How to solve the puzzle of ‘unintuitive’ revenue management

It is not unusual for a revenue management model, or any sophisticated optimisation model founded on big data, to recommend unintuitive actions as highlighted below:

  • Don’t sell the seat at a discount even though there are 20 empty seats
  • Do not match the low corporate fare offered by a competitor to a major client
  • Do not raise fares despite a consistent 90% load factor
  • Do not lower fares despite a consistent 65% load factor

Most of the time, these actions are based on multi-level statistical analysis, trading off opportunity costs and actual costs, comparison of the probability of success across a range of solutions. Communicating such recommendations to the rest of the organisation, and to high-level executives, remains a key challenge for Revenue Managers. Sales needs to know why Revenue Management is putting its biggest client at risk. Senior management needs to understand why financial losses pile up despite high load factors on a particular flight or market.

At the EyeforTravel Smart Analytics conference in Atlanta, Kelly McGuire, Vice President, Advanced Analytics of Wyndham Destination Network, outlined some communication tips for RM organisations faced with a puzzle. She offered three suggestions namely to use business language, employ common metrics (focus on profitability and cite analogies (tell a story).

Let us see how this would work with some of the common, somewhat puzzling, Revenue Management actions.

PUZZLE 1: 65% load factor is optimal. Don’t lower fares

Acceptance of low load factors remains one of the more challenging Revenue Management actions. Why not sell more seats? Using McGuire’s guide, I would offer:

1.  Business Language: Based on our analysis, offering a lower fare would cause existing customers to pay less. Expected dilution is not forecast to be offset by enough new passengers to be net positive. We are already offering a fare structure that includes low fares; few passengers are buying the lowest, heavily restricted fares but instead most are purchasing higher, less restricted fares.

Read rest of the article at Eye for Travel