Revenue Management & Dynamic Pricing – An Everyday perspective to understanding it.

There is a lot of enigma about Revenue Management and the complexity that it entails. Application of Revenue Management and Dynamic pricing is much closer to us than what we can imagine. As Einstein famously said "If you can't explain it simply, you don't understand it well enough".

Each individual practices the concept in some form or the other. Let me explain:

All of us have access to the same 24 hours in a day. Right? What we do with it and what value we attribute to the time is based on every individual's priorities and perspective. Isn't it?

I want to work for 12 hours a day, spend 6 hours sleeping, 2-3 hours traveling and remaining in the mundane work or 8 hours work, 2 hours traveling, 7 hours sleep, 2 hours family time and then the mundane. (Segmentation basis needs or priorities)

?So, we all are optimizing the time that is fixed according to our priorities. Mind you that these priorities also change basis the different stages of our life and circumstances. (Demographics based segmentation). Basis how well, the time is utilized, the overall level of happiness and well-being is calculated. Fair?

You would be wondering that this seems to be philosophy more than the topic we are here to discuss. Lol. So, let's bring in the dimension of revenues.

• Hours is the capacity and how well you use it is the traffic and the happiness is the revenues?
• How well one uses the hours - Segment mix will decide better yields and revenues, more sleep (leisure) and less work (corporate) not optimum, similarly, lots of corporate and complete loss of leisure can also be dangerous (managing overbooking, booking curves and a scenario like Covid).
• When you add the value that I described earlier as the dollar value, you start getting into the arena of dynamic pricing and revenue management.

Now assume, I control the 24 hours for everyone and I can fix a price for every hour, minute and second. Basis how many people want to work, at what time , how long and so on and so forth, there will be a demand curve basis which I will pick up the best combination (Leisure, corporate, etc.) which will ensure the best mix and revenue. Remember the capacity at this point is constrained. If I open up more slots, things change.

Now you can relate this to almost all business', the exception being that the capacity constrained is for a different time frame and thus the timelines.

When a luxury brand restricts output, increasing the perceived value and thus the price, it’s an application of RM, though the pricing has not yet been made dynamic but one of the levers has been put into action. A manufacturing unit of cars manages its assembly line and the combination of car models to ensure optimal utilization as well as pricing and segment mix (price sensitive, value seekers, luxury buyers, etc.). The examples are endless, and you just need to look around to see its applications.

From a perspective of pricing, Dynamic pricing is basically nothing but using multiple parameters that are important to a customer which can help segment them and then associate a price basis the same. For example, booking early or during a sale period is one segment whereas having flexibility to modify a booking or having access to a lounge or an upgrade tends to appeal to someone else and there are price points catering to these different requirements. Traditionally, airlines have been catering to this through RBD (Reservation Booking Designator) with a different price point in each RBD (26 RBDs). Over the past few years, the concept of continuous pricing has been taking shape which allows carriers to make personalised offerings to customers since the price point most relevant to certain customer segments might be between two the price points of two RBDs and continuous pricing offers this flexibility to airlines which has been possible with technological advances.

However, the traditional candidates are Airlines, Hotels, Car Rentals, Cruises, Media and Entertainment parks wherein the capacity takes a longer time to change and dynamic pricing (price change is a very key lever).

I would pause here with a hope that I have been able to put forth a simple explanation to our complex world of Revenue Management and Dynamic pricing and it leads to many more questions and discussions. This is not to take away the complexity and the balancing act that revenue managers need to understand and undertake between multiple factors that drive demand, supply, customer perception, regulations and many more. As I always say, Revenue Management is all about the Artist who understands the Science behind it through his/her creativity and a keen understanding of the business.

#RevenueManagement #DynamicPricing #airlines #hospitality