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Worldwide, deregulation and technological innovation have brought dramatic changes
to the way the service industry is operated and managed. The cost of service is dictated
by customer choice, market competition, and transparency of information. This
new environment brings with it numerous business challenges—a demand for more flexible
services and products, a need for more dynamic and proactive pricing, an increased number
and complexity of transactions, and higher levels of risk and volatility that impede
optimal revenue opportunities for many service providers.
Enhancing revenue involves two broad activities: (1) cost decisions within a firm;
and (2) revenue management through strategic pricing decisions. Cost decisions represent
risk that is unique to the firm. For example, what impact will technology upgrades and
new accounting practices, such as activity-based costing and replacement analysis, have on
the profit margin of services provided? To date, much research exists on the cost decisions at
the firm level, including literature on activity-based costing, technology-driven database
systems, and replacement analysis. On the other hand, revenue management is driven by market
risk and dependent on competition, supply and demand of the market, and the overall
economic state of a country or region. Revenue management approaches have surfaced in several
service industries.
Revenue management is a scientific method of managing the revenue-generating
processes of a company to deliver the right product to the right customer, at the right time, and at
the right price. First embraced by the deregulated US airline industry in the late 1970s,
revenue optimization today is also practiced in the cargo, hospitality, broadcasting, railroad, and
most recently the healthcare and telecom service industries. Furthermore, most of these
industries provide services by accepting reservations (or commitments) overtime (such as tickets in
the case of airlines, and airtime in the case of cellular phone). The presence of a
networked environment and a reservation process poses the following problem: Given the
limited resources and capacity constraints, when should service products be sold and what
strategy would support the greatest revenue opportunities? Finding an optimal solution to this
generic problem is extremely difficult, because it requires the decision maker to quantitatively
account for future uncertainty and displacement effects. Thus, service industries are confronted
with committing resources and products without knowing the demand and revenue
opportunities available in the future. |
