On a flight to Goa, two passengers were discussing about the price they paid for the flight and hotel. They were amazed at the price difference as one of them was charged 6800 INR for a round trip airfare and 30000 INR for a hotel and the other 4600 INR for the airfare and just 18000 INR for the same hotel. The first passenger had booked his flight and hotel only one day in advance while the other a month in advance. How can the same airline or hotel manage profit by charging so discriminately? The answer to this amusing question is “Revenue Management” .

After segmenting the market and defining the price structure for each segment, other essentials of RM come in to play. Demand forecasting is first of these essentials. Demand is forecasted with the help of historical data of demand patterns for the particular service. Usually, demand exhibits definite patterns such as trends and cycles. For example demand may vary by time of day, day of week or season of year. These demand patterns can be used to predict the potential future demand in each market segment.

In airline, car rental and hotel industry, little information is available for millions of customers. Hence they use statistical techniques for demand forecasting. Media broadcasters on the other hand have detailed knowledge of their customers since they usually number in the hundreds. Therefore, they estimate the demand for commercial spots during various shows by monitoring historical buying patterns of customers.

The next step is to allocate inventory amongst the market segments. As stated earlier, industries such as airlines, hotels, car rental companies and broadcasters sell their inventory at premium and concession prices. Typically price-sensitive customers book early while the demand for premium inventory arrives late. Therefore industries, which practice RM, need to set a booking limit to restrict maximum amount of inventory to be sold at concession price. If this limit is set too high, the industry may suffer an opportunity loss by being forced to turn away some of their premium customers; if it is too low, some inventory may remain unsold.

Overbooking

Another important element of the revenue management is the use of overbooking when there is a chance that a customer may not appear. Capacity-constrained industries overbook to redeem for customer cancellations and no-shows. For this reason, it is obligatory to forecast cancellations and no-shows . Insufficient overbooking results in unsold inventory; on the other hand excessive overbooking results in penalty cost which includes both the financial remuneration given to bumped customers and the prospective loss of future revenue due to customer dissatisfaction. The optimal level of overbooking is where the anticipated cost of overbooking for the next unit to be sold is equal to the expected marginal revenue from that unit.

Revenue management is a process that can significantly increase revenues of capacity-constrained firms through better inventory management and pricing. By using RM concepts, these firms can protect premium inventory for sale at higher prices, stimulate market growth by offering discounts and minimize wastage of perishable inventory.