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Revenue Management Appendix 10A. Revenue Management is the problem of the disappearing inventory. Managers must be flexible to change their predicted sales by market segment as information arrives.

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revenue management appendix 10a
Revenue ManagementAppendix 10A
  • Revenue Management is the problem of the disappearing inventory.
  • Managers must be flexible to change their predicted sales by market segment as information arrives.
  • Airlines price discriminates between business and non-business travelers. If too few business travelers have booked tickets compared to the amount expected, then more non-business tickets should be released.

2005 South-Western Publishing


Should we Overbook?

  • Managers may authorize reservation clerks to sell more seats ( or more rooms) than are available.
  • The greater the overbooking, the lower are the costs of spoilage.
  • Spoilageis an inventory NOT sold. If capacity is large, an airline or hotel will have high spoilage.
  • The greater the overbooking, the greater are the costs of spillage, making customers unhappy by finding that they have no seat or reservation.
spillage spoilage with random demand
Spillage & Spoilage With Random Demand
  • Figure 14A.1 on page 639
  • Demand shifts between low and high
  • At each price, there is a chance for unsold capacity known as spoilageif QLow occurs.
  • Or disappointed customers who can’t be satisfied known as spillage if QHigh occurs.

Customer demand

distributions at each





High Demand

Mean Demand

Spoilage Spillage


  • Spillage is the excess demand that cannot be met.
  • If the service industry has low capacity, the spillage will be great
  • Customers leave the hotel or airline unable to get a room or an airplane seat.
  • How do airlines handle times when they have overbooked a flight and everyone shows up?
    • Does it make sense that they ask for volunteers to wait for a later plane?
    • Does it make sense for them to give free tickets to those who are bumped?
cross functional revenue management
Cross-Functional Revenue Management

Capacity Planning

  • The optimal plan will require pricing, marketing, demand forecasting, and capital budgeting – all cross-functional thinking
  • The issue at the center is which orders to accept and refuse?
  • A larger capacity reduces spillage, but increases spoilage
  • A lower price reduces spoilage but increases spillage






& Refusal




Demand estimation

& forecasting

Figure 14A.2 page 641

optimal overbooking
Optimal Overbooking

Figure 14.7


  • Spillage and spoilage costsgo in opposite directions, the sum of these costs has a minimum with the optimal amount of overbooking.
  • Since business travelers tend to a large extent to be repeat customers, the cost of spillage (oversells) may be very high.
  • The optimal amount of overbooking for this market segment may well be lower than for non-business clients.





100% 110% 120% ...

Percent Overbooked