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The Changing Tide in Pricing and Revenue
Management
By Andy Archer,
GVP of Pricing and Revenue Management
Group, JDA Software
Why Price Sensitive Revenue Management
instead of traditional revenue management?
For a number of years, many of the largest and most successful
organizations in the travel industry have been earning impressive
returns through the use of sophisticated revenue management
solutions, often designed by JDA Software through strategic
acquisitions and ongoing innovations. For more than 25 years,
we have helped companies achieve impressive revenue gains,
particularly when they are faced with conditions where demand
outstrips supply. However, over the last few years our customers
have made us aware of a large, untapped opportunity. And that’s
where Price Sensitive Revenue Management comes in to play. Price
Sensitive Revenue Management is a different approach to revenue
management that helps companies achieve real value
and significant profit margins.
Anyone who travels on business knows that discounts on airfares
and hotel rooms are generally unavailable on popular travel dates.
This is where revenue management has really delivered—by
producing forecasts and managing rates and availability so that
operators sell the mix of product that will provide the most profit
during peak demand periods. When we look at the demand for
many of our customers—in industries as diverse as hospitality,
cruise lines and passenger rail—a surprisingly large number of
dates are not as busy as one would think. In fact, for many
companies in travel and hospitality sectors, the majority of hotel
nights and flights are not sold out, which demonstrates the business
need for a solution that goes beyond revenue management.
Traditional revenue management systems allow operators to change
prices to maximize profits during conditions of high demand, but
there’s an untapped opportunity to change prices when demand is
low. It doesn’t sound like there would be much of a difference in the
approach, but there is. Price is the common denominator, but the
decision is based on a different set of information and an entirely
different set of calculations. The traditional revenue management
system produces a forecast based on historical demand and current
booking trends. This is a good way to predict demand, and one that
has served many companies very well for a long time. However, it
misses a critical ingredient by assuming that prices are more or
less constant.
Over the past few years, JDA has developed ground-breaking
technologies in the leisure travel sector, which is by far the most
price-sensitive industry we have worked with and has consequently
led us to rethink demand forecasting. Rather than assuming that
“demand is what it is,” JDA uses price-sensitive forecasting to figure
out what demand is for a particular product or service and how it’s
affected if the price point is increased or decreased.
Once you understand the impact that price has on demand—and
determining that is a considerable undertaking—you can answer
a very different question from the traditional one. Rather than
establishing which discounts you should open or close based on
availability, Price Sensitive Revenue Management solutions answers
the more fundamental question: At what price will we make the
most money? While there are similarities between the old and new
approaches, Price Sensitive Revenue Management represents a far
more powerful capability.
Changing price only marginally stimulates
demand for the product under management.
The benefits of Price Sensitive Revenue Management solutions
come from using price far more effectively to steal share from your
competitors set. In a competitive environment, there is often little to
differentiate one supplier from another. We know that customers—
equipped with sophisticated price shopping capabilities—are
becoming better at getting deals. Price is a significant factor in every
industry we work in, particularly in the positioning of your prices
relative to your competitors’ prices. If you can optimize that, then
you can outperform your competitors.
We should not forget that revenue managers also have some
highly sophisticated shopping tools at their disposal. Many of our
customers acquire data that gives them a thorough understanding
of their competitors’ information, and this affects how companies
achieve optimal pricing and revenue. But there’s still a big
opportunity here—over the past decade, we’ve seen many instances
of revenue management solutions that also provide provide
competitive pricing information. This is all very useful in helping
users interpret revenue management system recommendations,
The Changing Tide in Pricing and Revenue Management
but the question we have asked ourselves is: Why leave it to the
revenue manager to make the decisions? Software and computing
power have moved forward in the last decade, so should we still be
approaching revenue management optimization in the same way
that we did in the 1990s?
Given the wealth of competitor data at the fingertips of many of our
customers, there are better ways to optimize pricing and inventory.
Instead of taking the traditional revenue management optimization
approach, which is based solely on demand and availability, imagine
providing a revenue manager with a set of recommendations
based on price-sensitive demand forecasts, availability and, more
importantly, your position relative to that of your competitors. It isn’t
hard to see how that increases the potential revenue upside, while
significantly easing the load for revenue managers.
In terms of additional complexity for customers, there’s no doubt
that the inner workings of a price optimization solution are complex,
but they are not hard to use. For instance, think about the revenue
management systems that they replace. Generally, the most
sophisticated revenue management systems work with inventory
allocations or limits and pattern controls—origin and destination
in passenger travel, length of hotel stays, etc.—that do a great job
of precisely defining the mix of business you should be accepting
on any given day. These controls are not conceptually difficult to
grasp, but when you look at the controls applied to a specific date
and you attempt to relate that to demand patterns, it can get very
complicated. If you were to multiply that by the number of days in a
typical forecasting horizon, you have something that’s too difficult
for an individual to process.
For example, think of an out-of-town hotelier. It’s difficult for them
to find time to interpret a series of system-generated hurdle points
and the impact that they will have on the business. Price, on the
other hand, is very simple. Everybody understands it! The greater
the extent to which operators can use price as the main aspect
of profitability and the lower their dependency is on complex
inventory controls, the more likely it is that operators will succeed
in implementing Price Sensitive Revenue Management solutions
that will make them more money. And, let us not forget, that’s the
purpose of all pricing and revenue management solutions. For more
information about JDA Price Sensitive Revenue Management, please
visit: http://www.jda.com/revenuemanagement.
About JDA Pricing and Revenue Management Group
JDA Pricing and Revenue Management Group, a global business unit within JDA Software, is a leading provider of Price Sensitive
Revenue Management™ solutions that help companies improve profits by balancing supply and demand through innovative
forecasting, pricing and revenue management. For more than 25 years, companies in the travel, transportation, hospitality and
media industries have benefited from the ongoing innovation and deep domain expertise from JDA. To learn more about JDA
Pricing and Revenue Management, please visit www.jda.com/revenuemanagement.
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