Travel Reference
In-Depth Information
27
Revenue management in tourism
Una McMahon-Beattie and Ian Yeoman
Introduction
Revenue Management (RM) has been described as an essential instrument, approach or tool
which seeks to use information systems and pricing strategies to sell the right capacity to the
right customer at the right price and at the right time (Kimes 1989; Kimes and Wirtz 2003a;
Ivanov and Zhechev 2012). At the heart of RM is an understanding of customers' perception of
a product's or service's value and an accurate alignment of price, placement and availability
within identifi ed customer segments (Cross, Higbie and Cross 2011). Given its focus on the
three strategic levers of price, time and space (Kimes and Renaghan 2011) RM therefore
encompasses elements of both the operations and marketing functions. Operationally it focuses
on capacity allocation given exogenous demand estimates (Gallego and van Ryzin 1997). In
marketing management terms it plays a role in managing customer behaviour (Anderson and
Xie 2010) and stimulating and managing customer demand (Cross, Higbie and Cross 2009).
Here pricing is crucial as it, 'allows a fi rm to capture rent for the activities that the organization
undertakes to create value for the customers' (Sinha and Gazley 2012: 251). This chapter will
provide an overview of the rise of and use of RM in tourism. It will examine why RM is widely
practised in services where fi xed costs are high relative to variable costs, allowing discriminatory
prices to appeal to buyers with differing levels of price elasticity. The practice of RM is explored
in the context of the economic theory of consumer surplus, which examines consumers'
perceived value of a product/service and their willingness to pay. Finally, the key challenges and
issues for RM are highlighted such as the potential confl icts between Customer Relationship
Management (CRM) and RM, the implications of dynamic pricing and ethical issues relating to
trust and fairness.
The defi nition of RM
The origins of RM (then known as Yield Management) can be seen in the development of a
computer reservation system (SABRE) by American Airlines in 1966 which had the capability
of controlling reservations inventory. However, its popularity as a capacity management strategy
came after the deregulation of the US airline industry in 1978 when airlines 'inadvertently
