Revenue management a modern tool
Eighteen years ago I first heard of revenue management at a consultants conference in London. It was at that time the most modern tool that airlines had to handle the pricing of your flights. Large companies in the sector began to use it with renewed intelligence in the 80s to optimally manage the tangle of different price structures that existed at the time. Of course, everyone involved in reservation systems was actively reflecting on how they could use this technique for their own industry.
Time has passed and the terminology (and the concepts that support it) have been generalized to other industries. Today you hear about revenue management o yield management in a number of sectors, sometimes unthinkable two decades ago: hospital beds, operating rooms, hotel rooms, cargo space on ships, power generation capacity, etc.
First of all, perhaps it would be useful to clarify the difference in approach between the two words, since they represent different ways of conceiving the company:
- revenue management implies orienting the company towards the maximization of sales revenue (that is, the revenue) generated by strategic implicitly and previously taken by the reservation system;
- yield management involves directing the operation towards maximizing performance (i.e. the yield) due to the decisions made implicitly and previously by the reservation system.
Perhaps I should start by discussing a little more about the convenience of using the term yield instead of revenue. This can be a semantic discussion, since basically any are more interested in margin maximization or profitability than sales maximization per se. In practice, many systems implicitly work to improve the yield that can be extracted from the operation and not only the revenue. But it seems to me that it is convenient to remember which is the most important concept, as well as accepting that for those who do not have English as their native language, it is undoubtedly easier to pronounce the phrase. revenue management.
Perhaps the time has also come to reflect on the strategic consequences of revenue management, as well as seeking to crystallize the business vision that implies its use in any business.
What is the revenue management from the point of view of the general management of a company?
In simple terms, the revenue management It consists of a methodology (generally supported by information, the computers and the necessary modeling) to allow the generation of maximum secure income for future service provision in a context in which the operation has the following general conditions:
- Intensive use of capital goods. In this type of company, the amortization content of capital goods may be important due to, for example, the relatively high content of technology, the significant unit value of the investments needed to offer the specific product or service, and the same size. (Generally discrete and non-continuous, which implies steps of large investments once the installed capacity is exhausted). The amortization of these capital goods implies the existence from the beginning of operations of a very important component for the costs fixed (see next section). In certain sectors, the possibility is added that permanent flow technology can make fixed assets obsolete relatively easily, thus generating the need for even greater accelerated amortization. This factor creates pressure on the bidder and may eventually be favorable to the buyer.
- Strong influence of fixed costs on the cost structure. The previous paragraph demonstrated the existence of a significant fixed cost associated with the depreciation of capital goods. This depreciation is combined in this case with a number of other operating costs that are necessary to be able to offer the specific product or service. These other costs are also usually largely fixed within the discrete environment of capacity variation mentioned in the previous aspect. For this same reason, the variable costs related to the addition of a demanded unit to the supply equation of the product or service have a relatively low impact. It is then spoken of an operation that in a given environment has marginal costs (variable costs to add an additional unit to the offer) low enough to allow great flexibility in the pricing. This factor also creates pressure on the bidder and may eventually be favorable to the buyer.
- Perishable nature of the product or service. This feature is also concatenated with the first paragraph. In effect, the very size of production capacity generally causes it to exceed predictable demand. Therefore, the unoccupied capacity is transformed into a true perishable product, since the capacity that is not used (through the sale) at a given time or period, cannot be converted into stocks or can only be storable in Limited form for reasons intrinsic to the storage capacity of the product or for the financial cost of establishing very high value inventories. In this sense, the product or service becomes perishable since the possibility of invoicing its sale is associated with a limited moment or period of time. It is a great conceptual distance from the traditional idea of a “perishable” product: flowers, fish, dairy, etc. This factor creates additional pressure on the bidder and may eventually be favorable to the buyer.
- Customers who make the purchase decision with very different planning horizons. There are many sectors in which demand is made up of two highly divergent behavioral components, associated with very different planning horizons. A component, which we could call base demand, implies planned purchasing decisions, often with long-term supply contracts and with very well negotiated prices based on rational elements of valuation by both parties, leading mainly to prices designed on a "cost +% profit" formula. The second component, which we will call casual or punctual demand, generally involves last-minute purchase decisions, motivated by an unforeseen, impulsive or very punctual need (even though it may constitute a regular pulse, as is the case of the demand for electricity in certain early hours of the night), a real purchase that it could not justify a purchase forecast that could lead to an early negotiation. This factor generates a relative bargaining advantage for the offeror or the plaintiff according to the situation of relative pressures at the time of purchase, and thus influences the price that the plaintiff is willing to pay.
- Customers who make the purchase decision with very different valuation elements. Following the concepts used in marketing and value strategies, it is increasingly clear that as many segments as individual consumers can be defined in many sectors of the economy. This extreme fragmentation is related to the value term of inequality:
Value> = Price> Cost
Thus, there will be individuals who favor the convenience of buying the product for a specific time and are willing to pay more to make it available. Other individuals will prefer to adjust when they can dispose of the product so that they can achieve an appreciable reduction in cost. Others, on the other hand, will choose to maintain total flexibility until the last moment, risking perhaps paying very high prices, not finding a product that is available and in some cases obtaining the product at very low prices when it has almost no value for the offeror but still retain value for the plaintiff. This factor generates the possibility of identifying relative negotiating advantages for the offeror and therefore influencing the price that the claimant is willing to pay.
This implies certain simple rules that have been applied to the maximum degree of diffusion in the air transport industry, whose intermediaries and end users have quickly understood these rules and have used them for the mutual benefit of the provider and their client. Although consumers today are familiar with air fares that always seem to be different, there are particularly market-oriented applications of the concept, such as "last minute" offers available at North American and European airports, in which the passenger practically finds out of your destination when approaching the counter of the provider of said services.
From the point of view of the general management of a company, this represents achieving, in the most imaginative way possible, an important set of key objectives related to each other, in a way that constitutes a particular conception of the value chain of any deal:
- The maximization of income given a configuration of assets and resources. That is, sales maximization given the existing production capacity, which with the hypotheses previously discussed must be important enough to be worth playing in marginal cases with the positioning of the product through pricing differential for different situations with the simple objective of generating as many sales as possible and consequently cash flow incoming. It is therefore about making additional sales at least at a price higher than the marginal cost of each unit of product.
- The maximization of the gross margin based on the aforementioned configuration. Naturally, the gross margin maximization is operated on the basis that the previous condition has already been satisfied. Therefore, it is about making additional sales at the highest price (above the marginal cost of production) that is compatible with the addition of new units sold.
- Maximizing the operating profitability of the assets used. Finally, this concept aims to optimize the use of installed production capacity in order to saturate the infrastructure and achieve the most efficient amortization of the investments made in the required assets. Therefore, it is a matter of adding as many additional sales units as possible above the long-term and stable demand that constitutes the base of operation of the business.
It is clear that not all businesses fully comply with the preceding descriptions, although they can be partially described with these elements.
In that case, it may be that the revenue management it is applicable to a specific part of the business or only at a certain moment in the life of the company.
In what type of companies can the concept be used?
It is logical, as previously stated, that the application of the concept of revenue management in any activity that has the general characteristics mentioned in the previous paragraph. By carefully observing these conditions, it is possible to analyze a series of activities (an enumeration that does not exclude other sectors in which the concepts could also be specifically applied) in which the application of the concept of revenue management may be one more tool than useful and therefore advisable:
It was historically the first of the sectors to specifically use this methodology. The models have become more sophisticated over the years. The original purpose was to increase the coefficient of occupancy of aircraft upon departure. For this, differential rates were established that privileged those who made firm reservations several months in advance, then increased the rate of customers who generated reservations between three months and a few days, and finally settled at very low prices the last, last available seats (last minute offers). Of course, considering the more or less consistent percentage of passengers who do not board the flight despite having reserved their seats (the “no shows”), flights are always oversold.
The typical customer segment for fares well in advance turns out to always be the wholesale tour operators that require ticket blocks in order to sell to retail intermediaries or end customers at low prices with a good difference income. The segment of clients at medium to increasing prices is made up of individuals who value the convenience of late and / or flexible plans, or business travelers who value the convenience of leaving on a date.
Finally the last minute offers They created a new segment in which travelers approached the airport to “be amazed” and leave for the destination whose availability and low price were most convenient for them. Thus, it is very difficult for two seatmates to end up paying similar fares for the same flight.
Over time the models of revenue management they have been sophisticated with the clear objective of maximizing the results of the airlines on each flight, especially with the pressure on costs that has been registered in recent years. They have also contributed significantly to predicting with greater certainty the effective demand for tickets to each destination in peak times and thus allowing airlines to have booster flights if necessary.
Another important historical user of the methodology of revenue management. The original purpose was to increase the occupancy rate of the rooms throughout the week during the year, particularly for hotels that were not in regions of very abrupt seasonality, in which case the model itself helped but did not solve the problem. problem of large variations in the load factor.
In order to encourage occupation, differential tariffs were also established that privileged those who made firm reservations several months in advance, particularly the large wholesale tourism operators. Subsequently, they increased the rate of clients that generated reservations between three months and a few days, particularly those corresponding to the corporate client segment. Finally, the last available rooms generated a series of interesting alternatives:
- Very high prices were defined depending on whether there was a major business, cultural or sports event in the city that generated a large influx of tourists.
- If not, low prices were set to attract additional demand to complete the hotel occupancy.
- But really low prices were also set for rooms that could be occupied very late, usually after dinner time (night tariffs), under the hypothesis that at that point even below the fixed cost it would be convenient to capture an additional client.
The models also took into account the existence of a more or less consistent percentage of clients who did not make their reservation effective (the “no shows”), despite the penalties that they normally incurred.
The typical customer segment for early bookings turns out to always be wholesale tour operators requiring room blocks in order to sell full tour packages to retail intermediaries or end customers at low prices with a good difference income. The segment of clients at medium to increasing prices is made up of individuals who value the convenience of having late and / or flexible travel plans, or business travelers who particularly value the convenience of making the trip on a certain date.
The last-minute segment is made up mostly of business travelers whose travel decision is made late and who are therefore relatively price insensitive. The segment of last minute offers It is usually made up of tourists in search of a certain level of comfort at particularly low rates, for which they are willing to uncertainty about where to spend the night until the last moment.
In this sector the models of revenue management They have also evolved mainly due to the increasing doubling of hotel property: in fact, the building is often owned by a specialized real estate investor; The business fund is controlled by a franchised or non-franchised hotel operator.
3. Wholesale tourism operators.
It is a sector that has been increasingly incorporating this methodology, although it previously had sufficient data and its own approaches to decide on demand and pricing. The original purpose was to maximize the sales of the tourism packages prepared by the operator in order to close the accounts of each of the products designed and marketed.
To this end, differential rates were established that privileged those who made firm reservations several months in advance. Then the rates increased for those clients that generated reservations between three months and a few days; and finally they liquidated at very low prices the last, last places available (last minute offers) on the tour.
The typical customer segment for long-term rates is made up of individuals with high forecasting ability and / or high price sensitivity. The segment of clients at medium to increasing prices is made up of individuals who value the convenience of late and / or more flexible plans.
Finally the last minute offers They also spawned a new segment in which travelers approached retail intermediaries to “surprise themselves” and set off for the destination whose availability and lowest price suited them best.
El revenue management It has been sophisticated with the clear objective of maximizing the results of the operators in each product, especially with the competitive pressures that have been generated in recent years specifically in the European market. It has also contributed significantly to predicting with more certainty the effective demand for seats at each destination in the respective stations and thus allowing operators to plan as early as possible the block reservation of a significant number (although always adequate, that is, less to the most probable demand for individual or family places by clients) of places in the different providers of tourist services.
The application of the methodology is not evident for most of the business models with which restaurants operate. Traditionally, restaurants have offered a menu for each meal at a predetermined price that generally did not vary with business hours.
Still, restaurants and bars have increasingly begun to apply the ideas behind the concept of happy hour, from a not very sophisticated analysis of billing times and the influx of public to its premises.
The application of happy hour in bars and pubs It started when its owners concluded that it was necessary to increase customer traffic at times when there was little traffic: the interval that occurs in Anglo-Saxon countries between the hours after departure from work and the hours after dinner. The idea was to retain customers who passed after work or to encourage customers who came after dinner to come to the bar to eat and drink at dinner time, allowing them to consume an additional drink for the price of first inasmuch as they remained on the premises during those quieter hours.
The concept was successful and became generalized in a complex economic context (late 70s) and then spread as a social and socializing innovation in the years of strong growth between 1985 and 1995. It is now part of the gastronomy landscape rather massive, focused on fast food bar or restaurant chains, without any doubt or prospect of disappearance.
Subsequently, the restaurants with the highest gastronomic level (although definitely not the restaurants with a clear differentiation due to their level of cuisine and atmosphere) decided to apply the concept, initially to the drinks and with little difference in time to the meals themselves. So, you can see happy hours desserts, which allow diners to eat free dessert provided they have started their dinner early.
The ingenuity of the Restaurant and owners of pubs It has generated variations around this concept with combinations that allow increasing marginal income, considering the existence of significant fixed costs in the equation of all activity in the gastronomic sector. Thus, some restaurants offer "early menus" as well as "midnight menus" (in both cases, a very limited variety of dishes at a very convenient price) to attract diners outside of peak dinner times.
These menus can be combined or complement outings to special attractions such as the theater, a recital, a concert, etc., and can be marketed both by the restaurant (based on the restaurant's casual or regular customer) and by tour operators who They pack various services or on the recommendation of the original attraction. Thus, there is in a cafe in Vienna the menu of the Association of Friends of Music served after the concerts only to diners who can display the entrance ticket to the Musikverein room at a time when the coffee naturally begins to empty from their regular diners.
Even more critical is the application of these concepts and models to the operation of company restaurants or other institutions (schools, hospitals), where peaks of high concentration of affluence of diners occur in very short periods, which forces the catering operator to have excess facilities and staff to cover a maddening period that can be limited to 45 'only unless there is a rationing of their capacity through the definition of separate shifts to serve all diners.
In all cases, intelligent handling of the pricing can always allow better management of the flow and therefore a more distributed operation over time with lower fixed costs per customer.
5. Urban and suburban transport.
The urbanization started in the XNUMXth century and the proliferation of suburban settlements in the XNUMXth century in the large metropolitan areas gave rise to the large urban and suburban transport systems. Paris, London, and New York are the most rapidly emerging examples in the mind as initial models of these complex systems.
The concept of commuter It began to become generalized as white-collar workers sought not to lose touch with a simpler and more natural life through its installation in the suburbs of large cities. Thus, significant regular flows of people were generated from the outskirts to the center of large cities in the morning hours and inverse flows from the center to the outskirts in the afternoon hours.
In times of economic prosperity, an important infrastructure could naturally be built to allow the channeling of these flows. The economic cycles and the relative increase in the investments necessary for urban and suburban public transport began to pose restrictions on the expansion of said infrastructure. The congestion of trains and buses, in what began to be called "rush hours", induced on the one hand the return of some people to the city center.
Additionally, space restrictions began to be considered to expand the infrastructure. For example, in subway transport various questions are asked without an easy or cost-efficient solution: how many routes can be added in a tunnel? How many tunnels can be built on the same axis of circulation? How many trains can circulate through safely tunnel in a time interval? Similar questions can be asked in surface rail transportation. Other questions related to logistics and cost-efficiency of filling streets and avenues with buses to transport very large numbers of passengers complete the picture of the situation.
Very quickly, the administrators of the urban and suburban transport networks initiated actions to encourage the use of their infrastructure outside of peak hours, rather than to discourage the use in peak hours (presumably the schedule convenience factor predominates strongly over the factor comfort for those who venture to enter a train or bus at these times). The driver The main part of this offer consists rather in avoiding the oversaturation of the infrastructure, but the consideration of generating income with the use of assets that are planned and calculated to satisfy the alluvial demand represented by the peaks is not absent.
Thus, in many urban areas, special rates have been generated for trips at “non-peak” times such as Travelcard from the London Transport Authority which allows free travel throughout the day on the London network for little more than a round-trip ticket in the urban sector, provided it is purchased and used after 9.30 in the morning . This differential pricing induces many users to postpone their trip until after the entrance to London from the periphery, as well as encourages the use of infrastructure for the rest of the day. Specifically, however, it does not discourage the use of the network at peak departure times towards the periphery.
6. Long-distance passenger rail transport.
In the case of countries with high population density and good railway coverage (with examples such as Great Britain, Holland, France), the problem of railway network congestion at peak hours has been increasingly raised as the concept of commuter to ex-urban or directly rural areas with the consequent pressure already exerted from these peripheral areas towards the point of convergence of the network around the metropolis.
They look extreme from commuters between neighboring countries, no longer limited to crossing a land border, such as between Belgium and the Netherlands. Almost a decade ago, this is the case of some Britons who live in French territory and go to work in the south-east of England using the services of the Eurotunnel (taking advantage of the lower property prices and better quality of life on the other side of the English Channel. ). This situation adds pressure to the resources of the passenger transport system from areas not formally included in the suburban fare zones (really very far away) towards the irradiation center of the network.
But the original application of the concept of revenue management It can be assimilated more to the even greater concern than airlines of using an infrastructure with a very high total fixed cost but with low opportunity cost and almost no variable cost per unit offered to the public. Long-distance rail systems tend to have a relatively low load factor at times of the year when tourism or family reasons do not lead to large passenger flows. To seek a better balance, differential fares have been established that privilege those who make reservations to travel on days and weeks of the year that traditionally do not register a large influx of passengers. The desire to obtain firm reservations several months in advance, as in the airlines, has played less in this industry, except in the case of sales of seat blocks to wholesale tour operators. This segment also requires ticket blocks to be able to sell to retail intermediaries or end customers at a low price with a good difference income.
The segment of customers at medium and growing prices is made up of individuals who value the convenience of late and / or flexible plans, or travelers who must depart with the convenience of travel on a certain date, whether or not it is a period of congestion at stations. and wagons. Probably the strong bureaucratic influence of the public sector has not generated a large presence of last minute offers, which probably motivates many trains to still leave with too many empty seats.
Probably the railway company with the most experience in handling fares with the vision of revenue management be the SNCF (Société Nationale des Chémins de Fer, that is, the administration of French railways).
7. Use of infrastructure for cargo transportation.
This example is a little more complex since it starts from the hypothesis that the cargo has very different claims regarding the passengers regarding the time of their transport.
Indeed, although there are passengers who are willing to take a night flight or a long-distance night train, in general most of the offer of passenger transport tends to be concentrated in times that could be called "normal" because they are higher comfort for people.
Cargo does not have similar expectations, as it generally does not need to follow human biological rhythms. Therefore, providers of some cargo transportation infrastructure assets (airports, rail networks) seek to maximize their revenues through a pricing differential to encourage the use of its assets at times or days of the week when passenger traffic would not generate demand.
This ensures the use of infrastructure at times when there is naturally no pressure on installed capacity and instead frees up capacity for a type of traffic that has preference (and pays for it) to travel on certain dates and times.
8. Distribution and generation of electricity.
The electrical energy sector is probably one of the first users of the philosophy of revenue management, but essentially motivated by the economic equation of the different methods of electricity production. Indeed, these methods can be classified according to the combination of the relative weight of the fixed costs of electricity generation and the ease (and costs) of incorporating or withdrawing the production capacity of the national system:
- nuclear energy: a very high percentage content of fixed costs (depreciation of the nuclear power plant and complementary facilities) with a content of materials constituting the variable cost (according to uranium, graphite, heavy water technology, etc.), with a complex and expensive cycle of on and off generation capacity;
- hydroelectricity: the commercial mode of electricity generation with the highest percentage content of fixed costs (amortization of the construction of the dam, hydroelectric power station and connection to the national grid), with great flexibility to connect and disconnect generation capacity to the national grid, thus as practically zero variable costs;
- gas thermal: in this modality, the generation of energy has a relatively cheap fuel (and of limited contamination for thermoelectric generation) and modern technology that is easy to switch on and off, but without the enormous cost of nuclear energy;
- coal-fired /fuel oil: it is an old technology with relatively lower fixed costs but with a fuel that has slowly become relatively expensive and in addition to a very high degree of pollution, in short, an undesirable form of electricity generation.
Therefore, when the electricity sector belonged (or belongs, as in the case of EDF, Electricité de France) to the public sector or when the industry has been vertically privatized from generation to billing to the end customer, the solution has been simple and had as a critical variable the generation costs: the network supplied the base demand with nuclear energy (due to its low variable cost but with the difficulties of connecting and disconnecting it to the network) and the next step of base demand with hydroelectric power (with its minimum variable cost and great flexibility operational).
As the peaks approached, an integrated system would have started the gas turbines for their easy on / off as well as the cheap and clean fuel it uses. And lastly at the really peak moments, the coal-fired power plants would have been turned on or fuel oil, whose variable cost is very close to the total cost and therefore it is only convenient for the generator to operate for a couple of hours. But this assumed the impossibility of adjusting the consumer price by transferring the differential costs of meeting demand at base times or at critical points. The deregulation of the sector as well as its fragmentation through privatization with the aim of avoiding monopolistic behavior, have led electric power distributors to pay attention to the other variable in their economic equation, the Prices. Indeed, in many cases (industries, shops and increasingly families), users already know that their unit cost of electricity will depend on the time of day when their consumption occurs.
In some cases, distributors have sought to define the pricing to maximize your income (or at least to minimize your losses) using an economic-financial criterion; In many cases, distributors have sought to define prices on the basis of respecting the restrictions on generation capacity and, therefore, to direct discretionary demand towards hours when it is not necessary to operate high-cost unit plants.
9. Telephone services.
Many years ago, our country knew the price offers in urban telephone calls, represented by the introduction by ENTEL of what was called the "metered service" that implied the allocation of a quota of minutes of calls in the peak periods by which paid a fixed amount (whether or not those minutes were consumed) and from the defined limit, a variable amount related to additional consumption was paid with a very high unit price. This pricing approach was clearly related to a rationing of the telephone infrastructure, in which the disconnection of investment decisions with market needs had led to a chronic undercapacity of urban calls to meet demand at peak hours. Had the conflict been resolved under open market conditions, the operator's response would have been to anticipate demand and install additional capacity and seek to prevent bottlenecks from occurring except in exceptional circumstances.
In post-privatization Argentina (who knows for how much longer) the investments made in both landline and cellular telephony have avoided these bottlenecks and the pricing Differential according to day and time of call is more oriented to generate spurious traffic that can channel your communications outside of peak hours. Given the condition of significant fixed costs represented by the telephone infrastructure, promoting international or long-distance calls at night and on weekends implies targeting offers to the segment of people who may be interested in communicating with friends and / or relatives in other cities but who prefer to postpone the call based on its lower price.
This same logic has given rise to intermediaries who are willing to buy part of the transmission capacity of networks whose mission is to diversify the target consumer that can be reached with special communications offers. In exchange for a fixed and predictable income, the carrier Structural ensures income that would otherwise have to fight directly in the end-user market.
10. Use of public roads and streets.
The same reasons discussed in section 5 have slowly led to public transport planners beginning to consider the application of revenue management. In effect, the road infrastructure of metropolitan areas suffers from strong fluctuations in demand: in-bound or incoming during a generally limited period of the morning hours, with great intensity; out-bound or outgoing for a slightly longer period and therefore a relatively lower intensity is recorded than in the morning peak.
This same effect occurs on roads and motorways in regions of high urban density such as the west and south of Germany, the Netherlands, Belgium and south-east England, where residential areas and work poles in addition to the concentrations generated in large cities (Frankfurt, Amsterdam-Rotterdam, Brussels, London) are scattered over a vast geographical area with characteristics both urban (small cities), suburban, exurban and rural. This phenomenon is already seen to the north of the city of Buenos Aires.
The instinctive first steps have been taken by certain cities that have limited access to areas of the city with some objective criteria; for example, even-numbered cars cannot enter the macro-center on certain days of the week and odd-numbered cars on other days of the week. This system was experienced by the city of Buenos Aires in the 90's. The reasons can be many, among others, to reduce traffic congestion or control the effect of environmental or noise pollution in said areas.
In this same sense, road operators have reasoned to handle the massive reversible traffic flows with the variability in the number of toll booths enabled on access highways to cities like Buenos Aires. It is simply a matter of adjusting the number of car service windows to facilitate the passage through the barrier that represents the collection of tolls.
The oil crises of the XNUMXth century induced the use of political measures (which survive in some metropolitan areas of the USA) such as the reservation of lanes for cars with more than two people (car pools) in the accesses to the cities, or directly the prohibition of entry of cars with less than two passengers.
Implicitly parking restrictions such as those applied in municipalities adjacent to the center of large metropolitan areas try to contribute to the management of road infrastructure. Reserving parking areas for residents and charging street parking fees to non-residents during peak hours are the main tools to help guide residents. commuters towards public transport. Similarly, building large parking at train or subway stations on the outskirts of large cities contribute to the same effect.
But it was only very recently that the concept of paying a fee for the use of streets and expressways at peak times was introduced. In London, Mayor Ken Livingston established in 2003 the congestion charge which involves charging for traffic in the London macro-center during the hours considered "peak", with the simplicity of use and ease of payment that current consumers require (example: payment of the right of use by cell phone) and a strict control of use of city streets and avenues that has only allowed for a number of recent technological innovations.
In this case the revenue management It is used as a public policy tool to discourage the use of private cars to enter an urban area with extremely high traffic congestion during peak hours (extending the cost to most of the day). This encourages commuters to use public transportation.
11. Occupancy of hospital beds.
Another important historical user of the methodology of revenue management is the hotel management of hospital beds. It should be considered that (particularly in Latin countries, but this is certainly the case in Great Britain as well) public hospitals have more of a supply than demand problem, that is, their beds are insufficient to serve all the public who would like to enter they.
Therefore we will focus in this discussion on the impact of management of income for private sector sanitariums, essentially oriented towards maximizing their benefits, just like any other company. The original purpose of using the revenue management was to increase the coefficient of occupancy of the rooms throughout the week during the year, particularly for private sanitariums whose profitability (as in hotels) depends largely on the coefficient of occupancy of the hospital.
An important factor is the unpredictability of demand, that is, the type of hospitalizations caused by the category of diseases of the patients. The seasonality of hospitalizations for acute pathologies can produce peaks at certain times of the year (eg, hospitalizations for pneumonia in the winter) but in general it is an element of uncertainty in the management Of demand. On the other hand, there is a more constant demand, although not so predictable in the case of chronic diseases (eg hospitalization of an alcoholic for cirrhosis or of a cardiovascular patient for a pressure spike).
Another important factor when looking to forecast the demand for hospitalizations is the affinity group membership that they have agreements with a sanatorium. Indeed, the influx of private patients to a given sanatorium is completely random and dependent on factors as diverse as the knowledge of their medical professionals, the comfort of the hotel and auxiliary facilities, the geographical location in a given city, etc. On the other hand, the agreements signed between sanatoriums and health funders (social works, prepaid, etc.) assure a sanatorium a basic demand that allows covering a good part of the fixed costs.
In order to encourage occupation, sanatoriums have also sought to offer different rates than the type of billing that a particular patient is necessarily received with. Thus, concepts of comprehensive fees have been generated for the complete treatment of certain types of pathologies (eg, angioplasty module, kidney removal module, etc.) or with a daily fee for certain types of hospitalization (eg: surgical hospitalization module, intensive care hospitalization module). These approaches are only possible when it comes to negotiating on important populations that can ensure a certain demand and therefore allow the sanatorial provider a certain profitability. Another requirement is the existence of historical information on costs and length of hospitalization by the sanatorium, as well as information on the occurrence of each pathology by the financing entity (social works, prepaid medicine).
12. Use of operating rooms.
As well as the administration of a hospital faces a large uncertainty factor for its operation in the bed occupancy rate, a not less problem is the utilization factor of its operating rooms. These are facilities that require significant investments from a financial point of view and also represent real bottlenecks in terms of both scheduled and emergency patient care.
The unpredictability aspect of demand once again haunts the considerations of a hospital administrator. Indeed, a good number (probably the majority) of surgical interventions fall into the category of programmable operations, a proportion whose increase has been contributed by the strong growth of outpatient operations that do not require a post-operative operation in hospital. This has allowed operations to be triaged to allocate the expensive infrastructure of an operating room to operations that deserve it, and to divert minor operations to intervention rooms with less technological content (and therefore requiring a lower investment in fixed assets).
Operating rooms are then the stage in which complex operations are carried out with a certain risk to life. The programmed operations respond to pathologies that are perfectly identified or that do not represent an immediate danger to the patient's life. They can be foreseen months in advance.
However, a small but strongly fluctuating part lies in emergencies caused by accidents or acute fulminant pathologies that are impossible to predict with any statistical model. This unpredictable factor generates the need for hospitals to have excess capacity to deal with such cases or to be willing to alter the scheduling of facilities and personnel in an unforeseen situation (a case that I could personally see when the rash arrival of my third son displaced the delivery room to a very well-planned caesarean section).
But the programmable operations allow to adequately adjust the capacity offered by the hospital in the face of irregular demand for emergencies or acute situations. This schedule leads to the encouragement of the use of operating rooms during the weekend by surgical teams faced with restrictions by health funders (social works, prepaid medicine). It is then possible to see the offer of surgery shifts on Saturdays or Sundays at lower prices than the surgeries carried out during the week, essentially derived from the hospital's rate flexibility during days that, due to the natural preference of the surgical teams, should register a very low utilization rate of operating rooms.
13. Industries with inflexible production capacity and fluctuating demand.
Until now, the analysis has seemed to focus primarily on the provision of services, in which it is clear that the non-provision implies an irreversible loss of income due to the impossibility of making a stock of hours of personal care, for example from a doctor or a psychologist. .
But the concept is strictly applicable to industries with a very high value of fixed production assets and that therefore have a high content of amortizations in their costs. These amortizations must be divided between the volume produced in a given period to ensure the technological non-obsolescence of the installation or to obtain a return that exceeds the opportunity cost of the capital invested by the shareholders in the installation. Reasonable examples include petrochemical plants, steel mills, paper mills.
Likewise, there are industrial sectors that due to their technological complexity require a very high level of availability of highly specialized personnel (in handling specific aspects of a process, in quality controls, in support of development in the production of high-value products unit) with very high costs that must be amortized through its allocation to actual production volume delivered and invoiced. Products that would fall into this category are medical diagnostic systems, manufacturing control systems, or industrial services such as highly specialized cutting of tooling parts through copper wires.
Finally, there are sectors in which production consists of units of high unit value and manufacturing complexity, with clear examples such as the manufacture of aircraft and, above all, shipyards. In these sectors, the existence of temporary gaps in which there is no production implies the assumption of high costs of facilities and labor or, alternatively, the hyper-flexible management of labor through a policy of hire and fire It has very negative consequences in the management of personnel with a high content of specialization.
Given the reason that leads to a high content of fixed production costs, the company is then forced to ensure the greatest possible uniformity in its production load throughout the year. This can be done through working with a command book such that the installation always has a queue of units to be produced.
Or, when the previous method is not feasible to be applied, through the generation of additional demand when natural demand assumes its fluctuations with the use of lower than normal pricing but that at least ensures the coverage of some fixed costs in difficult periods. From here to treating the productive capacity with the optics of a hotel there is a very short step.
As the reader will appreciate, the application details may vary. The historical circumstances or the reasons why the practice has become widespread in different economic sectors will also vary. But behind all these variations, the essential principles of revenue management apply in all the cases discussed.
El revenue management and generic strategies
The strategic analysis according to the classic vision of Michael Porter, raises the existence of three types of generic strategies:
- Cost leadership: emphasizes the cost term of the value inequality, with the aim of generating a higher unit profit given a market price; or alternatively to be able to offer the product or service at lower prices and thus generate higher profits through a higher volume of sales.
- What makes us different: works on the value term of the value inequality, with the aim of generating a gap greater in the perception of product value (difference between perceived value and price charged, generally with certain consequences in terms of cost of the inequality) and thus generate higher profits through a higher volume of sales; or alternatively allow the offeror to charge a higher unit price based on an increase in the customer's perception of value.
- Segmentation: it consists of focusing the company's strategy on a market segment, being able to choose both cost leadership and differentiation in the segment; it should therefore be borne in mind that the observations made for the two types of strategy above apply in this case and must be valid for a group of clients only.
The application of revenue management in the context of a strategy of leadership de costs implies that the company makes a particularly important effort in reducing fixed costs given its enormous influence on the cost equation of this type of company. It is important not to jump off the cliff arguing that this strategy involves low prices - it involves lowering costs to decide what to do with it. pricing.
Instead, the use of revenue management in the case of the implementation of a differentiation implies serious restrictions on pricing of the product or service. Indeed, a pricing wrong will dispose the company beyond the fact that it may be complying with the short-term optimization of the variables that make up the revenue management.
In the context of a strategy of segmentation, you can work on cost leadership or alternatively on differentiation within a specific market segment. In such a case, the revenue management it generates the same consequences as in each generic strategy, applied to the segment under analysis. The handling of pricing it should be even finer in the case that touches us, since as the segment is a subset of the market, it tends to be smaller and therefore more transparent for its consumers. This can lead to disillusionment with the product much faster than in the case of an entire market.
What implicit vision justifies the application of revenue management?
The tool of the revenue management It was identified from its appearance with the resolution of relatively pedestrian problems bordering on the operational. Since it was in itself a new way of operating the company, a change in the working method of information management and decision-making pricing applied to specific cases.
Is there an implicit strategic vision behind the application of the revenue management?
Before developing an answer to this question, another appears simply for a matter of pragmatism. Why would it be important to answer that question? One could after all just understand what the input necessary for the tool and the output it produces, and then treat the revenue management like a black box whose detailed knowledge is needed only from the company's operations or IT staff.
However, being able to answer the question of whether there is such an implicit strategic vision is of the greatest administrative importance. A management team does not apply itself to understanding an innovation with the same enthusiasm and the same patience depending on whether they believe that something constitutes an operational improvement or that its application implies a radically different understanding of the essence of the business in which the company is active. company. Therefore, answering that question is essential to face the task of strategic thinking to which senior management must dedicate itself.
There is a strategic vision behind the concept of revenue management. It is related to a way of not bastarding luxury products or products without so much glamor, but it goes tangentially through a marketing positioning: in effect, the nominal price of the goods does not change and the theoretical position of the product before the consumer seeks to be maintained . The emphasis is on a real price structure that constantly dulls and varies to make the buyer perceive that the purchase opportunity gives him the possibility of accessing high-value goods or services through a smart choice of time of purchase.
The strategic vision of revenue management is essentially related to the efficient use of the capital entrusted to the management by the shareholders. It is related to a maximization of income that allows increasing the profitability of the company without affecting the base commercial positioning. As an approach, it is not a strategic vision that appeals for its glamor and intellectual depth, but in high intensity industries of capital goods use it is a true noblesse oblige that allows to continue attracting investors to industries that are obviously doomed to fight hard to give value to their shareholders.
Synergistic, tactical and operational impact of your application
As in any systemically conducted company, top management cannot ignore the impact of any change in company strategy in the synergistic, tactical and operational fields, particularly given the often operational reasoning with which the ideas of revenue management they come to the industry. But it is also important to recognize that certain changes driven by operational reasons (eg, decongesting at peak times) also lead to more or less explicit changes in business strategy.
The reasoning will then start from the assumption that it exists at the level strategic of the company a vision of the type detailed in the previous section. In such conditions and given the considerations that have been made in the first paragraph of this section, it is essential to try to describe the way in which the strategic decision to operate in a mode of revenue management cascades until the day to day of the operation of the company.
First, at the level synergistic the introduction of this type of strategy in the company requires adequate communication throughout the organization. Indeed, there will be changes in the marketing and operations processes that can only be successfully implemented if the culture of the company changes in such a way as to acquire flexibility and the search for concrete results that a type vision revenue management accurate. This implies adequately communicating the message that products do not alter their value but rather offer customers the possibility of acquiring them at lower prices because this responds to a need to maximize the utilization of installed capacity.
It is in the aspect tactical where undoubtedly the greatest emotional and financial investment of the company is registered for the application of the approach revenue management. In effect, there must be an abandonment of the market attitude of bidders, in which the commercial area blindly defends the price; And this is particularly difficult when it comes to sectors (such as airlines or hospitality) that are used to managing high prices or fares as a way to close their economic equation. In addition to this change of attitude, difficult in itself, the company must adopt new ways of working as well as invest in computer systems that allow the employee to front line (front of customer contact or channels) offer the right price to the right customer. These systems use statistical models that simulate the influx of customers according to the advance with respect to the date on which the products or services in question will be delivered. Nothing that was used as procedures or information prior to the application of the concept is useful; the maximum change occurs in this field where, in addition to the necessary investments, managerial time must be used to overcome the natural resistance that employees raised in another commercial culture will oppose.
Finally, at the level operating, the revenue management becomes the true skin of the company, since all reasoning of the offer of services and every individual decision of pricing derives from the relentless use of systems and working methods defined on the tactical level. The success of the entire approach is closely linked to its application on a day-to-day basis, in each interaction with each client, with the vision of the very specific situation of balance between supply and demand at the time it is being analyzed. Commercial ability and operational flexibility will then be two crucial factors in the performance of each employee in a given situation, and that performance The performance of the entire company will be derived individually. And therefore, the successful application of the vision of revenue management.
Fashion concept or enduring focus?
Initially, the concept of revenue management He was viewed with the same skepticism with which so many innovations are received in the business world. Not a few managers of airlines and hotel chains (the first users aware of the concept) dismissed it as something irrelevant to the golden and exalted offer of their respective companies: how to bastardize the concept of a first-class seat in Swissair through the price manipulation? Perhaps the lack of adaptability to a buyer's market explains the disappearance or merger of so many famous brands in this type of service.
When airlines today compete for the business traveler they continue to surround their advertising with all the luxury conditions of the past, plus a host of innovations presented as exclusive or pioneering. Thus, the sleeping seats of British Airways intercontinental flights; thus Internet connections on Lufthansa intercontinental flights. However, like all innovations, they are short-lived and companies are forced to combine product differentiation (or what they may present as such) with the most ruthless application of the revenue management in all categories.
This true change of attitude and the twenty years of survival and success in the sectors that saw it born (airlines, hospitality) as well as the colonization of other industries by the concept, should confirm the enduring condition that the focus of revenue management He has managed to win in the competitive arsenal of companies.
The state of high competition in which the world economy is found means that this tool, which has emerged from applications closely related to tourism and hospitality, is today incorporated in many ways into the thinking of company managers from other sectors. This renews the importance of the message that many Asian thinkers gave about strategy many centuries ago when they recommended "learning all the arts" in order to consider themselves fit for combat.
And then, just as the industry has been able to learn something from hospitality, the idea appears strongly that no sector of the modern economy can consider that it has unique rules and that its problems are solved with exclusively its own methods. Learning all the arts in 2005 implies opening your mind and abstracting the problems of the company in which you work to seek to find the best solution - although inspiration is something so distant in appearance from administration hotel like biology.
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Author: Ing. Alejandro Marchionna Faré *