Revenue Management - The Opera looks to Maurice for help
sfgate.com
REVENUE MANAGEMENT
Hotels, airlines, opera houses hope this tool will help them maximize sales and profits
REBECCA SMITH
Tuesday, May 25, 1999
©1999 San Francisco Chronicle
Opera is the fastest growing performing art in America and the only one whose audience is getting younger.
But it still has a problem. Nationally, 24 percent of seats at opera performances go unsold, representing at least $70 million in lost revenue. That's money badly needed by the nation's 113 professional opera companies that rely on ticket sales to cover half their costs. Wealthy donors pick up the other half.
It's no wonder, then, that the annual Opera World conference in Vancouver, B.C., this month was abuzz with talk about a branch of applied mathematics called ''revenue management'' that promises to fill empty seats and make performing arts companies more self-sufficient.
Part art and part science, revenue management relies on complex formulas to maximize sales and profits by extracting the highest price possible for a perishable product or service.
It explains why a leisure passenger on an airplane pays $250 for a cross-country trip, while the business traveler in the next seat pays $1,200.
Airlines pioneered revenue management, and it later was adopted by hotels, rental car companies and cruise lines. Now, as computers get cheaper and more powerful, other enterprises as varied as operas, Internet service providers, natural gas pipelines and golf courses are looking into it.
Any business that has a fixed capacity and a perishable product or service is a candidate for revenue management. The key is being able to determine customers' elasticity of demand -- how badly they need the product or service and how much they're willing to pay.
''There's great interest in this subject,'' said Sam Smith, marketing director for the industry's biggest trade group, Opera America. ''If somebody figures out how to adapt this tool to us, it could revolutionize our business.''
It has already revolutionized the airline industry.
In 1978, deregulation forced carriers to set prices according to demand, instead of costs.
Using powerful computer systems tied to central reservations systems, the airline industry learned to forecast demand with astonishing precision, and continuously change seat prices based on current sales.
The goal was not just to fill planes, which had been flying half- empty before deregulation, but to charge the highest fare each passenger was willing to pay.
''Revenue management offered us a way to capture revenues that were being left on the table,'' said Kevin Geraghty, manager of revenue management for Delta Airlines in Atlanta.
In 1984, when revenue management was widely used but not yet perfected, U.S. airlines filled only 60.4 percent of all available seats. Last year, the seat occupancy rate hit 70.9 percent. That's the highest rate for U.S. carriers since the 1940s, and it's even more remarkable because the industry boosted its seat inventory by 70 percent between 1984 and 1998.
Although airline profits have fluctuated widely, without revenue management the industry wouldn't have a profit at all, said Garrett Van Ryzin, a professor in the Graduate School of Business at Columbia University.
''The real beneficiary of revenue management has been the consumer,'' said David Swierenga, chief economist for the Air Transport Association in Washington, D.C., a trade group. He said that from 1984 to 1998, the cost of air travel declined by 36 percent, although the savings have not been shared evenly.
Designing a capable revenue management tool is a daunting task. United Airlines, the nation's largest carrier, has 140 million seats to sell each year on 780,000 flights.
United recently bought IBM's Deep Blue supercomputer -- the machine that beat world chess champ Garry Kasparov -- to forecast demand and adjust prices. It's expected to make more than 10 million fare changes this year in pursuit of higher profits.
Deep Blue cost $20 million ''but we expect it to enhance revenues by $100 million a year,'' said Bob Merz, director of domestic pricing for United in Chicago.
One way airlines segregate customers is by imposing advance purchase requirements and Saturday night stays for cheap tickets. These restrictions act as ''gates'' that separate price-sensitive leisure travelers from time-sensitive business travelers. The challenge for other industries is to find the right gates.
A cottage industry of revenue management consultants -- many of them former airline executives -- is springing up to help companies do just that.
''There's the potential for it to sweep many industries now,'' said Warren Lieberman, a former American Airlines manager who's now president of Veritec Solutions in Belmont, a revenue management consulting firm. ''We're on the cusp of something big.''
Among the industries developing revenue management tools:
-- Broadcast networks like ABC and the Canadian Broadcasting System are using it to price advertising spots.
-- Natural gas companies are using it to price their transportation services so pipelines stay full.
-- Restaurants are exploring how they might use it to move customers to off-peak periods by charging reservation fees and higher meal prices on Friday and Saturday nights.
-- Internet service providers and fiber-optic networks are looking at it as a way to better use fixed capacity.
-- Golf courses are studying how to use it to better reflect the value of a tee time on Saturday morning in summer versus a Wednesday afternoon in winter.
''I can't think of an industry that sells something with a fixed supply and variable demand that couldn't use it,'' said Andy Boyd, a former Texas A&M University professor who now works for PROS Strategic Solutions in Houston, a revenue management consulting firm.
Even industries that haven't thought about it should, said Delta's Geraghty. ''Hospitals have hugely expensive pieces of equipment sitting idle all night. What if they offered MRIs (magnetic resonance imaging) to uninsured people at cut-rate prices at night. Wouldn't everyone win?''
The San Francisco Opera currently is debugging a new computer system, dubbed Silver Stream, that heralds its first serious foray into revenue management. Using a mainframe computer donated by Hewlett-Packard Co., it will apply revenue management tools to sell tickets on the Internet.
Silver Stream will track all electronic sales and develop individual customer profiles. Customers who bought tickets over the Internet for the upcoming ''Der Ring Des Nibelungen,'' for example, will receive an e-mail solicitation for next year's production of Wagner's final, five- hour opera, ''Parsifal.''
San Francisco Opera wants to use revenue management to build a broader audience, tailor marketing to individual tastes and price tickets to better match demand.
Ultimately, it wants to convert single-ticket buyers into season ticket holders, said Tom Gulick, director of marketing for San Francisco Opera. Subscribers are highly desirable because they pay in advance, helping finance production costs, and they tend to become donors.
If it builds a big enough database, the Opera board may decide to charge a wider variety of ticket prices depending on the performance, the date and the customer.
''It makes no sense for opera companies to price seats nine months in advance and have no ability to respond to market forces like good or bad reviews,'' said David McIntosh, an economist for Ernst & Young's Center for Business Innovation in Cambridge, Mass., who spoke at the Vancouver opera conference.
Revenue management pushes executives to think about their businesses in new ways.
Cheryl Kimes, associate professor of hotel administration at Cornell University, counsels restaurateurs to give up trying to raise the size of checks by pushing wine and desserts. That just makes people sit longer.
Instead, she says, operators should focus on raising ''revenue per seat hour,'' a phrase modeled on the airline industry's benchmark ''revenue per seat mile.''
That means getting parties seated, served and billed faster -- the same way Southwest Airlines focuses on getting planes loaded and out the gate faster.
''Restaurants aren't just selling food,'' said Kimes. ''They're selling time in a room. Revenue management will help them capture the value of the total product.''
©1999 San Francisco Chronicle Page D1 |
