The Basics of Revenue Management

I'm taking this great class at SMU this semester called revenue management. It is a very math intensive class and involves a lot of statistical modeling in Excel. We are using a relatively new concept called Dynamic Programming which is a methodology to solve complex optimization problems over time.

While these theories aren't necessarily new, they do not have widespread adoption in the business world yet. There are only 3 MBA programs in the country teaching it right now, and only two of them teach it for credit. This class is mostly seen just at the PhD level right now, but that is going to change.

Here's how it works:

Lets say you are the Red Sox (I can always bring my examples back to baseball). You've just aquired a Japanese superstar pitcher and want to maximize your revenue generation opportunities with him. You already sell out your ballpark for the entire year, so selling new seats seem like it won't work for you. However, this isn't the case - you do have the choice to not sell out every game and instead hold back a number of seats to sell at the last minute when you know the superstar will be pitching. But how many do you hold back and how much do you charge?

Here's where Revenue Management comes in. It helps you decide how many seats you should hold back, potentially how much you should charge for them, and when you should sell them. See, the problem is not whether you should hold the seats back and soak the poor tourists who are willing to pay ungodly amounts of money at the last minute to see a particular pitcher. You know you should do that. The problem is how many and for how much. If you try to hold back too many, you risk the possibility that no one buys and you are stuck with a bunch of unsold seats that you could have sold to a million other people 3 months ago.

If this sounds eerily familiar, it should. This model has been used for about 20 years by the airline industry. We all know it as "three week advanced booking." The dirty little secret is that if 150 people show up for a 150 seat plane four week ahead of time, the airline will not sell it out and will hold the seats back for higher revenue customers at the last minute.

The dirtier secret is called over-booking. You might think that over-booking is caused by tickets being sold in multiple places and they just can't coordinate well enough and mistakes happen. On the contrary, overbooking is planned and encouraged. See, the airlines have figured out and have a lot of data on no-shows. They've computed the probabilities and are milking it for every dollar they can. They know that if too many passengers show up that they will have to give them compensation, but they've computed that into the overbooking equation as well.

My professor thinks, and I agree, that this mode of thinking will slowly invade every aspect of startegic thinking in companies over time. As the tools and concepts get easier to use, companies will leverage it.

A manufacturing plant in China that normally books capacity out months or years ahead of time will start holding back capacity for rush orders. More importantly, they will know how much capacity to hold and how much to charge.

Target will hold inventory of the new Elmo-super-duper-tickle-me-with-extreme-giggle-technology back until New Years' eve and charge a hefty premium for it.

You will see this everywhere.

All new website

Short Story:

My home server got trashed, I couldn’t reload it, and we’ve now got a new website. The good news is that you still only need to type in http://www.kreusch.com/. This site doesn’t allow me to have videos, but from what we could gather nobody was downloading them because of slowness anyway. So, I combined several web technologies that are out there in cyber-space. I'm now linking to a photo server on Flickr and a Video server on MotionBox. It’s pretty self-explanatory, but if you want to know some of the advanced, cooler features, skip past the “long story” and have a look at the “Flickr features” section.

Long story:

This past weekend was quite an adventure for me. I had a three day flex Friday weekend, and my primary goal was to reload our home server that was hosting our Kreusch.com website. I don't want to get all technical on you, but the reason I did this was because the server was loaded with Windows Server 2003 which did not allow me to do many things such as install antivirus software, an online backup service, and use my DVD burner. The latter of these concerned me more. All 1000+ of the pictures we have taken over the last year were subject to complete annihilation in the event of a hard drive crash or a fire.

So, I started my install of Windows XP. I fought the server and the server won. The website would simply not reload. In addition, the website installation script decided to delete our last two months of videos of Jack! Luckily, I have a very expensive program that I bought a number of years back that allows you to unerase deleted files, so I was able to recover the videos after a 13 hour hard drive scan and recovery process.

I learned a few things through this experience, so if you’d like some free computer advice, skip to the “Computer advice” section of this email.

Flickr Features

I decided to go with the premium Flickr service for a couple of reasons. The primary reason is that after you pay them $25 per year, you are allowed to upload as many full-resolution photos as you want. There also no download bandwidth restrictions or advertising, the servers are really fast, and since Yahoo! owns it, it should be pretty stable.

The basics: the home page that you are taken to when you type http://pictures.kreusch.com/ is a basic photo gallery. The latest photos to be uploaded will always be on this home page. Keep in mind that since I uploaded everything this weekend, the latest photos according to the system are honeymoon pictures. On the right side of the page you’ll see a light gray area that will show the last 10 uploaded photo sets. A photo set is basically a batch of photos I have uploaded. Browsing is pretty simple, and there is a great slideshow feature for looking at the photos.

Prints: This website allows you to order high-quality prints right from the site. You add them to your cart and check out. Note that this feature is only available if you log in using an email address I have entered into my contacts list. This is to prevent random people on the internet from printing photos.

Sets: If you look for a link called “Sets” you will go to a page that will show all photo galleries I have uploaded. There are well over 1000 pictures posted now, so dive in!

The Archive: If you look for a link called “Archives” you will be taken to a really cool feature that allows you to see photos organized by when they were taken. When you click on a month, it will show you a calendar with all of the pictures on it. This is VERY cool if you ask me.

Tags: If you look for a link called “Tags”, you will be taken to a page that shows all of the “tags” that I have added to pictures. Tags are simple keywords for pictures. This page is kind of strange in that it changes the font size and boldness based upon the frequency of the tag in relation to other tags. Therefore, obviously, the “jack” tag is huge compared to the rest.

Email upload: I have an email address that can be used to upload photos so that they will appear on our picture site moments later. So, if you have any pictures of the family or of Jack, please email them to me and I'll forward them to the site right away!!!

Geotags: There is a mapping feature which will show a map of the world and where each photo was taken. This is pretty cool and will help us remember where we took our photos ten years from now. You can zoom in real close. For example, if you zoom in to Ponca, I've labeled the Marland Mansion, Teris House, and First Baptist.

Computer Advice

This weekend was a trial of computer proportions. Here are some things that I highly recommend.

Create an online backup account!!! Go to the website http://www.mozy.com/ RIGHT NOW!!! They have a FREE online backup service that will allow you to store up to 2 GB of data on their secure servers. Basically, you point it at what you want to backup and it does so quietly in the background of your computer only when you are not using it. If you need more than 2GB it is only $5 per month for unlimited backup. This is insane not to take advantage of. Any fire, hard drive crash, or whatever would cause you photos, videos, or precious documents to go away. This service give you all you need to keep your data safe.
Stop paying for antivirus. One of the premier antivirus programs is called AVG antivirus and is free for home use. Download it at http://free.grisoft.com/.