Slide 1 Revenue Management Appendix 10A Revenue Management is the problem of the disappearing inventory. Managers must be flexible to change their predicted sales by market segment as information arrives. Airlines price discriminates between business and non-business travelers. If too few business travelers have booked tickets compared to the amount expected, then more non-business tickets should be released.  2005 South-Western Publishing

Slide 2 Managers may authorize reservation clerks to sell more seats ( or more rooms) than are available. The greater the overbooking, the lower are the costs of spoilage. Spoilage is an inventory NOT sold. If capacity is large, an airline or hotel will have high spoilage. The greater the overbooking, the greater are the costs of spillage, making customers unhappy by finding that they have no seat or reservation.

Slide 3 Spillage & Spoilage With Random Demand Figure 14A.1 on page 639 Demand shifts between low and high At each price, there is a chance for unsold capacity known as spoilage if Q Low occurs. Or disappointed customers who can’t be satisfied known as spillage if Q High occurs. Mean Demand High Demand Low Demand P Customer demand distributions at each price Q Low Q Mean Q High Spoilage Spillage

Slide 4 Spillage Spillage is the excess demand that cannot be met. If the service industry has low capacity, the spillage will be great Customers leave the hotel or airline unable to get a room or an airplane seat. How do airlines handle times when they have overbooked a flight and everyone shows up? »Does it make sense that they ask for volunteers to wait for a later plane? »Does it make sense for them to give free tickets to those who are bumped?

Slide 5 Cross-Functional Revenue Management The optimal plan will require pricing, marketing, demand forecasting, and capital budgeting – all cross-functional thinking The issue at the center is which orders to accept and refuse? A larger capacity reduces spillage, but increases spoilage A lower price reduces spoilage but increases spillage Order Acceptance & Refusal Process Capacity Planning Account Management Customers Pricing Demand estimation & forecasting Scheduling Figure 14A.2 page 641

Slide 6 Optimal Overbooking Spillage and spoilage costs go in opposite directions, the sum of these costs has a minimum with the optimal amount of overbooking. Since business travelers tend to a large extent to be repeat customers, the cost of spillage (oversells) may be very high. The optimal amount of overbooking for this market segment may well be lower than for non-business clients. 100% 110% 120%... Percent Overbooked Spoilage Spillage Total Cost optimal Figure 14.7