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Revenue Management and Pricing:
Case Studies and Applications
REVENUE MANAGEMENT
AND PRICING:
Case Studies and Applications
Edited by
IAN YEOMAN AND
UNA McMAHON-BEATTIE
Revenue management and pricing: Case studies and applications
Copyright # Ian Yeoman and Una McMahon-Beattie 2004
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British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
ISBN 1-8448-0062-8
Published by Thomson Learning 2004
Typeset by YHT Ltd, London
Printed in the UK by TJ International, Padstow, Cornwall
To Dad
Ian Yeoman
To my mother, Ellen
Una McMahon-Beattie
Contents
Editors and Contributors ix
Foreword
E. J. Krieken
xiii
Introduction: Using the Book xv
Cases
1 Revenue Management Basics in the Charter Boat Industry 1
Raul Bermudez, Tamara Dieck and Warren Lieberman
2 easyJet: An Airline that Changed our Flying Habits 9
Gerald Barlow
3 The Wedding Bell Blues 24
Sheryl E. Kimes
4 The Right Price Consultants 32
Julie Swann
5 Revenue Management in Restaurants: A Case Example from
Bornholm, Denmark
46
Nick Johns and Charlotte Rassing
6 Dynamic Pricing of Distillate Products at Petroleum Terminals 58
Douglas Harvey, Nicola Secomandi, and Theodore V. Valkov
7 Free Nelson Mandela? The Politics and Pricing of Culture Within
Society
71
Elizabeth Carnegie
8 Sex and Saunas 79
Ian Yeoman, Catherine Drudy, Ruth Robertson and
Una McMahon-Beattie
vii
9 Hotel Demand/Cancellation Analysis and Estimation of
Unconstrained Demand Using Statistical Methods
91
Patrick H. Liu
10 Bolton Wanderers: A Case of Good Practice in the Football Industry? 109
Gerald Barlow
11 Unconstraining Demand Data at US Airways 124
Richard H. Zeni and Kenneth D. Lawrence
12 Revenue Management in the Health Care Industry 137
Warren Lieberman
13 Revenue Management in Visitor Attractions: A Case Study of the
EcoTech Centre, Swaffham, Norfolk
143
Julian Hoseason
14 To Trust or Not to Trust: Variable Pricing and the Customer 157
Una McMahon-Beattie, Adrian Palmer and Ian Yeoman
15 Cases in Legal Aspects 166
Michael Boella and Thrine´ Hely
16 Understanding the Bid Price Approach to Revenue Management: A
Case of the Revenue Inn
174
Deitrich Chen and Michael Freimer
Suggested Solutions 184
Endnote 215
Montgomery Blair
Contents viii
Editors and Contributors
Ian Yeoman is an established champion and expert in the field of revenue management,
over 60 works having been published in journals, books and conferences. Ian is the
founding editor of the Journal of Revenue and Pricing Management and contributing
editor to Yield Management: Strategies for the Service Industries.
Una McMahon-Beattie is a lecturer, researcher and consultant at the University of
Ulster. She graduated with an MSc in international hotel management from the
University of Surrey. Her research interests focus on the areas of revenue management,
variable pricing and consumer trust. She has published widely in the UK and inter-
nationally in these areas. Una is co-editor of Yield Management: Strategies for the
Service Industries and the Practice Editor for the Journal of Revenue and Pricing
Management.
Gerald Barlow is Lecturer in Operations Management and Management Science at
Canterbury Business School, University of Kent at Canterbury. His current research
area involves work with the NHS on problems around queuing and queuing psychol-
ogy, and in issues related to capacity and capacity management.
Raul Bermudez is currently the Director of Global Charter Sales and Revenue Man-
agement for The Moorings, the world’s premier yacht charter organization. Bermudez
is responsible for the worldwide charter sales organization, pricing and fleet planning.
Prior to joining The Moorings, Raul spent ten years at Ryder where he served in a
variety of roles, from pricing consultant to computer systems designer.
Montgomery Blair has worked both on the client and vendor side of revenue man-
agement systems for the past five years. He is currently the Director of Science for
Dollar Thrifty Automotive Group, Inc., where he is most passionate about the pricing,
business strategy, price elasticity, performance measurement and training aspects of
revenue management application. He is past President and Chair and currently sits on
the Board of Directors for the INFORMS (Institute for Operations Research and
Management Science) Revenue Management and Pricing Section and is on the editorial
ix
board of the Journal of Revenue and Pricing Management. He holds a BS and MS in
economics from the Colorado School of Mines.
Mike Boella is Honorary Faculty Fellow at the University of Brighton. He is co-author
of Principles of Hospitality Law together with barrister Alan Pannett. Mike worked for
Forte and Co., Bass and PriceWaterhouse before joining the University of Brighton.
Mike also teaches at the University of Applied Sciences in Bad Honnef, Germany, at
the Ecole Hoteliere de Lausanne, and he is also a visiting professor at the University of
Perpignan. He is editor of a number of Croner CCH Catering publications.
Elizabeth Carnegie lectures in tourism at Napier University. A graduate of Edinburgh
University and Museum Studies, Leicester, she worked at Glasgow Museums,
becoming Deputy Director of North East Lincolnshire Museums prior to entering
academia. She is working towards a PhD in feminist geography at Edinburgh Uni-
versity, has published on museums and oral history and is reviews editor of Oral
History Journal.
Dietrich Chen is a member of senior management at Grupo Financiero Uno – a Central
American financial services group. He received an MA in mathematics from the
Claremont Graduate University in 1995 and a PhD in operations research from Cornell
University in 2000. Before joining Grupo Financiero Uno, he was a senior consultant at
McKinsey & Company.
Tamara Dieck is a vice president at Veritec Solutions, a revenue management and
pricing consulting firm. Ms Dieck specializes in the application of management science
and statistical tools to design customized solutions. She enjoys variety and has worked
on revenue management assignments in the airline, boat charter, car rental, cruise line,
e-commerce, hotel, passenger rail, self-storage, timeshare, tour operator and trucking
industries.
Catherine Drudy is a research student at Napier University, interested in the revenue
and health issues of sex tourism in Edinburgh.
Michael Freimer is an assistant professor in management science and information
systems at the Smeal College of Business Administration at the Pennsylvania State
University. He received a PhD in operations research from Cornell University in 2001,
and afterwards spent a year as a visiting assistant professor at Cornell’s School of Hotel
Administration.
Douglas Harvey is currently a forecast analyst at The Goodyear Tire & Rubber
Company, working at their world headquarters offices in Akron, Ohio. He received his
BS in mathematics from Rensselaer Polytechnic Institute (Troy, NY) and his MS in
statistics from the University of Illinois at Urbana-Champaign. Prior to joining
Goodyear, Doug served as a research scientist for PROS Revenue Management in
Houston, Texas.
Thrine´ Hely worked in the travel industry for 28 years prior to entering higher edu-
cation. The majority of that time she worked for scheduled and charter airlines. From
1996–9 she served as a member of the Air Transport Users Council (AUC). During this
time she was a member of the Economic Policy Committee for the Council and
represented them on the Gatwick Airport Consultative Committee (Passenger Services
Sub-Committee). Having studied for a part-time MBA from 1990–2, Thrine´ is now
studying for a PhD.
Editors and Contributors x
Julian Hoseason is the Academic Dean at the Bulle Campus of the Glion Institute for
Higher Education based in Switzerland. His professional background started in tour
operations and his teaching has focused on tourism, operations management, the
heritage and attractions sector, gravity modelling and the development of e-learning in
higher education. His research interests focus on capacity and revenue management
across the tourism industry. He is also the editor of a specialist web site, polandinex-
ile.com, that has recorded the testimonies and archive material of WWII veterans.
Nick Johns is Honorary Professor of Service Sector Management at Queen Margaret
College, Edinburgh, and Senior Visiting Fellow at the Centre for Regional and Tourism
Research, Bornholm, Denmark. He is well known for his work on the quality and
productivity of hospitality operations and has published widely in these areas.
Sheryl E. Kimes is Professor of Operations Management in the School of Hotel
Administration at Cornell University. She holds a PhD in operations management from
the University of Texas–Austin and specializes in the teaching, research and practice of
revenue management in a wide variety of industries.
Boet Kreiken is Senior Vice President, Pricing & Revenue Management. His responsi-
bilities include NWA/KLM joint venture RM activities as well as responsibilities with
other partners such as Kenya Airways. During 1999–2000 he was responsible for
international pricing and revenue management of the KLM/Alitalia joint venture based
in Rome. Boet is a member of the editorial board of the Journal of Revenue and Pricing
Management.
Kenneth D. Lawrence is Professor of Management and Marketing Science in the School
of Management at the New Jersey Institute of Technology. He has 227 published works
in the areas of management science, statistics and forecasting. His publications can be
found in 24 journals and he has been cited a great number of times in over 50 journals.
Warren Lieberman is President of Veritec Solutions, a consulting and software devel-
opment firm specializing in custom revenue management and pricing solutions. He
holds a PhD in operations research from Yale University. Dr Lieberman began his
career in revenue management in 1984 with American Airlines. He has served as
Chairman of the Yield Management Study Group of the Airline Group of the Inter-
national Federation of Operations Research Societies (AGIFORS). Warren is a
recognized authority on non-traditional implementations of revenue management, with
his experience spanning many industries. He is a member of the editorial board of the
Journal of Revenue and Pricing Management.
Patrick Liu is a senior consultant in operations research and revenue/pricing optimi-
zation. He holds a PhD from the University of Toronto. He has successfully completed
systems such as the optimal natural gas trading/pricing/transportation for Williams
Energy, pricing/revenue optimization and demand forecasting systems for major hotels
(including Starwood Hotels & Resorts chains, MGM Grand in Las Vegas, and Swiss-
oˆ tels), optimal pricing/bandwidth trading/product portfolio/traffic routing for telecom
providers, and a production planning/workforce scheduling system for the US postal
service.
Adrian Palmer is Professor of Services Marketing at the University of Gloucestershire
Business School, Cheltenham, UK. After holding marketing management positions
within the travel industry, he joined academia where he has researched buyer–seller
relationships within the services sector. Recent research has been published in the
Editors and Contributors xi
European Journal of Marketing, Journal of Marketing Management, Journal of Strategic
Marketing and Journal of Services Marketing.
Charlotte Rassing is employed as a tourism researcher at the Centre for Regional and
Tourism Research in Bornholm. At the same time she works as a project manager at
IFKA in Copenhagen where she is responsible for the publication Quarterly Economic
Outlook and the preparation of forecasting models.
Ruth Robertson studied tourism management at Napier University, Edinburgh, with a
special interest in the social and political issues of sex tourism in Scotland.
Nicola Secomandi earned a PhD in operations research and statistics in 1998 and an MS
in computer science in 1993, both from the University of Houston, Houston, TX. After
joining PROS Revenue Management in 1998, he spent part of 2001 as a research
associate in the Department of Civil and Environmental Engineering at Cornell Uni-
versity, Ithaca, NY. His research interests include decision support to the energy
industry, dynamic pricing/revenue management, and investment science. He is a
member of The Institute of Operations Research and the Management Sciences.
Julie Swann is an assistant professor in the School of Industrial and Systems Engi-
neering at the Georgia Institute of Technology. She is currently focused on the mod-
elling and analysis of problems and algorithms in logistics, and supply chain
management, with particular interest in pricing and revenue management. Recent
awards include the Council of Logistics Management Doctoral Dissertation Award
(2002) for her thesis in dynamic pricing for manufacturing.
Theodore Valkov is Director of Product Development at PROS Revenue Management,
where he is pursuing his long-time interest in the creation of enterprise software that
uses fact and science-based analysis to help companies improve and automate com-
mercial decision-making. Pricing optimization is one such application that has enjoyed
substantial business interest in the recent year. Theodore holds a ScD in computer
modelling and management of technology from MIT, and served as Business Devel-
opment Advisor for Shell International prior to joining PROS.
Richard H. Zeni is Director of Revenue Management Optimization for US Airways. He
has over twenty years of airline industry experience that includes working in all areas of
airport operations. He holds a PhD in management science from Rutgers University.
His recent work includes research into unconstraining demand and developing best
practices for implementing and operating an O&D revenue management system.
Editors and Contributors xii
Foreword
Companies that are better at fulfilling customer needs make better returns. In the
current state of the world economy and cut-throat competition, the essence for survival
is to create more customer value as perceived by your customers relative to your
competitors. Low inflation and global competition are fierce barriers to price increases.
Many companies have already jumped through hoops to cut costs and productivity. So
now they need to create new products, additional value and other ways to generate
more revenues from their customers.
Apart from world-class product development, pricing and revenue management are
key to success. Pricing is vital in attracting and capturing demand. Pricing is also
fundamental in optimizing your product’s true worth out there in the real market-place,
while revenue management is managing and controlling displacements (do not sell now,
if you can get more later or vice versa). Pricing is more concerned with dilution.
Without having the right segmentation and distribution and terms and conditions in
place, a customer could be willing to pay more but you yourself could unintentionally
be offering the same product at a lower price, basically destroying value.
In the age of internet transparency, sometimes distressed inventories and, for
example, low-cost product offerings, the balancing act of managing customer value,
pricing and revenue management practices should be managed as a whole and not as
independent entities.
This new book delivers a wealth of new cases, best practices and a broad range of
experiences covering many industries and service sectors. It also complements Una and
Ian’s other book Yield Management: Strategies for the Services Industries, as it shows
how revenue management really works in practice. The book is both aimed at practi-
tioners and MBA students mastering the growing profession of pricing and revenue
management worldwide. It covers a wide diversity of case studies and applications.
Within KLM, pricing, revenue management and forecasting are considered core
competencies. We invest heavily in systems as well as in the ‘intellectual human capital’
of our staff, in order to stay ahead of competition. It is strategic to continuously invest
in these areas, and it pays off well.
xiii
I am sure that this state-of-the-art book will contribute further to the effective
application and growing understanding of revenue management and pricing tactics and
strategies.
E.J. Kreiken
KLM Royal Dutch Airlines
Senior Vice President Pricing & Revenue Management
Foreword xiv
Introduction: Using the Book
Revenue Management and Pricing is an extension of our previous book Yield Man-
agement: Strategies for the Service Industries. This first book provided readers with the
necessary underpinning theory, knowledge and application of yield management. This
new, case study book, treats revenue management and pricing as a practical subject that
is more than a management science algorithm. It is certainly an area that deserves wider
reading and dissemination. One of the best ways to learn is to benchmark best practice
through telling a story of ‘how in fact, revenue management is practised’: hence the
purpose of this book. Opening this case book will help the reader gain an insight into
revenue management and pricing. It will allow the practitioner and student to develop a
useful understanding of the complexities of this often misunderstood scientific subject.
More importantly, the book will give you the opportunity to know how Revenue
Managers work, how they face the issues and how they work with problems. The book
is an opportunity for readers to assess, experiment and learn from leading academics,
researchers and practitioners. Essentially, the book will allow you to:
*
Search for best practice examples of revenue management and pricing.
*
Give you a chance to evaluate real situations faced by Revenue Managers.
*
Gain useful insight into Revenue Managers’ thinking.
*
Assess a problem, without the pressures of operational time.
*
Reflect upon suggested solutions from the case studies.
*
Debate, discuss and interpret revenue management scenarios, that could improve
your business performance.
*
Understand revenue management and pricing in a wider context of business.
All the cases in this book are designed to provoke debate and thinking within the realms
of revenue and pricing decisions. The cases have been selected in order that the prac-
titioner can understand a specific application in different industries or evoke issues and
implications. Its purpose is to promote discussion as how the Revenue Managers might
improve the business and contribute to organizational objectives, through a range of
xv
skills and techniques needed to understand and practise revenue management and
pricing. Analysis of the cases allows you the opportunity to apply and test out many of
the ideas and examples of best practice from industry and academia.
The book asks you a number of things: either to understand a situation and its
implications or provide a solution to a specific problem. Reading the case studies is the
equivalent of observing the practices of revenue management and pricing, in order to
understand the context of the situation. You will be able to:
*
Draw upon the facts, whether hard or soft, in order to form a precise account of the
problem situation.
*
Infer facts, in order that a problem can be reconstructed in such a manner that
draws logic to a chaotic or unstructured account.
*
Find out what the purpose of the case study is all about, which will allow you to
conclude possible aims and objectives of the case study.
Many of the cases are subjective, and they include hearsay statements or opinions
which are not factual. But they are a reliable source of information that can shape
debate in order to understand the practices of revenue management and pricing. Also,
the nature of case studies is often based upon assumptions that require an interpreta-
tion and subjectivity when analysing the cases.
The next stage involves analysing the situation in order to determine the elements of
the case studies. It is a process of breaking down the issues and bringing to the surface
assumptions that determine the component parts of the case studies. A good idea is for
the reader to use mind maps in order to map out the most important issues and related
components. This will help you summarize your findings in a graphic format, which
assists thinking and makes it easier. Many students use cause and effect diagrams as a
means to identify root causes and show logical connections in the case studies. This
simple process of identification forms the basis of an analysis of the case studies, in
which solutions or options can be developed.
Having spent time analysing a case study, the reader needs to move forward to
identify possible options in order to take a course of action. Readers will find a range of
questions in each case study, which will have multiple answers. The purpose of the
questions is to shape debate rather than provide a final solution. As revenue manage-
ment and pricing solutions are never a final answer but rather a purposeful answer, the
searching of solutions involves the reader in developing and evaluating options. The
process of evaluation means determining the value or worth of solutions, through using
criteria such as feasibility, acceptance and risk. But once this decision is taken, the
reader then turns to the issues of implementation. Implementation is concerned with
questions of when, speed, cost, times and order that leads to the implementation of
revenue management and pricing decisions.
Therefore, the aim of this book is to provide readers with a practical insight into the
workings of revenue management and pricing which will cross the diversity of industries
and provide meaningful knowledge of application. So enjoy your journey of discovery
and learning.
Ian Yeoman and Una McMahon-Beattie
Introduction xvi
1
Revenue Management Basics in the
Charter Boat Industry
Raul Bermudez, Tamara Dieck and Warren Lieberman
INTRODUCTION
Picture yourself on a 45 foot yacht exploring the tropical islands and warm waters of
the Caribbean as you enjoy a first-class sailing vacation. With a product like that to
offer, what could a boat charter company want with revenue management? The
Moorings is well known for its quality boat charters, enjoying excellent customer
satisfaction and strong product demand, especially from repeat customers. But, having
heard about the revenue management benefits other industries were claiming, its senior
management wondered if revenue management could benefit the company.
Although many travel-related companies, including cruise lines, car rental compa-
nies, hotels, tour operators and even some golf resorts use revenue management, its
principles had not been applied to the boat charter industry. The question in this case is
to consider how The Moorings could make use of revenue management tools and
principles to enjoy even more success. Boat charter companies do have similar issues
with industries that employ revenue management techniques. For example, they have
perishable products, seasonal demand and price competition. But they also have cus-
tomer service and operational needs that are significantly different than do firms in
these other industries. This case focuses on key revenue management principles that
helped The Moorings improve on its success.
AIMS AND OBJECTIVES
At the core of revenue management is the maximization of profits from the sale of
perishable assets by controlling price and inventory. Revenue management in the airline
1
industry has its roots in availability controls of different fares. For the hotel industry,
the greatest benefits often arise from controlling availability by length of stay. And in
the cruise line and car rental industries, revenue management typically involves offering
the right price and promotions. Although the same principles of revenue management
might apply to each of these industries, the applications of revenue management
techniques differ.
In essence, The Moorings has a unique opportunity to define what revenue man-
agement should mean for its industry. The objective of this case is to think about what
techniques and decision support capabilities can be used by The Moorings to better
control its inventory and prices.
BACKGROUND
The Moorings offers both bareboat (i.e., self-skippered) and crewed (professional
captain and cook are provided) yacht vacations on monohulls and catamarans that can
accommodate from two to ten persons. You can sail away to exotic waters in the South
Pacific, Caribbean, Mediterranean, or North America. They have 24 bases to sail from
including Tortola, St Lucia, Grenada, St Martin, Tahiti, Tonga, Palma, Nice, Athens,
Bahamas and Baja.
Boat Types
Each base has from eight to 30 different boat types and from one to 40 boats in a given
boat type. The larger bases have more than 150 boats and smaller bases may have only
a dozen boats. Boats are mainly classified based on overall length and passenger
capacity.
In addition, the fleet is segmented into two lines, generally according to age. Both
lines comprise monohulls and catamarans and include such amenities as linens, towels,
dishes, pots and pans, and housekeeping supplies. The Exclusive Line yachts are brand
new yachts that spend approximately two years in charter before moving into the Club
Line, where they are available from their second through fifth anniversaries. The
Exclusive Line yachts generally produce higher prices than the Club Line yachts.
Vacations
Vacations are typically booked for one or two week durations. For sailors, it is a great
way to experience sailing waters far from home. For those new to sailing, a crewed
charter can be the ultimate luxury, with a captain who will sail you where you want to
go and a cook to delight your taste buds.
Services
The company is well known for its outstanding service and personal attention. Prior to
each charter, the yachts are given a comprehensive review that takes approximately
eight hours. In addition, yachts are subject to a set of scheduled preventative main-
Revenue Management and Pricing 2
tenance procedures. In the unlikely event of mechanical difficulties while on charter,
The Moorings will get to the yacht with the parts necessary to fix the problem.
In addition to the boat charter, The Moorings offers trip cancellation insurance,
hotel and air bookings (often discounted from publicly available fares), provisions and
special services. Provisioning plans for bareboat charters range from a Charter-Starter
Kit with the basic supplies and staples (napkins, garbage bags, coffee, salt and pepper,
etc.) to a Split Provisioning Plan that includes the Starter Kit, breakfasts, lunches,
dinners, and snacks. Other offerings include the rentals of kayaks and windsurfers and
the services of a skipper or cook.
Yacht Ownership and Management
The company offers a yacht ownership and management programme. Most private
yacht owners sail an average of 25 to 30 days a year while having to pay the year-round
costs of maintenance, insurance and dockage. With The Moorings ownership pro-
gramme, however, you own the yacht and earn a charter income stream, while receiving
up to six weeks of sailing time. Owners may also vacation aboard other Moorings
yachts at bases around the world. The Moorings charters and maintains the yacht and
pays all operating expenses. The Moorings can make owning a boat within the financial
reach of more people, while still allowing boat owners to sail.
In order to keep the wear and tear equal across a given type of yacht at a base, the
company seeks to balance the usage of each boat. Boat owners receive an income
stream based on the revenue received by The Moorings for chartering their specific
boat. Because the owners receive an income stream based on the boat’s charters, The
Moorings aims to equalize the revenue produced by each boat.
The Moorings also offers flotillas, regattas and group events. Learn-to-sail and live-
aboard cruising courses prepare sailors with some experience for taking the next step to
bareboat cruises.
Booking Charters
Charters are booked with The Moorings’ charter agents. While these staff members
provide a service similar to that provided by reservation agents at many travel com-
panies, many of these reservations agents are experienced sailors themselves. Conse-
quently, they often provide useful product and regional information to the customers.
The largest percentage of clients book directly with charter agents in response to sailing
and luxury magazine advertisements. Many bookings come from repeat clients. Indirect
bookings are also received from brokers that specialize in yacht charter vacations and
from travel agents who primarily bring the product to the non-sailors of the world.
More and more interest is also being generated over the Internet.
Pricing of boat charters is fairly simple. The year is split into four seasons with
different prices by base, season and yacht type. Sample rates for two bases in the
Caribbean, St Lucia and Grenada, are shown in Table 1.1.
The Charter Boat Industry 3
Rates
The Moorings develops and publishes its rates once a year. This is the industry standard
for pricing. These rates are effective until the next year’s rates are established. The rate
sheets claim that all prices are subject to change without notice. Despite this disclaimer,
changing rates is labour intensive and is rarely done. The effective rate sheets are good
for charters being booked up to five years in the future.
Discounting
Price competition has been fierce among the largest charter vacation providers and has
led to frequent discounting. The Moorings is worried that this hurts their leadership
position in the market. They do not want to be known as the discounting brand, but as
the sailing vacation industry leader that provides first-class sailing vacations. Relative
to other firms that charter yachts, The Moorings is known throughout the industry as
providing a higher level of service.
Available discounts include 10 per cent-off coupons distributed at boat shows,
Holiday Escape special rates for 30 November to 17 December, three days free when
you buy ten days in the Caribbean, and two days free when you buy five in the
Bahamas. Special deals to generate demand are also sent in direct mailings to previous
clients.
There has been a shift recently to put less emphasis on discounts. Where charter
agents used to offer some form of discount to many prospective clients, revenue
management controls now limit the use of discounts. Where before there were pages of
approximately 40 available discounts, there is now one page of approximately ten valid
discounts that the charter agent may utilize.
The difficulty for revenue management is in knowing when and where discounts are
needed to stimulate demand. The Moorings does not have formal demand forecasts. A
typical booking curve is shown in Figure 1.1, but the booking curve does vary by base,
charter month and yacht type.
Table 1.1 Sample charter rates for St Lucia and Grenada (Daily Yacht Rates, US$)
Season A Season B Season C Season D
Dec 18–Jan 3 Jan 4–Jan 29 May 3–July 11 Jul 12–Oct 29
Jan 30–Apr 11 Apr 12–May 2 Oct 30–Dec 17
Exclusive Line – Newest
Model Yachts
Moorings 362 530 430 350 280
Moorings 413 640 530 430 350
Moorings 505 970 800 680 530
Moorings 3800 Catamaran 825 700 600 485
Club Line
Moorings 405 525 435 375 305
Moorings 505/503 880 740 640 495
Moorings 3700 Catamaran 720 590 520 420
Revenue Management and Pricing 4
Demand and Boat Utilization
Demand for the newest yacht or catamaran is always strong. Also, certain bases and
seasons typically enjoy demand that is greater than capacity. For example, the Pre-
sident’s Day holiday in February is a popular travel week for American customers.
However, there are certain base, boat and season combinations where The Moorings
wants to stimulate additional demand.
While profits have been increasing steadily the past few years, boat utilization levels
have been less than the company’s goals. During the past few years, monthly utilization
levels have never been greater than 70 per cent. Figure 1.2 depicts typical monthly
utilization levels in the Caribbean.
As illustrated by Figure 1.2, The Moorings experiences a seasonal drop in utilization
levels from August through October. This has been attributed to the less desirable
weather in the Caribbean during this time period. August through October corresponds
to the middle of hurricane season, with September weather being the most problematic.
Utilization levels greater than 90 per cent are generally not achievable because of the
time needed to clean and turn boats around in-between charters; senior management
has noted that this still leaves a 20 per cent gap for improvement.
The Moorings has noticed dips in utilization at shoulder seasons (i.e., just before the
start of a lower-rate season). Customers seemingly wait for the price break to book their
charters, although charter rates are prorated. So, customers booking a seven-day
charter, that has two days in Season B and the remaining five days in Season C, only
pay the higher Season B rate for those first two days.
Customers are assigned to a specific boat at the time of booking, although this
information is not conveyed to the customer. For example, when a customer calls and
requests a Moorings 413 (a three-cabin, six to eight passenger monohull) for 14–21
March in Tortola the charter agent checks the availability of each boat. An availability
screen provides the information shown in Table 1.2. Each letter represents a different
contract for a boat charter. Boat and date combinations that do not contain a letter are
dates on which that boat is available for charter.
Figure 1.1 Sample charter booking curve
The Charter Boat Industry 5
The screen shows, for each date, the contracts assigned to each boat. For example,
Boat 413–1 has two contracts assigned to it: Contract ‘a’ from the 11th to the 17th and
Contract ‘b’ from the 19th to the 24th. The agent must search the list of boats on the
screen to determine if there is a boat available for the requested dates; if none are
available, the agent should then determine whether the current contracts could be
moved so as to create an available boat. As you might imagine, contracts cannot be
split between boats.
In this example we have nine boats and there is a way to reassign the contracts to
boats so that the request received for chartering a boat from 14–21 March can be
accepted. Whether or not this actually occurs, however, depends on how long it takes to
do so and whether the agent who is handling the call is willing to take the time to do so
(and, can figure out how to do so). When a boat class only has two or three boats the
problem is not too difficult, but for boat classes with nine boats and certainly if there
are 20 or 30 boats, the problem quickly becomes complex. The Moorings is convinced
there must be a better way to manage their inventory, but no one has yet figured out a
practical way to do so.
Figure 1.2 Monthly boat utilization
Table 1.2 Current March bookings for Moorings 413 in Tortola
Boat 11th 12th 13th 14th 15th 16th 17th 18th 19th 20th 21st 22nd 23rd 24th
413–1 a a a a a a a b b b b b b
413–2 c c c c c c c d d d d
413–3 e e e e e e e e f f
413–4 g g g g h h h h h h h
413–5 i i i i i i i i j j j j
413–6 k k l l l l l l l l
413–7 m m m m m m m m
413–8 n n n n n n n n n n n
413–9 o o o o p p p p p p p
Revenue Management and Pricing 6
While the majority of bareboat charters begin and end at the same base, approxi-
mately 5 per cent of these charters end at a different base from where the charter began.
At some bases, this can be as high as 20 per cent. One route that has a high percentage
of these ‘one-way’ charters is in the Caribbean, between St Lucia and Grenada. Due to
wind and current directions, customer demand is heaviest in the route going north to
south. Customers start their sailing trip in St Lucia and end in Grenada. Sailing in this
direction is much easier than sailing in the reverse direction. Consequently, excess
inventory can end up in Grenada. Indeed, because customers are given the option of
returning to the same base or sailing to a different base at the time of booking, all of the
St Lucia fleet would ultimately end up in Grenada if the one-way boats were not
brought back to St Lucia. To alleviate the over-fleeting issue, the company hires
individuals to sail its yachts back to St Lucia. The trip from Grenada to St Lucia
usually takes two days. Although customers are charged a drop-off fee for the rede-
livery, the fee does not cover all the incremental costs incurred by The Moorings to
reposition the yacht.
The Moorings staff has considered increasing the repositioning fee that is paid by
customers. But, they do not believe that customers will be willing to pay the full charge,
so the company has accepted this incremental expense as a ‘cost of doing business’.
The time required to deliver boats back to St Lucia reduces the time that a boat can
be generating revenue for The Moorings. The amount of time spent in shuttling boats
back to St Lucia can be quite significant. For example, if a yacht is rented for fifteen
one-way trips during the year, this results in 30 days in which the boat cannot be rented.
In this case, the maximum possible utilization for a boat would be just under 92 per
cent. Because an additional day has to be spent cleaning and maintaining a boat after
each rental, the maximum time a boat can be rented decreases even more.
In addition, it is a manual process to track the boat movements from base to base.
Each boat has a home base in the system, and only one home base. If a boat has its
home base in St Lucia, but has just arrived in Grenada at the end of a one-way charter,
the reservation system still shows the boat to be at its home base. The agents do not see
where a boat is physically located; they only see the home base. When the boat is being
redelivered back to St Lucia, the redelivery time looks like charter utilization because
the system does not allow for the tracking of delivery time. The delivery days are added
to the customer contract and discounted out. Not only does this procedure confuse the
customer, it overstates utilization and discount percentages. This manual procedure of
accounting for delivery days makes it difficult for agents to select and assign a St Lucia
home base boat to a customer who wants to reserve a boat in Grenada for a Grenada to
St Lucia one-way.
The pricing and inventory management for one-way transactions between the islands
of St Lucia and Grenada can be summarized as follows:
*
The same price is charged for a one-way charter from either base (as shown earlier
in Table 1.1).
*
An additional drop-off fee is charged to redeliver the boat to its starting base.
*
One-way transaction flow is approximately 90 per cent from St Lucia to Grenada.
*
Yachts are automatically redelivered back to their starting base.
*
Reservation agents manually assign specific yachts to reservations.
The company is considering making some changes to improve the profitability and boat
utilization for St Lucia and Grenada charters.
The Moorings is already moving forward on its revenue management path. Some
The Charter Boat Industry 7
progress has been made, as evidenced by the reduced number of discounts that charter
agents can offer. As part of its efforts, The Moorings has engaged a revenue man-
agement firm to provide a strategic plan to enhance revenue management capabilities.
DISCUSSION QUESTIONS
1. How could The Moorings provide a more flexible charter to boat assignment
(rather than assigning charters to boats as requests come in)? Try to find the best
matching of charter contracts to boats for a given base and boat type. The best
matching comes closest to equalizing revenue across boats.
2. Develop a pricing strategy to improve the utilization of boats in St Lucia and
Grenada.
3. What recommendations would you give The Moorings to improve its pricing?
Revenue Management and Pricing 8

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