Exam 16: Pricing and Revenue Management in a Supply Chain

Revenue management may be defined as

In most instances of differential pricing, demand from the segment paying the lower price

The cost of a capacity shortage is the increase in productivity that results from having to go to a backup source.

Effective differential pricing over time will generally

A shortage of capacity (or inventory) occurs when

Customers will have a negative perception of revenue management tactics if they are simply presented as a mechanism for extracting maximum revenue.

In most instances of differential pricing, demand from the segment paying the lower price arises earlier in time than demand from the segment paying the higher price.

The amount of the asset reserved for the higher price segment is such that the expected marginal revenue from the higher priced segment is less than the price to the lower price segment.

Scenario 16.1 - The Stone Lion The Stone Lion, a bed and breakfast located in a sleepy town, caters to two groups of customers, young couples interested in something marginally more exotic than a staycation, and corporate clients interested in doing some team-building at a location with no cellular service. Corporations know they can get rooms with minimal notice, but young couples on tight budgets tend to plan well in advance of their planned stay at the property. The corporate rate for rooms is $250 per person and the demand pattern is normal with a mean of 20 and a standard deviation of 10. The proprietor of the Stone Lion takes pity on the young couples and charges them only $150 for identical accommodations. -What is the difference in the number of rooms that should be held by the Stone Lion if the standard deviation of corporate demand increases by five and if it decreases by five?

The use of differential pricing should

To differentiate between the various market segments, the firm must either eliminate barriers that identify product or service attributes the segments value differently.

Revenue management may also be defined as the use of differential pricing based on customer segment, time of use, and product or capacity availability to increase supply chain surplus.

It is important for the firm to structure its revenue management program in a way that

Revenue management is

Pricing can be used to

Any asset that loses value over time is perishable.

Scenario 16.4 - Santorini Donkeys Sturdy little donkeys are used to carry corpulent tourists up the Santorini caldera to the town of Fira. One cruise line that routinely docks at the port is considering a plan to maintain their own donkey herd, which will cost them $15,000 per thousand tourists. The number of tourists needing this service is normally distributed, with a mean of Usually, this is enough donkey capacity, but occasionally the cruise line rotates a bigger ship through this route and the excursion director must purchase donkey capacity on the spot market, where is costs $20 per tourist. -Once a local donkey herder learns of the cruise line's plan, he lowers his donkey rental price to $17.50 per tourist. How many donkeys should be in the cruise line's herd?

Scenario 16.4 - Santorini Donkeys Sturdy little donkeys are used to carry corpulent tourists up the Santorini caldera to the town of Fira. One cruise line that routinely docks at the port is considering a plan to maintain their own donkey herd, which will cost them $15,000 per thousand tourists. The number of tourists needing this service is normally distributed, with a mean of Usually, this is enough donkey capacity, but occasionally the cruise line rotates a bigger ship through this route and the excursion director must purchase donkey capacity on the spot market, where is costs $20 per tourist. -Once a local donkey herder learns of the cruise line's plan, he raises his donkey rental price to $25 per tourist. How many donkeys should be in the cruise line's herd?

The cost of a capacity shortage is

Scenario 16.1 - The Stone Lion The Stone Lion, a bed and breakfast located in a sleepy town, caters to two groups of customers, young couples interested in something marginally more exotic than a staycation, and corporate clients interested in doing some team-building at a location with no cellular service. Corporations know they can get rooms with minimal notice, but young couples on tight budgets tend to plan well in advance of their planned stay at the property. The corporate rate for rooms is $250 per person and the demand pattern is normal with a mean of 20 and a standard deviation of 10. The proprietor of the Stone Lion takes pity on the young couples and charges them only $150 for identical accommodations. -How many rooms should be reserved for corporate clients?