Revenue Management System

The economic measure of how sensitive customer demand is to a change in price. In a Revenue Management System, this is not a static coefficient but a dynamic, real-time calculation.

• Elastic Demand: A small price drop causes a large increase in bookings (common in leisure travel).
• Inelastic Demand: Price changes have little effect on volume (common in last-minute business travel).
• Cross-Elasticity: Measures how the price of a substitute product (e.g., a different flight time) affects demand for the primary product.

The strategic practice of dividing heterogeneous customers into distinct groups with different willingness-to-pay. Fences are the rules that prevent high-value customers from accessing lower-priced segments.

• Physical Fences: Product attributes like advance purchase requirements or Saturday-night stay rules.
• Non-Physical Fences: Transactional characteristics like corporate discount codes or loyalty status.
• Opaque Channels: Services like Priceline where the brand is hidden until purchase, allowing price discrimination without diluting the public tariff.

A network optimization method where a threshold price is calculated for each unit of constrained capacity. The system accepts a booking request only if the offered price exceeds this marginal opportunity cost.

• Additive Bid Prices: Assumes the total value of a multi-leg itinerary is the sum of individual leg bid prices.
• Dynamic Programming: Used to compute bid prices recursively by evaluating the expected future value of remaining inventory.
• Network Effect: A seat on a connecting flight is valued based on its contribution to all possible origin-destination markets, not just a single leg.

A probabilistic algorithm that intentionally sells more inventory than physical capacity to compensate for predicted no-shows and cancellations. The objective is to minimize the combined cost of spoilage (empty seats) and denied boarding.

• Binomial Distribution: Models the probability of a specific number of passengers showing up given a historical show-rate.
• Cost Ratio: The optimal overbooking level is found where the cost of an empty unit equals the expected cost of denying a customer.
• Involuntary vs. Voluntary: The system calculates the incentive required to solicit volunteers before resorting to involuntary denied boarding.

Two distinct levers within a Revenue Management System that are often confused. Understanding the difference is critical for system architecture.

• Dynamic Availability: The classic airline model. Fixed price points exist (booking classes), and the system opens or closes availability to each class based on demand forecasts. The price doesn't change, only access to it.
• Dynamic Pricing: The price itself is continuously adjusted as a continuous variable. Common in hotels and retail, this requires a price-response function to estimate demand at any possible price point.
• Hybrid Systems: Modern systems often combine both, adjusting the price bands and the availability within those bands simultaneously.

The statistical engine that predicts the maximum price a specific customer segment will accept before abandoning the purchase. This is the foundational input for all price optimization.

• Van Westendorp Price Sensitivity Meter: A direct survey method asking consumers at what price a product is too expensive or too cheap.
• Gabor-Granger Technique: Surveys that present a series of prices and ask for purchase intent at each level to build a demand curve.
• Conjoint Analysis: A discrete choice model that decomposes a product into attributes (price, brand, features) to measure the implicit utility and price sensitivity of each attribute.