A series about dynamic pricing
Capacity Inventory is a phrase we came up with internally at TheDropp to better understand businesses whose revenue is tied to “butts in seats.” You see, when we first started chatting with local small businesses, we learned that there was very little they can do to fill excess capacity within 2-3 days of expiration. Capacity inventory is an expiring inventory in the sense that once the day has passed, boat has sailed, or event has ended, all vacant seats are lost revenue. As a result, capacity-driven businesses are challenged to find that “sweet spot” for pricing; one that is both competitive (to fill those seats) and sustainable.
It’s not uncommon to offer seasonal pricing, or pricing that fluctuates based on time of day. But, it’s far less common for smaller establishments to take advantage of true dynamic pricing, oftentimes called “yield management” or “revenue optimization.” This can be a complicated exercise. When your inventory is not a tangible product —something that can just as easily be sold tomorrow — you have a few more things to consider when planning out your pricing structure.
And let’s face it … that type of math is complicated, and trying to wrap your head around it with regard to your businesses specificity is not the best use of your time. The heavy lifting needs to be done for you.
In this series of articles, we will walk you through this world of capacity inventory and revenue optimization, with a focus on the small business. We’ll illustrate examples from businesses that are affected most by this type of business model, namely tour operators and activity providers, boutique hotels and local restaurants.
But before we get too far ahead of ourselves, let’s define some of the key points that will be discussed more thoroughly in future posts.
Capacity average is the average number of paying customers over a specified time period. The calculation is the percentage of purchased seats/tickets (units) with regard to available seats/tickets (units). For instance, if you run a business that can operate 10 tours per day, with 10 participants per tour, your full capacity for a single day is 100. But it’s more common to run at some smaller percentage of full capacity. You determine the capacity by dividing the number of actual participants by the total number of possible participants. Using the same example, if 60 total participants moved through your tour in a single day, you ran at a 60 percent capacity.
Of course, that’s just one day and alone that information is not very interesting. It becomes much more useful when we can compare that single day’s capacity to historical data:
- Compared to the same day last year
- Compared to the same day of week this season
- Compared to the overall daily capacity this year
- Compared to the overall historical daily capacity
You know your business best, so you’ll be the most qualified to determine what data makes most sense to compare.
This is an important metric to help determine your baseline pricing, and although it seems pretty straight forward, it can get complicated pretty quickly.
Revenue per available seat _____
In an effort to understand the value of airline operation efficiency, the industry created a unit of measurement called Revenue Per Available Seat Mile. You reach the RPASM by dividing operating income by another unit of measurement called Available Seat Miles. ASM is the total number of commercial seats available on the aircraft multiplied by the distance of the trip (in miles).
If this sounds a bit confusing, don’t worry too much about it right now; this will be the focus of a future article in this series. Here’s the important take away: This calculation provides a data set which allows you to understand how much revenue you earn for every seat (whether occupied or not) for a given flight and we can adapt the formula slightly for a number of businesses that profit from “butts in seats.”
- Restaurants (rePASH): Revenue per available seat hour
- Lodging (rePAR): Revenue per available room night
- Tour Operators (rePAST): Revenue per available seat trip
- Rentals (rePARD): Revenue per available rental day
If you understand revenue per available seat, you can create a data-driven baseline for your pricing, which will give a much better understanding of your wiggle room through the peaks and valley’s of seasonality. Let’s face it, wiggle room should have some data behind it, not just the pressure from your competition.
Yield Management & Revenue Optimization
As defined by Wikipedia, Yield Management is a variable pricing strategy based on understanding, anticipating, and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource. In laymen’s terms: a perpetual change in pricing, that is mutually beneficial to both the proprietor selling a service and the customer seeking a service. The price is often persuaded by supply and demand, weather and seasonality.
Whether you know it or not, you are very likely already using a basic form of yield management. But how do you determine the price adjustments? Do you follow a particular formula based on historical data (capacity average and/or revenue per available seat)? Do you follow trends set forth by your competition? Do you just throw out numbers until potential customers bite?
In this article we’ll discuss how to create a more data-driven approach to your pricing.
The travel lifecycle and the rise of in-destination bookings
The traditional travel lifecycle is broken down into four steps:
- Booking for other travel services
Understanding this lifecycle can help determine your marketing initiatives and sales pipeline, as well as offer up a bit of predictability for your seasonal revenue. And predictability is a great thing to have.
But these days more and more people are waiting until the last minute to book reservations. In this article, we’ll take a closer look at the travel life cycle, and create a plan that adapts to the rise of in-destination decision making. We’ll consider new opportunities (like TheDropp) that offer a new and unique way to get in front of customers, and we’ll discuss how mobile devices have given travelers the ability to experience a location like the locals.
This is just the beginning
So there you have it. Over the next several weeks we’ll dive deep into these topics, and by the end, it’s my hope that you’ll have the tools necessary to create a rock solid dynamic pricing structure for your capacity-driven business. In the meantime, if you have any questions (or some practical advice), please do not hesitate to reach out to me directly.
Until next time.