Skip to 0 minutes and 15 seconds My first question is pretty simple: what is a revenue management? So, revenue management, or yield management, because people say the two things, is all the techniques that consists in making the price changing depending on the demand. And this, on a constrained environment.
Skip to 0 minutes and 33 seconds For example: the airline industry. You have hundreds seats in a plane. When the flight has left, the empty seats that you didn’t sell are lost. The same thing for hotel industry. Revenue management is all the techniques that makes more money on these hundreds seats for this plane. And how has it been invented?
Skip to 1 minute and 0 seconds There is one historical person that invented revenue management who is Bob Cross. Bob Cross is a lawyer in the late seventies in Delta Airlines and actually was in charge of marketing when low-cost companies entered the market.
Skip to 1 minute and 21 seconds Delta Airlines tried to react to these low fares by decreasing their fares. There had the volume that came back but the revenue was still very low. So next year’s they decided to come back to normal rates but then they’ve lost the demand so the revenue was still very low. Bob Cross is the first one that noticed that maybe you should forecast the demand and keep high prices on high demanded flights and decrease prices only on a very low demanded flights. And it was a huge success.
Skip to 2 minutes and 4 seconds But for me, he’s not the one that really invented the revenue management. He is the one that industrialized the revenue management. For me, the ones who invented revenue management are the carpet salesman, in North Africa. Because, in their stores, when you enter in a store, you have no prices. And the guy depending on it if is early in the season or late in the season is going to adapt the price that he’s going to give it to you and based on how you are dressed is going to say “okay maybe i could put a high price or a lower price”. So it’s the good price for the good person at the good time. So they invented revenue management.
Skip to 2 minutes and 47 seconds So that’s a scoop Bob Cross didn’t invented revenue management. He industrialized it. We are here in a small theme park but let’s talk about the bigger one, may be the biggest one, Disneyland. They have announced recently that there will be using a new pricing policy for the theme parks, that would reduce the ticket price on low demand days and increase the fees at more popular times. Is that demand-based pricing something new? Well, I don’t think it’s new. I think the communication is new. They always add offers with
Skip to 3 minutes and 28 seconds low prices on specific dates.
Skip to 3 minutes and 32 seconds For example the annual pass. The annual pass is the ability for some guests, they call guests their customer, to go whenever they want in the park. Except some excluded days when the demand is very high, for example Christmas periods, and they call black-out dates. So they have a special prices for annual pass during the year except on some specific dates. And also they do offers, just for January, just on week-end or week… So it’s more the communication that is new. So if we focus still on theme parks as Disneyland. What are the particularity of revenue management for these? I would say that’s, especially on tickets, normally, for revenue management, you need two things.
Skip to 4 minutes and 27 seconds First you need to anticipate the demand and then to react to do the demand that you observe. Anticipate is to forecast the demand saying ok “this period is going to be a high demanded day so I will start with high rates”. “These period will be a low demanded period: I will start was low rates”. This is the anticipation. Then, you see the bookings coming and you may react, you may change your rates because the demand is higher than you’ve expected. So you may increase your rate, or the contrary.
Skip to 5 minutes and 1 second In the theme park, depending on how many pre-booked tickets you have on this day, the second part may be a little bit different because you don’t have enough pre-booked tickets to change your rates within the commercialization. I’m used to see these parks as big hotels, with car parks, and attractions… and something for kids.
Skip to 5 minutes and 29 seconds Are all these sectors using a lot or a little bit of price discrimination and revenue management? Well, the interesting thing in Disneyland is that people are coming for the parks. So they buy tickets. They also buy hotel rooms, they also go to restaurants and buy merchandises. The strange thing is that, for sure Disneyland Paris or Disneyland anywhere, they do revenue management on hotels, on tickets, on parkings, on restaurants, on merchandize. They do it everywhere.
Skip to 6 minutes and 6 seconds But they started with the hotel because it’s the biggest part in the revenue. Because in Disneyland, the tickets are included in the price’s night. So it’s the biggest part of revenues. So they started with that. With the pre-booking and then they extended the optimisation to restaurants, to tickets and merchandise.
Skip to 6 minutes and 33 seconds We have seen that different people coming from different countries may have different prices to be offered. Some people find unfair or unacceptable. What’s your opinion on this practice?
Skip to 6 minutes and 49 seconds First of all, the different prices depending on people, we already face that. For example, young people have different prices, elderly people have different prices. So why would it be not possible with countries?
Skip to 7 minutes and 5 seconds Second thing: it’s legal to do it. When you do a promotion, you can do a promotion just for this market.
Skip to 7 minutes and 14 seconds I would say the third point is: when, for example, a market has his money that goes down, the power to pay is lower. And the company may suffer from just one specific market. So, imagine, let us let’s take an example. You have two customers that were paying €100.
Skip to 7 minutes and 41 seconds One customer has his money that goes down. He can’t afford anymore to pay €100. First of all, you don’t change your rates. So you just win €100. Your company is dead. Second option, you decrease the rate for both markets. So the first one is very happy because he was going to pay €100, he pays €70 for example. But then, it’s a 30% decrease and it may also have a strong impact on a company. The third option is just to decrease the price on the market that is suffering. You losing a bit of money but less. So, this is what people do. All the thing, to conclude on that, is that people always complain when they pay a higher price.
Skip to 8 minutes and 31 seconds They don’t thanks revenue management when they decrease the prices. Yes sure. You have worked in many different industries (parking, boat cruise, car rental, theatre…)
Skip to 8 minutes and 46 seconds What are the main differences in terms of revenue management in all these sectors? There is no difference.
Skip to 8 minutes and 54 seconds When we come and see a customer, he always says “well, my business is different, it’s very complicated, it is more complex that what it can be done in the airlines industry…”. This is not true actually.
Skip to 9 minutes and 9 seconds Because, you always try to sell a unity: a seat
Skip to 9 minutes and 15 seconds in a plane, a seat in a train, a room in an hotel, a cabin in a cruise… So it’s a unity. And this unity maybe constraint. And then you’re going to forecast demand and if the demand is higher than the capacity you have, then prices are going up in order to have only the people who are ready to pay a high price. If the demand is lower than your capacity, you’re going to decrease the price in order to attract more people. So it’s actually the same. Thank you, Romain. Thank you very much.
Business talk: the practice of Revenue Management
What exactly is revenue management and was it been invented? What are the main differences between the practices of a large theme park like Disney and the merry-go-round which serves as the interview set? How do customers react to these pricing strategies?
Romain Charié (N&C) answers all these questions in a lively interview.
Note in particular how setting different prices to different people can be done in practice and fully accepted by customers. Can you spot how in the interview?
Join the discussion
In response to the question above, share your interpretation of Romain Charié’s explanations.
Romain Charié has created and is currently the associate director of N&C company in Paris.
He provides advice and designs revenue management tools for several firms in France. He has worked for several major companies in revenue management, like Air France , Europcar , Disneyland Paris , among others. He has been an engineer and revenue management expert for more than 15 years.
© By ENAC - Christophe Bontemps CC BY-NC-SA 3.0