A NEW LEVEL OF PROFIT OPTIMISATION
Revenue management (RM) is a management science discipline that is capable of optimising far more than just the limited inventory areas where it is applied today. RM theory is applied using a unique combination of marketing theories/insights supported by rigorous applications of economics leveraged by advanced mathematics and computers. It is continually adapting to create the right tools to fit many diverse and changing decision support needs. RM is not just running a series of repetitive defined processes; the processes are the end product of RM's application. RM is the intellectual prowess used to build these decision support systems that apply advanced analytical marketing and economics theories. RM enables the 'engines' that support these unique new decision support tools. Today, RM is only being routinely applied to inventory control.
Profit optimisation (PO) is a management style and approach that can encompass a large collection of RM activities and decision processes, from many diverse areas. PO can use and apply RM thought processes and tools in areas outside of inventory control using a profit optimisation system™ (POS™). PO should be centrally controlled using a POS™ to optimise the total profits from all the activities it is controlling. PO requires detailed, precise and proactive analysis of many diverse situations and processes. PO tools can be combined and managed harmoniously in a POS™ to support a common goal with a much larger scope than just traditional inventory control-based RM. There are numerous processes in pricing, customer relationship management (CRM) and distribution that could greatly benefit from coordination, support and direction from a centralised PO team using a POS™ comprised of RM and pricing analysis, control, theories and decision support tools.
IMPLEMENTING A POS™
RM should remain as an inventory-focused department or function and PO should become a new functional area that uses RM theories and tools to control and optimise areas in the booking process beyond traditional inventory control. A POS™ should be used to enhance and optimise many of the factors and activities from different areas that combine to contribute to bottomline profitability. A lack of PO understanding, coupled with internal politics, is delaying the unlocking of this large profit renaissance. RM has revolutionised the processes and profitability of inventory control; however, the advantages of this new proven management science have not been systematically and formally applied through a POS™ to other activities that interact with inventory. PO pioneers cannot rely on the comfort of the familiar and they must push boundaries. There will be errors and setbacks, but there must be faith that a POS™ will create enough new wins to more than offset the accompanying losses. Applying centrally coordinated PO to numerous new areas will be a major new advancement in increasing profits and expanding the impact of RM and pricing theories and their tools.
Today, there are many processes outside of traditional RM that operate as separate islands even though they are supposed to be part of an integrated multi-functional effort to market, distribute and sell products. These processes all direct customers' paths through the customers' booking journey. It is the sum and interaction of these separate areas of making a sale that determines the customers' ultimate total profitability. Why are RM, pricing, CRM and distribution still a chain of separate islands, or departments, that have separate rulers, and in many cases separate goals, databases, analytical processes and skill levels? These steps are all required pieces in a total process. However, there is no true integrated command, control, communication and standardised intelligence (C3I) system, like a POS™, that combines the data from these separate areas and uses RM and pricing theories and processes, under the leadership of RM experts, to create a central profit command centre (CPCC). A CPCC needs the support of a new 'system' where all these islands and their data can be aggregated, integrated, planned, tracked, analysed and controlled from one system or interface. There are many benefits from combining the databases and decisions of these separate departments, from numerous individual loosely organised efforts, into one CPCC with a centrally optimised process 'flow' managed using a POS™.
In order to enable truly dynamic pricing, RM controls and possible dynamic packaging by a POS™, of either the core element for sale plus any elements representing ancillary revenue streams, the limitations of today's reservation systems must be eliminated. Today's reservation systems 'hold and keep track of' the things that can be sold, either on one or numerous separate reservation systems. Many existing reservation systems will not allow an element to be sold and decremented from the 'remaining inventory' that the reservation system is holding unless the price it is being sold at and/or the terms for the sale match rate plans and product sales parameters that exist in the reservation system. This will restrict the capabilities of dynamic packaging and require numerous new parameters or rates to be continually entered into the reservation systems in order to allow very flexible sales and packaging of the elements. This will greatly hinder the POS™'s abilities to rapidly implement its decisions and/or make changes.
When POS™ is implemented, the flexibility of the reservation system(s) should be carefully explored. If the reservations systems will slow down or prevent the POS™ from rapidly adapting sales to the market, then an 'availability server' needs to be implemented within the POS™. The reservation system(s) will still 'hold' the inventories, however, the availability server in the POS™ will now determine who can buy the inventory and what the prices and sales parameters are. The availability server can be told to accept any request from the POS™, or to accept requests that meet certain criteria if parameters are desired. The creation of parameters in the availability server and their editing, tracking and analysis can be carried out in the POS™ much faster and with more precision than manually entering them into the existing reservation system rate and sales parameters. The POS™ could create the needed parameters in the availability server automatically to match its requests. Those requests that are not included in the POS™ requests could also still be processed based on the criteria in the reservation systems. Now the POS™ can be as dynamic and creative as required without the reservation system impeding the process. Having the availability server in the POS™ also means that the inventory data is now easily available for inclusion in any of the C3I processes. This adds a whole new level of data, analysis and control to the POS™ as well as allowing it to truly add distribution to its list of areas it can manage and integrate into CRM, pricing and RM.
COORDINATING DECISIONS
CRM decisions on who to contact and what promotions to give them, distribution decisions on what channels to open and close and pricing decisions on what price to offer to optimise profits on remaining inventory to each distribution channel are just a few of the decisions that need to be coordinated so the net effect of these actions produces the optimal demand that RM requests, when it is needed, to increase profitability. Each of these areas is already increasing their interactions with RM in many companies. They often report to one senior person. Today, however, this person usually does not have a deep enough RM background to apply RM to the coordination of these areas. Today, the central senior person may not truly even understand RM's application to inventory, much less how to apply it to ancilliary revenue-inventory areas. Applying RM to new inventory areas will require gathering data from many different systems and then creating one interface that would use these different systems to implement a coordinated analytical approach. A C3I system or interface would greatly improve the visibility and analysis of these processes and enable a total view of how the processes feed each other and are pieces of the total solution while enabling truly dynamic packaging.
VISUALISING THE PROCESS
Figure 1 outlines some of the departments and processes that should be controlled by a POS™. RM should remain as an inventory-focused department or function and PO should become a new functional area that uses RM and pricing theories and tools. Figure 1 shows the interaction between the boxes of RM, CRM and Distribution, which are separate processes with numerous activities. RM should determine when CRM promotions are needed to sell inventory as well as what distribution channels should be open, for how long and at what prices. Pricing is an RM decision support tool and should assist with static pricing for both the CRM and the distribution channels. As pricing evolves, this should become the dynamic market-based pricing I described in my earlier article. Box 1 shows how Yield Management began — controlling or yielding inventory to existing demand from CRM and distribution channels. Box 2 shows how RM expanded and began to have some inputs on marketing decisions. Box 3 shows the merger of RM and distribution, particularly when a live two-way automated distribution interface is used. RM can automatically open and shut channels and change prices via this new 'demand management' (DM) capability. In box 4, PO has expanded to include YM, RM and DM and to add CRM capabilities. CRM and other marketing programmes should be coordinated by RM analysis and recommendations and then fulfilled by CRM.
There is an enormous amount of untapped profits and operating efficiencies to harvest from developing a POS™ that captures these separate areas and consolidates them into one command, control, communication and intelligence system.
The technology exists and the next chapter of RM will show who stepped up to the challenge and shared this enterprise vision of total profit optimisation.
