The evolution of revenue management in the travel industry

6 February 2014

Raj Thapar

Raj Thapar

Director, Enterprise Performance Management

Travel organisations face important decisions regarding what to sell, when to sell, to whom to sell, and for how much. The purpose of revenue or yield management is to use data-based tactics and strategy to answer these questions in order to increase revenue.

In simple terms, it is the scientific approach used to achieve the highest possible income from every single journey within a travel organisation’s portfolio of routes, be it air, rail and road.

The role of the revenue manager

The role of the revenue manager has undergone a significant upheaval in recent times. It is now viewed as a strategic role as opposed to an operational one within the organisation, encapsulating the combination of pricing and demand management. Revenue management requires an appreciation of a multitude of factors, including: the influence of market forces that impact the price position; the ability to flex opposing factors and visualize the combined effect these have on demand; and, an understanding on the commercial/market position of the organisation to ensure any revenue management plans are in tune with the overall sales strategy.

Why has revenue management changed?

The origins of revenue management reside in the manner in which the travel organisations ran their business. A critical component of this business was the separation of different customer groups that had distinctly different but inherently stable values. The stability allowed the revenue managers to assume a level of independence between customer groups, for example a business traveler will always book a full flexible first class seat and would not cross over into the advanced purchase, non refundable first class seat group.  This assumption allowed each different fare type to be classed as a separate product, with a distinct group of customers, with relatively low levels of cross over between the set customer and product groups.

The theory, however, was effectively blown out of the water by a fact that was apparent to many in the industry but conveniently ignored; the strict fences in fact never existed. Customers were always free to select whichever product suited their needs. The business traveler could just as easily select the advance purchase non refundable first class fare as they could the fully flexible first class fare. It became apparent that the assumption of demand independence was flawed at best.

The theory was further downgraded with the emergence of low cost airlines. These airlines operated with far less reliance on customer fencing, and instead applied more creative methods for revenue management. Easyjet, for example, employed segmentation by type of route and flight times, but did not segment by customer. It was also apparent that other travel and tourism organizations, such as hotels did not contain strict fences, thus allowing for more flexibility and creativity when defining the rules for revenue management.

New vs. old revenue management systems

The underlying limitations of old style revenue management solutions were becoming harder to ignore, with the requirement to factor in the interdependence of the demand for fares and the introduction of new forecasting and optimization approaches. Unfortunately, many of the systems that supported revenue management decisions could not evolve to cope with the shift from traditional revenue management to the required revenue management/price optimisation that was needed. The problem became even greater for those organisations using a spreadsheet based revenue management solution.

Whilst it may have been possible to forecast demand with distinct fencing around your customer segments, it is seemingly improbable that such a solution will be able to cope with demand forecasting with integrated price optimisation. Such disparity between what the market recognises and what the existing revenue management solutions could do led to analysts not having faith in the results or recommendations that are being derived from legacy solutions. In such circumstances revenue managers find themselves working outside or around the revenue management system.

The strategic decisions revenue managers are now making require a different level of data and analysis. The legacy revenue management systems cannot support multi level analyses, and spreadsheets are certainly not a sustainable tool for the large data sets and complex analytical processes required for revenue managers to continue to succeed.

Revenue management needs big data

Many travel organisations have made significant investment in revenue management systems over the past decade. However, it is apparent that the market has significantly changed, which continues because of evolving demand patterns and buying trends.

In addition, there have been huge advances in forecasting, optimisation and predictive analytics. Many legacy revenue management solutions have been built to suit a historic perspective, and cannot keep up with the pace of analytical change, nor deal with the levels of data required to offer a complete revenue management or price optimisation solution.

One may argue that you can run effective revenue or yield management solutions without having to go down the “big data” route. Before we make the case for big data, it is important to consider the types of data you need to complete a revenue management solution:

  • Customer segments
  • Ticket classes / sub classes
  • Travel segments
  • Historical periods (days / weeks / months)
  • Actual / plan / forecast / "what if” scenarios / versions
  • Future periods (days / weeks / months)

The combination of all of this data runs into millions of records; and if we combine the requirements to store and generate forecasts based on this data, we then move into what the experts would term as big data territory.

There is a definite shift away from using aggregated data and a move to going more granular to achieve a more accurate forecast. Unfortunately, this level of granularity also puts more pressure on demand management or optimisation algorithms, and it becomes necessary to use big data solutions to expand the scope and size of revenue management optimisation.

Where are you in the evolution of revenue management?  

Here are a handful of questions to help you assess if it’s time to modernise your reporting and forecasting capabilities so you can drive revenue by attracting and keeping your travel customers happy:

  1. Is your revenue management solution able to provide real time information?
  2. Can your revenue management solution cater for exceptions?
  3. Can your solution cope with the increased granularity of charging so that individual journeys and segments of each journey can be accurately priced?
  4. Does your solution provide the necessary transparency for revenue managers to be able to understand and interrogate results easily?
  5. Are you able to cater for performance targets within your solution, especially those that result in direct cost savings to the operator and passengers alike?

In my next blog, I will showcase an example of an enhanced revenue management solution, focusing on the tangible benefits travel organizations have experienced with the adoption of the latest technology available.

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About the author

Raj Thapar

Director, Enterprise Performance Management

The overriding theme of my career has been helping organisations tackle complex financial consolidation, reporting and planning problems and creating effective EPM solutions. As a result, they are able to report accurate data efficiently and make more informed business decisions using an effective EPM strategy. I am able to draw upon my background as a qualified accountant, qualified lawyer and consultant to help me do this.

Over the last twenty years, I have helped organisations determine and realise their EPM strategy. I have worked across three continents, for clients such as AIA Group, Tata Global Beverages, Sumitomo Corporation and Old Mutual Plc. Although my clients come from a variety of sectors, I am currently focused on helping organisations within the Public Sector & Services sector, with a particular interest in Finance Transformation and the collaborative definition of the organisation's Record to Report strategy.

I have a keen interest in cutting edge technology and get a buzz out of leading teams develop complex consolidation, reporting and planning solutions.

Bluefin and SAP S/4HANA - welcome to the one horse race

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