THE MADNESS BEHIND THE SECRETS OF PRICING...
The wizardry behind these complex mathematical algorithms driving price changes is known as Revenue Management (RM), and is defined as - “the practice of dynamically pricing a perishable product and selectively allocating scarce capacity across segmented demand and distribution channels, while taking into account customers’ profitability and value, in an effort to maximize gross total revenue and, therefore, improve profitability,” said El Haddad.
From when it was first used in the airline industry in 1978, RM in the service industry expanded to many other sectors, including restaurants, spas, casinos and clubs. But how does this pricing technique operate?
Airlines and hotels rely on ever-more sophisticated software that takes into account a broad range of factors, from overall conditions across their global networks, right down to the individual preferences of their customers. Indeed, airlines and hotels have decades of data on customers’ habits and buying behaviors that enables them to predict demand for any given product. They also want to know their customers so well they're able to offer fully personalized pricing, because RM forecasts the willingness of customers to pay. Moreover, RM systems will increasingly take into account not only the airfare or the room price itself, but the total value a customer can generate for the airline or the hotel, including ancillary revenues; that's all the extras that can be added to the base price, and it's a growing source of profit.
For instance, a number of companies, such as Seatboost, Bidflyer, Plusgrade and Seatfrog, have come up with applications that allow airlines to sell upgrades to the highest bidder through an auction mechanism; an efficient but anonymous way to get passengers to tell the airline how much they're willing to pay for premium services.
What will be the future challenges in RM? On the basis of our experience, conversations and observations, we believe that hotel RM will become even more strategic in nature and that the use of marketing analytics will greatly increase. Hotels have been talking about total hotel RM for over five years, but still, the implementation process has been rather slow. This slow progress, combined with the pressure from asset managers and owners to leverage their investment, has led to some online travel agencies (OTAS) moving into the RM space in an attempt to offer total hotel RM. For example, Priceline has acquired Opentable (the largest restaurant reservations company in the United States) and a RM software provider. This strategic move, combined with the current ownership structure of most hotels, raise interesting questions about the future of hotel RM. Will RM still be something controlled by the hotel chains or will it develop into a function that is offered by OTAS? Only time will tell.
From the airlines’ perspective, we are looking to the future with new optimism and with Dynamic Pricing in the near future, set to radically change the way airlines compute and handle the pricing element of the transaction. The RM systems are already starting to promise delivery of enhanced capabilities, such as forecasting and optimizing ancillary revenues. Fare families are set to be the norm on airlines websites, as they strive to reduce their distribution costs by directing more traffic to their own websites. Alliances and codeshares continue to grow, which will further the requirement for alliance RM and greater sharing of commercial information to make better informed decisions. This will increase the pressure on RM suppliers to deliver big information and faster ways of interpreting the data, and measuring Key Performance Indicators.
If you have spent an evening researching flight or room deals, you know that airfare and hotel pricing can seem pretty complex; high one week, low the next, and longdistance often cheaper than short-haul. Indeed, airfare and room prices are changing, sometimes by the minute…
managing partner of h-hotelier and
from the Lebanese American University, explain why an airline’s vacant seat or a hotel’s empty room is the most perishable commodity in the world