Revenue Management &

Dynamic Pricing
Krishna Mohan T V
Assistant Professor
Operations, Supply Chain Management & Quantitative Techniques
✉ krishnamohan@iimbg.ac.in
 Course Plan
• The course will be conducted through Lectures, Case Discussion, and Problem
Solving
• Reference books
• Robert L. Phillips, Pricing and Revenue Optimization, Stanford Business Books, 2005
• Kalyan T. Talluri, Garret J. van Ryzin, Theory and Practice of Revenue Management, Springer 2004
• Rakesh V. Vohra, Lakshman Krishnamurthi, Principles of Pricing: An Analytical Approach,
Cambridge University Press, 20125
• *Pictures used in slides are downloaded from the internet. Copyright to the owners.
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Assessment Pattern
Assessment Pattern

Case
End term discussion
examination 25%
40%

Project
15%

Mid term examination

20%

Case Project Mid term examination End term

discussion examination
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 Evaluation Components
• Mid term and End Term Exam
• Questions mainly numerical in nature and some conceptual questions
• Case Discussion
• 8 groups
• Understanding the case and submitting the answers prior to the class
• Presentation
• Participation in case discussion
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 Evaluation Components
• Project
• Some sample topics will be discussed after introducing the key concepts
• Same groups of case discussion for project as well
• Project report submission (at least draft) prior to presentation
• Project contents:
• Scope: An application of RM
• Clearly define introduction and background with literature support
• Discussion of model(s) supported with data
• Suggestions for improving the existing model using RM concepts.
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A recent case to begin

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Why?

Image and news content source: Deccan Herald 7

 Why people pay hundreds of dollars to eat on
grounded planes?
• “When Singapore Airlines Ltd. said seats on its superjumbo-turned-
restaurant sold out in 30 minutes, one common question was:
Who on earth want to do that?
• Plenty of people, it turns out. For every person who doesn’t relish flying, let
alone schlepping to the airport and onto a parked plane for some reheated
airline food, there’s another who can’t get enough of the aviation experience
and is willing to shell out (big bucks) for it.”

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 Why people pay hundreds of dollars to eat on
grounded planes?
• “Singapore Airlines is opening up two of its Airbus SE A380s at Changi Airport as
temporary restaurants for two weekends later this month, offering dishes from its
menu, two complimentary alcoholic drinks and free flow of other beverages. A meal
in a suite costs S$642 ($472), while prices are S$321 for a business class seat,
S$96.30 for premium economy and S$53.50 for economy.
• At the top end, that sort of money would easily buy you an eight-course degustation
at Odette, consistently ranked as one of the world’s best restaurants, or a dinner for
two, plus wine, at Cut, the Marina Bay Sands steak house that’s part of celebrity
chef Wolfgang Puck’s stable.”
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 What motivates people?
• Economy class price was not bad considering getting an experience in A380 for the
first time: meals + inflight entertainment
• National pride to help SIA form the financial struggles
• Some experienced it as movie with extra legroom (those who dined in premium
economy)
• Some want to try the business class or suites who could not afford it in the air
• Some are social media influencers; some want a click for their Instagram

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What does Singapore Airlines get out of it?
• Capturing new revenue streams + showcase A380 to passengers
• The cabins are relatively new
• Provide experience to people who could not travel in these classes
• Showcase their service to the potential travellers
• Not significant profit as the food costs; only publicity gained

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 Result: most popular class of seating?
• Business class and suites most popular for those who could afford it
• But premium economy got the same level of attention given the price point.

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Introduction
Lecture 1
12-01-2021

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 Revenue Management (RM): Introduction
• Decision challenges faced by a seller
• Who is my customer?
Customer
• What should I sell?

Time
• When to sell? Product
• Where to sell?
• Why should I sell? Channel Pricing
• How to sell?

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 Pricing: History
Evolution of
Intrinsic Perfectly
Marketing
value competitive
Science
1960s
Up to 17th & 18th Century
Demand–Supply Dynamics Mathematical models
Price set by Custom/ Law
Customer’s value Use of OR and Statistics
- cannot charge too much
Producers 'cost Stylized models
1630 – Tulipomania
Why price variations occur? Speed of Decisions -
1720 – South Sea Bubble
Pricing : Strategic →
5WH? - Price
Tactical & Operational 15
 Perfect market, a dream?
Retail prices for a half gallon of whole milk on the Upper West Side of Manhattan, May 2002

Location Price Location Price Location Price

74th and Broadway $1.39 74th and Columbus 1.69 75th and Broadway 1.89
79th and Amsterdam 1.59 73rd and Columbus 1.79 71st and Columbus 1.99

77th and Broadway 1.59 74th and Amsterdam 1.79 78th and Amsterdam 2.00

Average Price $1.75

Standard Deviation 0.20

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 RM Tools: Driving Trends
• Success in Airline industry
• Rise of e-commerce
• Success of Supply Chain Management
• The New Wealth of Information

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 Driving Trends: Airlines
• Airline Deregulation Act of USA (1978)
• US Civil Aviation Board (CAB) loosened control of prices based on standardized price and
profitability targets
• Established carriers are free to price, used computerized reservation system, developed hub and spoke
networks
• Low –cost carriers and chartered airlines entered; targeted leisure customers
• American Airlines v/s PEOPLExpress (1978-80s)
• How American tackled the competition?
• Purchase restrictions and capacity-controlled fares
• Dynamic Inventory Allocation and
Maintenance Optimizer System (DINAMO)
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 Driving Trends: Airlines
• Lessons from airlines
• RM brings short term revenue benefits
• Electronic distribution enables RM (SABRE, Galileo)
• Critical: Effective Segmentation
• Opportunity Costs
• Revenue gains for airlines through RM: 4 – 5 % (comparable to profitability)
• Tom Cook (American Airlines) and Robert Cross(Delta Airlines) have been
termed as the “fathers” of corporate revenue management
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 Driving Trends
• New Wealth - Information
• Business Software: from legacy systems to Enterprise Resource Planning
(ERP) Systems
• Customer Relationship Management (CRM) Systems
• Case: Harrah’s Entertainment
• Success of Supply Chain Management (SCM)
• Use of quantitative techniques to improve supply chain efficiency
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 Driving Trends: Rise of E-Commerce
• Eliminate or Support Price Variability?
• How internet increased the relevance of RM?
• Increased velocity of pricing decisions
• Immediate information about consumer behavior
• A laboratory for experimenting pricing alternatives
• eBay, Priceline :- Auctions
• Information availability to consumers 21
 Traditional
Pricing
Approaches

Cost plus Market based Value based

Cost + Margin Commodity markets:

(FC allocation +ROI)
Ignores Competition &
Customers
Liked by Finance dept.:
guarantees adequate margin
Surprisingly resilient
Restaurant industry
firms price takers Customer value or one-
to-one pricing
Effective strategy for low Practically impossible
–cost suppliers’ market Liked by Marketing
entry dept.
Liked by Sales dept. Ignores cost and
competition
Ignores cost and
customer value
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 Exercise 1
• As an RM consultant you are offering a mistake-proof pricing and revenue optimization
service guaranteed to deliver $2 million in benefit to a customer, Antonio. It costs you
$5 lakhs to provide this service. Your competitor Mr. Shylock provides a similar, but
inferior service that delivers $1.5 million in guaranteed benefit. It also costs Mr. Shylock
$5 lakhs to provide the service
• When competing with Mr. Shylock, what price do you need to charge Antonio
in order to guarantee that you bag the assignment? Assume that you and Mr.
Shylock are rational profit seekers, and the costs and customer benefits are
public information
• How your price need to change if it only cost Mr. Shylock $4 lakhs to deliver
his service?
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 Exercise 1: Answer
• If you are charging Y and Shylock is charging S (Abbreviating 1 million as ‘m’).
Calculating your surplus for Antonio, Antonio will accept you if
2m-Y≥ 1.5m-S, .5m ≥Y-S …(1)
• Considering yours and Shylock’s surplus :
Your surplus: Y-.5m>0 …(2) and Shylock’s should be S-0.5m>0 …(3). You should
price a Y that satisfies equations/expressions (1) and (2)
• When it costs Shylock only 0.4m Antonio’s acceptance criterion remains same, But
yours and Shylock’s Surplus change as Y-.5m>0 …(4) and S-.4m>0 …(5).
• So you should price a Y that satisfies equations/expressions (1), (4) taking into
consideration (5)
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 RM Techniques: Favorable Situations
• Customer Heterogeneity
• Demand Variability and Uncertainty
• Limited and Perishable Capacity (Inflexibility)
• Capacity can be booked in advance
• Prices changed by opening and closing predefined classes
• Good Infrastructure for Information Systems

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 RM: Definition & Synonyms
• Revenue Management is the art and science of predicting real-time demand
at the micro market level and optimizing the price and availability of
products. (R. G. Cross, 1997)
• Synonyms
• Yield Management (Airline term)/ APP • Revenue Process Optimization
in Services • Demand Management
• Pricing and Revenue Management • Demand-Chain Management
• Pricing and Revenue Optimization
(PRO) 26
 RM: Applications
• Traditional • Non-Traditional • Highways
• Airline • Energy • Sporting Events
• Hotel • Broadcast
• Car Rental • Movie theatres
• Railways • Apparel
• Tour Operators • Restaurants
• Freight • Software
• Cruise • App-based Cabs
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 Scope of RM
• Goal: to provide the right price
• for every product Customer type
• to every customer segment

Product
• through every channel
• Customer commitments PRO Cube

• A seller agrees to provide a product or service now or future at a price

• List price, coupons, contracts, reserve price, pocket price
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 RM & Strategic pricing
• Strategic pricing
• more long term
• Goal: establish a position in the marketplace
• Revenue Management
• More tactical and operational
• Recognizes the need to change prices rapidly based on market conditions
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 Project: Sample Topics
• Industry Slowdown COVID-19: Pricing Tactics - used, possibilities, failures
• Pricing and rationing of COVID-19 vaccine: ethical, legal aspects
• Machine Learning and Artificial Intelligence: Scope in RMDP
• Public Transportation: Effective use and Social cost of RMDP
• How Airlines reinvented their pricing strategies during COVID-19?
• Bundling in Services
• Aspects of RM in Sharing economy (Network effects?)
• RM techniques: possibilities in Indian Agriculture 30