Delivery: The number of days prior delivery is segmented such that revenue is
maximized. As the days prior delivery increases the average price is reduced. The days prior
delivery segments are as follows:
Within 1-3 days: Highest
Within 4-10 days: High
Within 11-15 days: Average
Within 15-30 days: Low
More Than a month: Lowest
Across Channels: There are three channels for sales i.e. internet, dealer and company. The
internet provides discounted price in order to create artificial demand. Normal prices are applied
at Dealer’s point which though includes the affect of seasonality and days prior delivery. The
group purchase is done directly through the company at the most discounted prices due to bulk
order.
Individual and Group Booking: The days prior delivery method will be applied to both
individual and group booking, also other factors would affect the price too. Apart from that the
major difference is that huge discount will be provided in case of group booking due to bulk
order.
PRICE ELASTICITY AND ITS IMPACT
Purchasing a motorcycle remains to be a high involvement purchase for most households in
India. The fact that most Indians are price sensitive, it is no surprise that a lot of thought goes
into the purchase of a motorbike. As such any amount of price reduction is met with
overenthusiastic response, especially by the middle class, and the young adults segment who are
the major segments targeted in this regard. The fact that there exist a lot many review sites to
cater instant comparisons among various brands, as to their features and prices, indicates that the
price sensitivity goes up further. Every move of the organization is countered by the competitor
and it is not uncommon to find severe price wars within the same.
Revenue Class:
We have considered 3 revenue classes for our project:
1. Internet Prior –booking
2. Prior- booking through dealer
3. On the spot purchase
Internet Prior –booking revenue class:
Since the customers will be booking on internet on a company website, this will result in savings
for the company on dealership margins and the inventory carrying costs. Hence company can
give discounts and charge low price for this revenue class. This new channel will result in the
generation of an extra demand for the company.
New offers and promotions can be used to generate demand in this channel, especially during
off- peak seasons. Customer will be given more choices through this channel, in the form of
more colors and new models. The facilities like live-interaction with experts, feature
specifications and user reviews will be provided. The loyalty programs like Heromotocorp Club
membership and discount cards for services can also be sold in this revenue class.
The price for this revenue class will be at 5% discount than the dealer channel.
Prior- booking through dealer revenue class:
Prior booking will help in reduction of inventory carrying costs and creating artificial demand for
high price classes.
The price will be varied based on the basis of number of days prior booking is done.
The price for this revenue class will be fixed based on the historical trend.
On the spot purchase revenue class:
We will charge premium of 10% than prior booking revenue class. Customers can go directly to
the dealer and purchase the bike.
Benefit & Restriction Matrix:
Benefits
1 year free service
Loyalty programs
Discount service card
Warranty
More colors
New models availability
Restrictions
Internet Booking
Yes
Yes
Yes
Yes
Yes
Yes
Dealer Booking
Yes
No
No
Yes
No
Yes
On the Spot
Yes
No
No
Yes
No
No
Protections:
2%
April to June
Revenue Class
Forecast
(units)
Error
Price
Available
Protection Units
On the Spot
360
7
43274
389
1500
Prior Booking
841
17
39340
912
1111
Internet
120
2
37373
199
199
2%
July to September
Revenue Class
Forecast
(units)
Error
Price
Available
Protection Units
On the Spot
392
8
43506
410
1500
Prior Booking
914
18
39551
953
1090
Internet
131
3
37574
137
137
2%
Oct to Dec
Revenue Class
Forecast
(units)
On the Spot
Prior Booking
Error
460
9
43649
450
1500
1073
21
39681
1038
1050
153
3
37696
12
12
Internet
2%
Jan to March
Revenue Class
On the Spot
Prior Booking
Internet
Price
Available
Protection Units
Forecast
(units)
Error
Price
Available
Protection Units
493
10
43687
479
1500
1150
23
39716
1021
1021
164
3
37730
0
0
Based on the demand and available production capacity for each period, the protections are
calculated. The forecast error is assumed to be 2% and forecast is done based on the trend
analysis. The objective is to obtain maximum EMSR. For example during off- peak seasons, we
will try to sell more through internet channel by giving more benefits. While during peak seasons
we will close the internet channel as EMSR of this revenue class is less than other revenue
classes.
These protections levels will help us in opening and closing decisions on different revenue
classes.
Optimization:
Revenue is optimized by:



Introducing new revenue classes
Following differential pricing
Opening and closing inventory to protect and build artificial demand for certain revenue
classes.
Apart from increasing revenue, this project will also help the company to increase the
profitability by reducing inventory carrying costs and distributor margins.
Area Sales without Revenue management for the next financial year will be Rs. 21cr
Area Sales with Revenue management for the next financial year will be Rs. 25cr
Therefore, Incremental Revenue obtained will be Rs. 4 cr
Objective Function:
Maximize the sales in Rupees for the next financial year.
Problem:
The production capacity for each period (i.e. a financial quarter) is limited to only 1.5 cr units
and the production has to be continuous. But the demand for motorcycles is less than the
production capacity during the first two periods of the financial year and demand is more than
the production capacity during the last two periods of the financial year. Hence company has to
produce more during first half of the year and carry forward the inventory to meet the demand in
the second half of the year. This builds in the more inventory costs for the company and pressure
on the sales team to push more inventories to the dealers.
Solution:
New Revenue classes will be introduced. The internet channel will be used to sell more bikes
during off peak periods and the bookings and sales will happen directly on the company website.
This will help company to reduce the costs and price the bike lower to generate more demand.
This will also reduce the pressure on the dealers as they will not be forced to carry more
inventory than the demand in their channel. More offers and loyalty programs will be used to
incentivize the customers coming through this channel.
The internet channel will be closed when the demand in other two revenue classes will increase
during peak seasons.
Protections will be built for each revenue class for each period.
Protections are calculated on the basis of EMSR calculation for which forecast is done on the
trend analysis method and error is assumed to be 2%.
For forecasting the actual data is first de-seasonalized and then trend analysis is used for
forecasting. The forecasted data is again reseasonalised for each period.
The EMSR calculation is attached with the report.
Assumptions:
1.
2.
3.
4.
We have considered ourselves as the area sales manager of Heromotocorp limited.
The area sales is considered to be 0.1% of the total sales of the company.
The forecast error is assumed to be 2%
The 30% demand is considered to be price inelastic and will like to buy the bike on the
spot itself.
5. The opening up of internet as a new channel will bring extra demand of 10%
6. Because of savings in channel partner margins and inventory carrying costs, the company
will be able to reduce the price by 5% in the internet channel.
Optimal demand:
Forecast
Internet Prior Booking On the Spot Internet Price Booking Price Spot Price
Internet Sales Booking Sales
10%
70%
30%
-5%
0%
10%
Period
April to June
July to Sep
Oct to Dec
Jan to March
120
131
153
164
Units
841
914
1073
1150
360
392
460
493
37373
37574
37696
37730
Price
39340
39551
39681
39716
43274
43506
43649
43687
Spot Sales
Sales (in Rs)
Total Sales
44,84,760
3,30,85,193
1,55,78,640
5,31,48,593
49,22,194
3,61,49,669
1,70,54,352
5,81,26,215
57,67,488
4,25,77,203
2,00,78,540
6,84,23,231
61,87,720
4,56,73,284
2,15,37,691
7,33,98,695
Area sales with Revenue Management
25,30,96,734
Area Sales without Revenue Management
21,41,50,000
Incremental Revenue (Rs.)
3,89,46,734
Other revenue maximisation methods ( Over booking, upgrading etc):
In case of a motorcycle, it is not possible to bring in upgrades, as this is a single commodity in
itself. One cannot pay for a lower style of a product, and get a higher or better product. Over
booking too is unusual as generally, individuals who had booked for a motorcycle will come to
collect it, unlike airlines, where they may book and cancel later. This is a high involvement
purchase, thus in all probabilities, one will not give up the chance of getting delivery for the
product.
Your recommendations and rules for maximising revenue
As we had mentioned earlier, opening up various classes for booking for customers will help in
expanding the base of customers and get a larger market share. By this we mean, trying to
capture more number of customers by various distribution channels like the internet etc, and
allowing them various options like prior booking, on the spot prices and special prices on the
internet. Though there remains the reason of tangibility factors as to whether at all, this will be a
successful method or not remains to be seen, as customers generally prefer to buy a good only
after testing it by its look and touch. Yet, it is a cost effective, scalable solution which can tap
into hitherto unexplored markets.
How to measure the effectiveness of the revenue management process
A good point to start is, conducting a cost benefit analysis of the said project and checking
whether the costs incurred in putting on place such an elaborate distribution channel is really
worth the benefit of obtaining the extra revenue or not. It needs to be tested on a pilot basis at a
regional level initially, and might be extended over a year to see the level of revenue increase,
whether they are palpable or not. Not only this, that the revenue goes up or not, what needs to be
checked, is whether the revenue goes by the level that had been forecast, or is there a specific
pattern that it follows. If there is a difference in the pattern of revenue growth estimates need to
be revised upwards or downwards accordingly and then a similar cost benefit analysis is
proposed to be carried out. If however, the system proves to be ineffective, the internet medium
should be scrapped, and the sales team must revert to the original system of physical booking.