Tag: revenue management

OM in the News: Disneyland’s Dynamic Pricing Model

Disney’s theme parks in the U.S. can fill to capacity during certain times of year.

After raising some ticket prices for its theme parks by more than 20% over the past 5 years, Walt Disney will set a new benchmark when it offers die-hard fans the chance to attend a 6-hour preview of a new attraction at Disneyland — for $299. Even for fans used to high prices, the sneak peek at Pixar Pier breaks new ground.

The steep price stems in part from a perennial tension Disney faces at its theme parks, where public demand is so strong, reports The Wall Street Journal (June 19, 2018). Raising prices — currently around $100 on average days and more than $120 during “peak” times around holidays — could mitigate tourist appetite and increase profits. The company, however, is wary of appearing to gouge customers. Disney is working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased. Disney already has introduced a limited version of dynamic pricing to its parks, charging a range of prices based on 3 categories of dates: “value,” “regular” and “peak.” Prices range from $97 to $135 for Disneyland.

Under the new changes, a ticket to Disneyland for Christmas Day, for example, may cost less if purchased on July 1 than on Dec. 24. This would encourage visitors to commit to a day to visit the park farther in advance, which allows parks to plan better. Disney parks often reach their limit during the summer tourism season and over Christmas break, when the parks sometimes have to turn away would-be customers for several hours.

New attractions at the parks help Disney to handle crowds, but they also draw more visitors. Disney’s “Avatar”-themed experience has drawn crowds that can cause waiting times for some rides to average 1-2 hours—and in some cases, stretch to 4 hours.

Classroom discussion questions:
1. How does Disney’s use of yield management differ from that of airlines?

2. How does Disney deal with capacity issues (see the 6 points on page 313)?

 

 

OM in the News: Revenue Management and “Hello, Dolly!”

Thanks to what’s known as revenue management or dynamic pricing, in which costs shift constantly to match demand, top ticket prices for hit shows on Broadway have hit previously unheard-of levels. (Annual Broadway ticket sales reached a record $1.45 billion this season).

Last month the top box-office price for “Hello, Dolly!” was $748. For the phenomenon “Hamilton,” it was $849. Online this week the top price for a performance of “Hello, Dolly!” at several ticket resellers was $1,450. “People have been whipped into a frenzy by the top prices,” said the president of the Disney, producer of the current, dynamically priced hit musicals “The Lion King” and “Aladdin.”

As more transactions shift to the internet, consumers are getting used to a world in which dynamic pricing is increasingly the norm, writes The New York Times (June 9, 2017). We have pretty much accepted it for airline fares; airlines pioneered the concept of revenue management years ago. It has since spread to hotel rooms, sporting events, concerts and designer clothing — and is likely to be used for just about any highly differentiated product where demand may at times far exceed supply. The dynamic pricing algorithm, a software tool that draws on data for millions of past audience members, recommends prices for several different types of performances — peak dates like Christmas, off-peak dates like a weeknight in February, and periods in between.

“At the most basic level, all pricing is about allocating scarce resources,” said the head of optimization sciences at Uber. Surge pricing is another form of dynamic pricing. “I’ve worked in theater, concerts and sports,” he said, “and they all have a similar problem: For extreme hits, demand at what people would consider a reasonable price far exceeds supply.”

Classroom discussion questions:

  1. Why is revenue management a critical OM tool at airlines and hotels?
  2.  How does the Orlando Magic use dynamic pricing? (Review the video case in Chapter 13).

OM in the News: Yield Management Enters the Magic Kingdom

Fireworks blasted from the top of Cinderella Castle as Walt Disney World in Florida celebrated the Disney Global 50th Anniversary.
Fireworks blasted from the top of Cinderella Castle as Walt Disney World in Florida celebrated its 50th Anniversary.

“For the first time,” writes the Boston Globe (Feb. 29, 2016), “tickets to Walt Disney World in Florida and Disneyland in California will cost more during holidays and some weekends — up to 20% more — than during slower periods, as the bursting-at-the-seams parks seek to spread out demand.”  Here at Disney World in Orlando, Florida, which includes four major theme parks, the price changes are complex, and vary by park. At the most popular Disney World park, the Magic Kingdom, which handles 20 million visitors annually, single-day prices will remain at the current level, $105, for value periods. Prices will rise to $110 for regular periods, and to $124 for peak.

Overcrowding during holidays has become enough of a problem — endless lines for rides do not make for “the Happiest Place on Earth” — that Disney had little choice in moving to a demand-based ticket-pricing structure, analysts say. Demand-based pricing (which we call revenue or yield management in Chapter 13) is commonly used in the lodging and airline industries. It has also been adopted by other theme park operators in the U.S., including Universal Studios, which will unveil a major Harry Potter-themed expansion of its Los Angeles park next month. Movie theaters and sports teams are also experimenting with similar pricing efforts.

For Disney, the change will likely shift people visiting during mid-tier times into the quietest ones. During high-demand periods such as Christmas, it will generate more money but likely create no noticeable attendance drop-off.

Classroom discussion questions:

  1. Why is Disney introducing demand-based pricing?
  2. What professional sports teams are using yield management?

OM in the News: Yield Management Hits the Zoo

A ski resort in Michigan is among the businesses embracing dynamic pricing: Charging based on demand.
A ski resort in Michigan is among the businesses embracing dynamic pricing: Charging based on demand.

Adult passes to the Indianapolis Zoo used to cost $16.95. Now they set customers back $8 or $30—or almost anywhere in between. The zoo prices tickets like airfares, changing prices daily based on advance sales and expected demand. Since introducing such dynamic pricing last year, the zoo’s admission revenue has grown 12%.

Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, or even the minute, writes The Wall Street Journal (Dec. 14, 2015). Frequent price changes are increasingly common in the physical world, amplifying the effects of supply and demand on everything from parking spots to golf course fees. A Dallas highway shifts toll prices every 5 minutes depending on traffic. Kohl’s uses electronic price tags in 1,200 stores to change prices for busy and slow times. More than 250 ski resorts in North America adjust the price of tickets daily.

Airlines pioneered more sophisticated dynamic pricing (called yield management) in the 1980s. Hotels and rental car firms followed in the 1990s. Coca-Cola tested raising its vending-machine prices on hot days in 1999 but retreated after customer backlash.

More recently, sports teams, bands and SeaWorld have begun adjusting prices based on demand. Uber and Lyft charge multiples higher from one moment to the next, based on the number of users looking for a ride and drivers on the road. Consumers typically resist dynamic pricing when it is introduced, but then quickly acclimate. Five years ago, Major League Baseball teams caught flak when they began changing ticket prices based on factors such as date, opponent, weather forecasts and seats remaining. Now pretty much every one of them is doing it routinely. Our video case study, Using Revenue Management to Set Orlando Magic Ticket Prices, provides a great in-class example.

Classroom discussion questions:

  1. What are the advantages and disadvantages of this approach?
  2. What is the impact of yield management to the Orlando Magic (see the Chapter 13 video)?

OM in the News: Revenue Management Puts Lion King at the Top of Broadway

Since 2011, the show’s producers have been relying on a previously undisclosed computer algorithm to recommend the highest ticket prices that audiences would be likely to pay for each of the 1,700 seats at every performance. While other shows also employ this dynamic pricing system to raise seat prices during tourist-heavy holiday weeks, only Disney has reached the level of sophistication achieved in the airline and hotel industries by continually using its algorithm to calibrate prices based on demand and ticket purchasing patterns.

By charging $10 more here, $20 more there, “The Lion King” stunned Broadway at year’s end as the No. 1 earner for the first time since 2003, bumping off the champ, “Wicked.” And Disney even managed to do it by charging half as much for top tickets as some rivals. “Credit the management science experts at Disney’s corporate offices — a data army that no Broadway producer could ever match — for helping develop the winning formula,” writes The Times. The algorithm, a software tool that draws on “Lion King” data for 11.5 million audience members so far, recommends prices for five different types of performances — peak dates like Christmas, off-peak dates like a weeknight in February, and periods in between. “The Lion King” is widely believed to be selling far more seats for $227 than most Broadway shows sell at their top rates, a situation that bolsters its grosses.

Our newest video case study, “Using Revenue Management to Set Orlando Magic Ticket Prices,” in Chapter 13, makes a similar point for the sports industry, which has also traditionally lagged behind airlines, hotels, and rental car companies in profiting from yield management.

Classroom discussion questions:
1. Why is revenue (or yield) management a critical OM tool at airlines and hotels?

2. Why don’t more sports and entertainment organizations use this tool?

OM in the News: Jet Blue’s Unique Revenue Management Strategy

jet blueOne of the financial tricks in an airline’s tool kit is to sell more tickets than there are seats on a plane. If there are 150 seats, sell 175 tickets—people miss flights for a myriad of reasons and gate agents can typically muster enough volunteers who will take a later flight for a discount voucher. Yet this process doesn’t play out at JetBlue Airways, reports BusinessWeek (Feb. 5, 2014),  which has shunned “bumping” since its first flight 14 years ago. “Our traditional mission is to bring humanity back to air travel, and we feel that customers that purchase a seat should get a seat,” says the firm’s spokeswoman. It seems like a kinder way to treat travelers, but it might not be a smart way to run an airline.

The ultimate goal is to fill every seat on every flight, preferably in the order of who paid the most. Travelers flying on the lowest fares are those who also tend to volunteer their seats for compensation, while customers who pay the most—usually business travelers—can’t be tempted out of their seats. Overbooking pays off too: airlines almost always make more from the extra fares than they give back to volunteers in future-travel vouchers.

Yet because airlines have amassed years of detailed data on passenger no-shows—down to days, times, seasons, and specific routes—they only rarely need to write customers checks. The data also help them to know how to tweak their oversales for each flight, part of the complex algorithms that power revenue-management systems, the backbone of airlines’ fare pricing. Because it doesn’t overbook, JetBlue enjoys the lowest rate of involuntary denied boardings in the industry: only 18 people out of 21.3 million passengers through the first three quarters of 2013. On the other end of the spectrum, AirTran Airways had 1.28 passengers bumped for every 10,000 travelers (or 1,800 customers in total during the period).

Classroom discussion questions:

1. Should Jet Blue overbook, like other carriers do?

2. What other service industry overbooks?

Teaching Tip: The Secret to the Airline Pricing Model

This will probably be the 1st blog we do that can save you and your students money!  The Wall Street Journal (Jan.27,2011) just reported  that whatever you do, don’t buy your next airline ticket on a weekend.

We all know that airlines use revenue management (Ch.13) to maximize seat revenue. But the airlines don’t manage their inventory as actively on weekends, so if cheap seats sell on some flights, prices automatically jump higher. When is the best time to buy? The answer is Tuesday and Wednesday—and to be exact, it is at 3 pm on a Tuesday. “That’s when the maximum number of cheapest seats are on the marketplace”, says the CEO of FareCompare.com.

Though prices fluctuate frequently and the ups and downs of air fares can frustrate and anger us, it turns out that pricing has  followed  the same cycle during the week for many years. Discounts of 15-25% for seats are typically launched on Monday nights. “There is a method to the madness… behind the moves for airlines”, adds Expedia’s strategy director. “But for consumers it does seem crazy”. A ticket can be $199 on certain days and $499 other days, even months ahead of a flight.

Two weeks ago, reports the Journal, a Chicago-Atlanta  round-trip ticket for April  (on both American and Delta) cost $209 on Tuesday and Wednesday, but then $301 for the next 4 days. When Tuesday rolled around one week ago, the fares went to $219 —then back up to $307 by Friday.

This is certainly a topic that will interest your students.

OM in the News: Matching Supply (of seats) with Demand at Delta Air Lines

Have you ever been bumped from a flight that was over capacity? It’s a drama that plays out at departure gates every day in airports around the world. Typically, gate agents on overbooked flights embark on last-minute negotiations with passengers who might be willing to take a later plane. The agents broadcast their offers– vouchers worth $200-$400–and keep ratcheting up the price until enough passengers accept. Customers involuntarily bumped get an $800 voucher ( which the Transportation Dept. is proposing to raise to $1,300).

With 541,000 US passengers bumped in the 1st 9 months of 2010 (53,000 involuntarily), there must be a better way to manage capacity (Supp.7) and manage revenue (Ch.13). According to today’s Wall Street Journal (Jan.14,2011),  Delta Air Lines thinks it has the answer.

Delta’s high-tech new system (opened last month) asks passengers who check in online or at kiosks before going through security, what dollar amount they would accept to be bumped from their (overbooked) flight. Delta can then accept the lowest bids, eliminating a lot of uncertainty early. Not only does this give Delta a negotiating edge–passengers won’t know how low others are willing to go. But, in addition, “saving 3 or 4 minutes at the gate has a big operational impact”, according to Delta.  Delta calls it a “win-win” for both consumers and the airline.

Is this good customer service–or do any one of us even expect customer service when we fly? The topic fits well when discussing capacity and yield management issues in both Supp.7 and Ch.13. Given that 8-10% of passengers with reservations do not show for their flights, what other suggestions do students have?

Discussion questions:

1. Which system is better–Delta’s or its competitors?

2. What options do airlines have for capacity and demand?

OM in the News: Yield Management Turns to Sports

We discuss the subject of yield (revenue) management in detail in Chapter 13, Aggregate Planning. Examples are provided from the airlines(American), hotels (Marriott), car rental companies (Hertz), and even Disney’s theme parks. But the latest issue of Operations Management/Management Science (OR/MS) Today (Oct., 2010) turns to an interesting and relatively new application of revenue management that may interest your students, namely, major league baseball.

Ticket prices to sporting events have always been priced to depend on the seat’s location. But the San Francisco Giants have discovered that  dynamic pricing of game tickets has increased 2010 revenues 6%. Ticket costs now depend on the opposing teams,  pitching match-ups, day of the week,  and even the weather forecast.

For example, a ticket in the Field Club, behind home plate,  for the Oct. 1st game between the San Diego Padres and the host Giants cost $68 at the start of the season. It went to $92 on Aug. 1st,$121 a week later, $145 on Sept. 4th, and $175  just before the game!

Discussion questions:

1. Are other sports and teams replicating this concept of dynamic pricing ?

2. Will there be fan pushback to the idea?

3. How did the 2010 pennant race impact on the Giant’s decision to use yield management?