Roadblocks in revenue management: why you aren’t maximising revenue today

What’s the latest innovation in revenue management? What new algorithms or models are offered by various vendors to help improve forecasting or optimisation, for better estimate price elasticity, or increase revenue integrity? Are you missing out? Guest columnist Tom Bacon wonders if these are the right questions to be asking

Innovation is certainly important and valuable.  But in many airlines revenue management innovations have already gone beyond the capability of the organisation.  It’s all just too complicated!  There are four limitations to company’s ability to handle RM innovations:

·         System limits

·         People limits

·         Process limits

·         Organisational limits

Rather than focus on the next innovation or enhancement, it behooves airlines to review their current capabilities and ensure their people, their processes, their organisation and their systems are properly supporting optimal revenue management in their company.

Systems first

Can you support RM internally or must you rely completely on the vendor?  Either way, you face system limitations:  the internal department is unlikely able to do everything you want; and relying on the outside vendor adds miscommunication, expense and conflicting agendas. Technology remains a constraint whether you are fairly independent or mostly dependent.

And even if you have a sophisticated IT department, you will find that for many innovations or other modifications on the use of the RM system, you will still rely on the vendor in some way. I am currently trying to implement a number of new RM procedures at a large international airline and facing daily phone calls with the RM vendor to help me in implementation.

We all strive for systems that are both:

                 1) turnkey/easy to use; and

                2) transparent/easy to understand

But few systems have both capabilities - in a highly sophisticated system, it is difficult to strike the right balance.  Most airlines opt for easy to use and forego real understanding of what’s in the black box.  In the end, they need to be able to operate the system easily on a daily basis and they essentially outsource understanding and maintaining the complex forecast and optimisation models.

Even when a system is easy to use, it isn’t ‘turnkey’.  Airlines need ongoing support from the vendor; they need regular training and they need an ongoing dialogue with the vendor’s scientists and customer service employees to optimise use of the system.

People limits

The scientists designing the innovations in RM are totally different from the RM analysts who must operate the systems on a daily basis.  Although that’s a good thing, it certainly presents challenges.  In RM operations, we need market savvy, strong communication skills, and often RES system expertise, along with somewhat different business skills.  The different skills between the scientists and the operators can lead to misuse of the systems and sub-optimal results.

Obviously, airlines require a mix of skills in their RM organisation.  At a major legacy carrier, we recruited a mix of RES-proficient analysts and MBA’s into Revenue Management; at a low cost carrier, we had a mix of market analysts and data-driven statisticians; at an international carrier, we had a mix of highly experienced market oriented analysts and newly minted business analysts.  In each case, the RM department recognized the need for a variety of skills – but in the end, each airline also settled for compromises; each solution results in certain limitations.  In fact, in all of them, simplicity trumped sophistication – we could get better results with a simple solution that could be properly managed on a daily basis than a more sophisticated “black box” solution that didn’t lend itself to dynamic operations.

Process limitations

Whatever system is used, whatever innovation is implemented, revenue management continues to be a daily (or hourly) process.   The department must constantly respond to market changes and cannot rely on any RM system to do it all automatically. 

Internal RM processes need to facilitate this – with a combination of system created ‘flags’ and departmental metrics, goals, meetings and reports.  Implementation of a sophisticated RM system without having the basic management processes leads to serious revenue losses – in fact, in general, the processes are more critical to revenue success than any particular system.  Revenue management cannot be treated as a technical, system-oriented department without normal management processes.  When ‘the system’ misses a forecast or a revenue opportunity, we cannot blame the system itself – the department needs processes to ensure the system is both fully exploited and, when necessary, properly overridden.

What’s more every new innovation in the system likely requires modifications to the management processes.  Layering on another RM innovation without a corresponding process to review, maintain and exploit that innovation will likely be disappointing.

Getting organised

Revenue management cannot be a departmental silo.  In addition to responding quickly to market changes, it must work effectively with a variety of internal departments including loyalty, schedules, sales, marketing, ancillary, e-commerce, and distribution, along with IT.

In the end, revenue management must be customer oriented, more than technology or systems oriented.  Pricing – what customers pay – is a fundamental element of corporate strategy that touches virtually all departments.  In the end, we are interested in customer behaviour, market demand and competition.  The RM analysts need to be market oriented and the RM system needs to serve as a tool into demand trends and price elasticity and sell-up opportunities.  Information on the customer from the RM system needs to operate in two directions:  from RM to other customer-oriented departments in the company and from the other departments back into the system.

A broader focus

Rather than focus on the next innovation or enhancement, airlines must review their current capabilities and ensure their people, their processes, their organisation and their systems are properly supporting optimal revenue management in their company.  Before implementation of the next RM module, many airlines would benefit from a wholesale audit of their RM departments where the RM system itself is just one element.

Tom Bacon is former airline executive and industry consultant in revenue optimisation.  Questions?  Contact Tom at tom.bacon@yahoo.com.

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