November 2018, Amsterdam
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7 ways to make RM less short-term and more strategic
Guest columnist Tom Bacon considers how RM can become more tactical by thinking beyond the usual 30-day booking window
Revenue management (RM) isn’t strategic and it’s too focused on the short term. This is the view of a senior executive in one travel company where revenue management uses a state-of-the-art, highly analytical, statistical optimisation model managed by a team of experienced analysts.
With most bookings occurring in the 30 days before the flight or the hotel stay, RM becomes highly tactical, opening inventory for lower rates and fares to fill seats/rooms and closing inventory in response to strengthening demand. RM will resort to lower fare OTA bookings or even flash sales to meet their revenue objectives and they will match their competitors or undercut them in price when necessary. All these actions represent short-term tactical moves to gain unit revenue in the shortest of time periods. And they all risk harming that amorphous entity: ‘The Brand’. By reinforcing customer behaviour – such as the expectation of lower fares or finding ‘deals’ on OTA’s - this may contradict the travel firm’s longer term goals.
Of course, in some sense, demand so close to delivery - 30 days before the flight or hotel stay - is already set; most leisure passengers have decided on their vacation plans; business travellers – whose travel plans are more variable – will not respond to close-in sales or promotions. So, rather than working to ‘create’ demand so close-in, RM’s job is to optimally allocate fixed capacity to a given demand profile. In this sense, the job of RM is more like managing a mathematical algorithm than ‘strategic’.
RM can become more strategic by thinking beyond that 30-day period. Seven actions travel companies can take to make RM strategic are:
Focus on value creation. Travellers regularly complain about airline pricing tactics and politicians love to propose regulatory ‘fixes’. A ‘value-focused’ pricing department, however, would go a long way to addressing complaints. Recently in the US, some politicians have proposed regulating change fees, for example. Frontier Airlines’ new change fee policy (varying fees based on how much in advance the change is made) is more value-based than a fixed $200 fee – why not let the customer off the hook if the change is made well in advance?
Segment strategically. Align RM priorities with the broader strategic focus of the firm. If New York originating passengers are more important than connecting passengers to Orlando, ensure that the RM system recognises that. If international visitors are critical to your hotel property, ensure the RM system supports that customer segment as a priority rather than mathematically favouring an extra dollar from a less critical customer segment.
Recognise loyalty. Consideration of customer lifetime value drives a heavy emphasis on frequent flyers and other business travellers. Thus, support of the loyalty programme is a critical need for RM, including managing upgrades and ensuring satisfactory availability of award travel. Airlines that squeeze frequent flyers by limiting the perks they are accustomed to are effectively lowering critical demand for their firm in the longer term.
Pick your competitive battles. Although matching competitive pricing may help drive higher occupancy short-term, don’t automatically follow competitor discounting. Again, identify the markets or customers that are most critical in the longer term and price in a more targeted fashion.
Apply proper metrics. In markets with heavy reliance on leisure travellers, profitability may depend entirely on extremely high (90+%) occupancy. In other markets, however, discounts that help fill seats/rooms may ultimately be counter-productive. Although unit revenue is obviously superior to load factor as a metric, higher-yield markets require ongoing attention to long-term unit revenue to avoid spiral-down.
Position ancillary fees in line with strategy. Airlines have positioned themselves differently in terms of ancillary strategy – some report less than 5% ancillary revenue while others may approach 50% in ancillary revenue. Hotels, too, differ significantly on their dependence on ancillary revenue. RM needs to support either strategy; for travel companies with high ancillary performance, RM needs to embrace ‘Total Revenue Management’.
- Support airline channel preferences. In recognition of the long-term importance of direct distribution, RM should work closely with e-commerce and Distribution. Any initiative that drives a higher reliance on higher-cost third party distribution should be reviewed for consistency with a longer-term strategy.
Saying that ‘revenue management isn’t strategic’ is likely a valid criticism in some travel companies. RM, however, needs to support the overall positioning of the company, in customer minds and with regard to the competition.
Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website