IN-DEPTH: Interview with Bill Kotrba, senior director of Industry Strategy for JDA’s Pricing and Revenue Management Group

Published: 09 Sep 2010

IN-DEPTH: Interview with Bill Kotrba, senior director of Industry Strategy for JDA’s Pricing and Revenue Management Group

What sort of revenue management innovations are on the horizon over the next 5-10 years?

The big innovation that is on the horizon, according to Bill Kotrba, senior director of Industry Strategy for JDA’s Pricing and Revenue Management Group, is the capability to quantify price elasticity and use that output to generate optimal prices directly.

“Bringing publicly available competitor pricing data into the heart of the RM system and forecasting how customers will respond to changes in price—it’s a totally different approach. The most advanced hotels are moving in this direction and airlines are likely to follow suit,” says Kotrba, who is scheduled to speak at the forthcoming Travel Distribution Summit North America 2010, to be held in Chicago (13-14 October).

“Traditional RM systems have focused on the question, “How much demand am I expecting at my current prices and how much inventory should I protect for my highest price points?” This approach works very well for hotels or flights that run consistently full, as a means of “yielding out” the low value demand,” Kotrba said. “Future systems will focus on the question, “At what price will I generate the most revenue or profit?” This approach is attractive because it offers upside even for hotels and flights that are not expected to be full. It also addresses destructive price wars amid increasing price transparency. In some markets it may be deemed unnecessary to match a competitor that is slashing prices, based on estimates of customer price elasticity relative to that competitor.”

Kotrba recently spoke to EyeforTravel’s Ritesh Gupta about current issues and trends. Excerpts:

The Internet has brought instant price-transparency to businesses in the travel industry. Has this forced a shift in pricing strategy and how can revenue management help?

Bill Kotrba:

There is a very old saying in pricing, “You’re only as smart as your dumbest competitor.” Competition on the Web has made this painfully obvious. Unfortunately, this immediate visibility into competitors’ prices has led many to engage in profit-destructive and spiraling price wars. Managers insist they want to maximize revenue and profit, but their pricing behavior indicates otherwise. The least sophisticated will match absolutely any price to maintain market share and fill rooms or seats, usually with disappointing results.

Revenue Management (RM) helps in a number of ways. Companies that have embraced RM are very disciplined and analytical in how they approach pricing, and they are adopting the latest technology to do this more effectively. Avoiding price wars is all about understanding which competitors are relevant and really affect your results, and also about understanding how your customers will respond to price changes. This kind of price-response modeling is a major area of recent innovation in RM science and there are early adopters in the hotel space. The most valuable finding has been that some hotels can price above competition in certain markets and still fill to capacity.

It also helps to segment your rates in ways that limit exposure to dumb competitors. For example, offering deep discounts only to specific customer segments, or via opaque distribution channels.

Considering this transparency, it is said that Rate Integrity is the current mantra and the proliferation of channels of distribution from xml links to various extranets has made today's revenue managers task that much more challenging. What’s your take on this?

Bill Kotrba:

Rate integrity is much easier to maintain if there is sufficient focus on distribution channel integrity. A good distribution strategy creates pricing opportunities, i.e., the ability to increase or decrease prices for a particular customer segment without diluting revenue or perception in others. When channels overlap and are comparison-shopped by any and every customer, maintaining rate integrity may indeed be a huge challenge. But if distribution channels serve as a means to segment customers effectively based on things like group membership, buying behavior, travel behavior, product bundling, opaque pricing, etc., there is less risk that rate integrity becomes an issue.

It is said that the ability to make it simple to buy and simple for customers to understand that they are gaining value for money is crucial in setting the pricing strategy. When it comes to achieving the same across so many distribution channels, it is said that from a brand standpoint, consumers must develop “trust” in the firm’s pricing. So when the hotel firms insist on a “Best Price Guarantee”, does it pay off?

Bill Kotrba:

Consumers experience price discrimination in nearly every aspect of life, usually with no negative impact on brand image or trust. Tide costs twice as much per ounce at a small grocery store versus buying a shrink-wrapped quadruple pallet at a wholesale club—but no one seems to complain. They perceive value in the small size or convenient location that the local grocery store offers, or they don’t mind buying a one-year supply in exchange for a discount.

For some reason it has been more difficult for the travel and hospitality industries to create perceived value around the exact same type of price discrimination. For example, it is hard to build trust when a hotel offers a walk-up room for $299/night and the customer’s first instinct is to feel “gouged” by the high last-minute price. In reality, had the price been lower the hotel would not have had any rooms left for sale, a real loss for the customer. The challenge is to position the higher price as a “win” for the customer—because at that price there are still rooms available. “Best Price Guarantee” undermines and ignores opportunities to price discriminate in ways that will be perceived as win-win for the customer.

Many people believe that the role of RM in a business is to increase prices. Is this statement true?

Bill Kotrba:

Absolutely not. The mantra in RM has always been finding, “the right price” that maximizes total revenue or profit. Most of the time when RM fails at a company it’s because the RM organization was positioned as the “pricing police” focused only on rate increases or rate enforcement.

The best RM organizations recognize that sometimes prices should be lower, sometimes higher, and always look for win-win opportunities where customers are better off. The best RM systems provide clear visibility into future demand expectations so that high or low pricing can be used as a lever to balance supply and demand to maximize profit.

Experts believe that the way hotel companies dealt with price discounting was evidence of how mature their RM strategies were and probably also a fair indication of whether or not RM was part of their organisational culture. How do you assess the situation from an RM perspective?

Bill Kotrba:

The hotel industry has a large franchise component which isn’t seen in airlines and many other industries that use RM. Hotel chain headquarters may have very sophisticated central RM departments with very advanced systems, only to have franchisees ignore those systems and recommendations. So it’s difficult to say whether brand XYZ practices mature RM or not based on the way individual hotel franchises behave. Sometimes adjacent full-service and limited-service hotels of the same brand have different owners—and completely different pricing strategies. This often leads to brand dilution whereby the full-service property offers lower prices than the limited-service property. In the best case scenario, hotels fully understand their relevant competitive set and how customers will respond when prices change.

Many travel companies are building Customer Relationship Management (CRM) systems alongside revenue management systems. How can companies in the travel industry successfully integrate the two?

Bill Kotrba:

The first step is to recognize that all customers are not created equal. “Transactional” RM does not always maximise results when certain customers have a high long-term value to your company. CRM systems can leverage all available data about an individual customer’s lifetime value based on previous purchases and other information supplied voluntarily. The result can be that a room is offered at a discounted rate for one person—but not for another, based on how CRM long-term value is quantified. Casinos did this intuitively for decades long before RM and CRM systems existed.

The second step, and much more difficult, is recognizing specific individuals and actually delivering customized prices and products across a broad range of distribution channels and points-of-contact. There is another segmentation opportunity here, driving specific customers to interact with your company only via a specific site or distribution channel which recognizes them.

Can revenue management tools be applied to ancillary revenue streams in a business, such as hotel food and beverage, or checked bags at an airline?

Bill Kotrba:

Price elasticity measurement is something relatively new in RM and will likely find an application in the ancillary revenues. Prices for ancillary products have been determined by trial and error, cost recovery, or gut feel about what the market will bear. Customer price response models have become very sophisticated, able to find the “sweet spot” that maximizes revenue from movies-on-demand, in-flight snacks, checked bags, etc.

Revenue Managers today need to be able to assign “value” to their sales channels based upon profitability, not just top line numbers. What’s your opinion about this?

Bill Kotrba:

Building the cost-of-sale into RM systems and decisions is certainly not new. Air cargo RM systems, for example, have done this very effectively by taking into consideration important components such as fuel and handling costs to either accept or reject a cargo shipment at a certain price. Quantifying the cost-of-sale for a particular distribution channel may be easy or difficult, but including it as an RM system input is straightforward.

Travel Distribution Summit North America 2010

Bill Kotrba, who serves as senior director of Industry Strategy for JDA’s Pricing and Revenue Management Group, is scheduled to speak at the forthcoming Travel Distribution Summit North America 2010, to be held in Chicago (13-14 October). The two-day event will feature over 80 speakers, including the ones from Hilton, Wyndham, Travelport, Lufthansa, Expedia, Google and from many other such organisations of repute.

For more information, click here:

Or contact:

Marco Saio
Event Director
marco@eyefortravel.com
0044 (0) 207 375 7219

Or

Rosie Akenhead
Event Director
rosie@eyefortravel.com
0044 (0) 207 375 7229