Along our 2013 theme of building a strategic analytics culture within a Hospitality and Travel organization, I had a conversation this week with Maarten Oosten. Maarten is a senior manager in our Operations Research Center of Excellence at SAS. He is a cross-industry pricing and revenue management specialist, and has lately been thinking a lot about how companies can leverage pricing as a strategic tool. Maarten will provide much more detail in our upcoming Cornell CHR/SAS webcast this month. I am excited about previewing the topic in advance, as I think it’s a very interesting way to think about the revenue management function.
Maarten reiterated what we’ve discussed at the analytic hospitality executive before, that the job of the revenue manager is much broader than simply setting prices (or managing a revenue management system). They are frequently asked to perform or support analyses of distribution channel strategy, new product or service development, market share and competitive positioning. These types of analyses are much more strategic in nature, and require using traditional revenue management inputs and outputs in different ways.
Just as revenue managers need to think of their data in different ways, they should also take the opportunity to think about their objectives in different ways. The traditional objective of maximizing short term revenue, while clearly important, might not always be aligned with an organization’s overall business strategy. Pricing drives revenue, but it can also help to achieve other strategic goals as well. Companies who want to open new markets, stimulate growth in specific segments, increase loyalty or shift channel demand might decide to adopt a pricing strategy that is not specifically designed to maximize revenue in the short term, but rather, helps the company to achieve a longer term business objective. For example, undercutting the competition’s pricing in a market could impact your short term revenue, but it can provide the opportunity for you to gain market share and drive revenues, in the long term.
Maarten will describe this in more detail during the webcast, but he emphasized to me that taking this strategic view definitely does not mean throwing out the revenue management system or its recommendations. Rather, he says, the revenue management system outputs will provide valuable support for making these strategic decisions more intelligently. For example, a rental car company may want to foster loyalty from their most valuable segments by ensuring that there are always upgraded cars available on the lots, even if they could have rented those cars at the usual rate. They could simply decide to have 20 extra intermediate vehicles on the lot every day. Alternatively, revenue management forecasts could help them to refine that number, ensuring that the loyalty members get their upgrade, but freeing up some additional cars that aren’t needed for full-price rentals. Companies can, and should, also use revenue management data to perform tradeoff analyses, so that executives can fully understand the implications of their strategic decisions. Maarten thinks of this as adding an additional layer around the revenue management system that supports this longer term thinking, rather than replacing or removing the RM system altogether.
Speaking of revenue management systems, Maarten also advocates that, with this eye to managing to a business objective, companies think about how they manage their revenue management systems. Revenue management systems’ output is a long, complex matrix of pricing recommendations. Typically, revenue management systems are designed to either automatically update selling systems with these prices unless the revenue manager makes a change, or to force the revenue manager to review all prices before they are updated. Both methodologies require day to day, detailed work reviewing pricing – whether by running down a list, or by managing alerts and exception reporting. Maarten suggests that this process can, and should, be greatly simplified. Prices can be grouped together in like categories for review, for example, and these pricing categories should be able to either automatically update or not. Those categories that have specific strategic value can be managed more carefully, while other categories may be allowed to update automatically. Maarten calls this “targeted revenue management”, as opposed to managing by exception.
I encourage you to watch our webcast in February to hear more about this topic. We’ll be discussing this on the blog later this year as well, so stay tuned to the Analytic Hospitality Executive. We’d also love to hear from you. How are you thinking about pricing as a strategic tool?