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only minor servicing costs. This allows for a wide range of price discretion allowing service
companies the option of reducing prices during low demand times.
Key ingredients
Kimes (2000b: 9) has also categorized the ingredients necessary for an effective YM system:
. . . a company must possess the ability to segment the market based on its willingness to pay,
information on historical demand and booking patterns, good knowledge of pricing, a
well-developed overbooking policy, and a good information system.
The necessity of a good information system is apparent when considering the quantity and
complexity of information required to produce accurate forecasts per market segment. Also
essential is a good understanding of how an organization can segment its users by purpose, time,
different points of consumption and price sensitivity. A logical overbooking policy is also
important as service companies such as hotels and airlines tend to overbook to protect themselves
against the possibility of no-shows. Of particular interest to the revenue management practitioner
is the necessity for a good knowledge of pricing. By using multiple rates to optimise revenue, the
manager will know (in theory) when to use price discrimination and how. Indeed, beyond
the basics of price discrimination between identifi able market segments, research has been
investigating dynamic pricing and approaches to applying optimal pricing in real time based on
a number of factors including customers' willingness to pay (Westermann 2006; Lu and Mazzarella
2007; Cleophas, Frank and Kliewer 2009).
Strategic levers: price, time and space
Kimes and Chase (1998) and Kimes (2000b) identifi ed two strategic levers at the disposal of the
revenue manager: demand-based pricing (price) and customer duration management (time).
They argued that whilst many companies already offer price related promotions to manage
peaks and troughs in demand (e.g. early bird specials, special promotions), more sophisticated
manipulations of price in RM include not only time-of-the-day and day-of-week pricing but
also price premiums or discounts for different market segments. Successful RM, they argue,
stems from the ability to ascertain optimal balance between price and time. A third strategic lever,
space, has been proposed by Kimes and Renaghan (2011). Space can be used directly to generate
revenue, by dividing it into units and selling it to customers for a specifi c period of time (e.g. a
hotel bedroom for a night or an airline seat on a fl ight). However, revenue generation can also
be indirect. Here space is divided into units that are used to sell things to customers (e.g.
advertisements or retail). An understanding of how these three levers can be used in practice can
assist the revenue manager to maximize fi nancial returns.
Revenue management, consumer surplus and price discrimination
For the revenue management professional an understanding of the relationship between price
and revenue management decision is essential. McMahon-Beattie, Palmer and Yeoman (2011)
have noted that what RM tries to do is to reconcile the supply demand though the price
mechanism and exploit consumer surplus. Economists argue that consumer surplus is the
difference between the price that a consumer actually pays for a product, and the highest price
that they would be prepared to pay for it. A company which charges a uniform price for its
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