revman DMC

Revenue Management For DMCs? Yes, Please

During a recent trade show, I conducted a simple poll targeting a fairly large sample of DMCs I know firsthand or indirectly, asking more or less the same questions:

  • Would you be able to tell me your most profitable product or service right now?
  • How do you segment your customers?
  • Do you think they would change provider if your rates were dynamic from today?
  • Are you able to forecast your sales on certain dates with enough accuracy as to buy allotments from hotels at a very convenient rate, many months in advance?

This population of incoming operators is definitely successful, among the leaders in their destinations after decades of proven service, about half of them owning a fleet of vehicles, small to mid-sized companies. Only a couple of the subjects interviewed were under forty; based on the replies they’ve given, I can roughly classify them in three bunches:

Savvy unflinching: mostly owners, used to check periodic reports (something they would confuse with “data analysis”), no need for CRM as they know their clients (and their relatives) from the days when PanAm was a top brand. Dynamic pricing? Nonsense: that’s something hotels do, they’d say. Allotments acquired in advance? The nineties ended long ago, they’d say.

Vanguardist show-offs: in all cases, individuals not in charge of operations or direction (99% in sales, actually). Sure enough, they analyze data in real time, perform revenue management everywhere and obviously apply dynamic pricing… even twice a year! Clearly, if I asked them if their chatbots are multiracial, they would have replied positively as well.

–  Adamant golden agers: the archetypal “this has been working ok forever, no need to change anything” attitude.

True, labeling people is not nice, but… do you recognize yourself in any of the above kinds? You shouldn’t, since the title of this text attracted your attention. I bet that innovation is not just a fancy word for you: how about considering the idea that you could run your incoming business taking data-driven decisions and improving your bottom line with yield techniques?

You have much in common with hotels and airlines

About 4 years ago I’ve written this article >> (reworked in early 2016, needs updating) in which I exposed this very idea. By standard definition, the following are the necessary conditions to implement revenue management techniques to any product or service:

  • Fixed capacity (available seats in buses and vans, boats, etc.)
  • Perishable supply (tickets or seats not sold today are lost forever)
  • High fixed costs and low variable costs (should sound familiar to you!)
  • Market can be segmented (it certainly can)
  • Pricing strategy can be adopted (It sure can! By segment, season, day of the week, etc.)
  • Ability to forecast demand (with enough historical data, very easy to achieve)

Did you notice? That’s exactly your case, either if you sell just tours and transfers or the whole range of destination services. The idea is to adopt a variable pricing strategy closely related to segmentation (understand and anticipate your customers buying patterns), not just by season but by demand trends, in order to maximize income and reduce costs. Here’s an example: if today you check a flight rate for a departure date 30 days in the future, most probably that rate –for the same departure date- will be higher when you check again in two days’ time. You’re used to that, right? Consumers and wholesalers are used to price variances as well, in every possible scenario and verticals… so why on earth are you still selling your island tour at the same price to everybody, all year round?

The Barber Shop’s Tale

I am going to provide a simple illustration of the benefits of yield (or revenue) management, by telling you the true story that gave birth to this yield concept… A concept which changed forever the airline, accommodation and travel industries in general.

A good barber was losing clients because most of them would show up on Saturdays afternoon, so long waiting times were driving business away. To avoid such situation, it was suggested to the barber that instead of charging the same amount to everybody every day, a higher price should be paid on Saturdays afternoon, while a lower price should be assigned to less busy days, like Wednesdays. The result? Pensioners and students flocked to the lower priced days, while businessmen (willing to pay more) kept their Saturday schedule. All customers were happy: discount for the price-sensitive segment, no more waiting for the highest profitable segment, which didn’t mind to pay a bit more for the convenience.

Yes, I realize you don’t sell just a single thing and it would be a daunting task to execute something like that for all your tours, transfers… even for hotel contracts. In fact, you shouldn’t do it by paper and pencil, not even through spreadsheets, as there are certain reservation and/or management systems in the market that provide automation for this. Nevertheless, we can have an experimental go at it with a simple case.

Let’s assume your boss is one of the adamant golden agers: you managed to convince her to try some price flickering, but your company does not rely on modern age IT. Now, obviously your most profitable items are your own, thus you can easily decide at how much you can sell them. Select two or three of your top items -say tours, for instance: your diligently recorded sales reports will tell you that during the high-season months you’re usually sold-out, while during the shoulder months you have about 50% occupancy, and less than 20% on low season. Next, think about your clients: those coming on high season are the big spenders, while the low-seasoners are definitely on a tight budget, you’d reckon. Why don’t you apply the simple Wednesday/Saturday rule, then? Something along the lines of 20% higher than base price on the busy period, 10 to 15% lower on quiet months. People coming in high season willing to do your tour would not mind a reasonable increase; savers that wouldn’t do the tour without a discount, might reconsider. As a result, you’ll have higher income during high season (with no further investment), as well as on low season for an increased volume.
Go on, do the math and tell me this doesn’t make sense!

Of course, this is a very simplistic occurrence. In real life, dynamic pricing should take into account several factors, not only rough seasonality and a broad type of customer. As it is, a complex model integrating all relevant data will provide greater accuracy, so you’d be able to adjust prices confidently (even automatically) for everything you sell, including the hotels which do exactly the same processing with your contracted rates. And no, your wholesaler clients won’t change provider just for applying dynamic pricing! If they’re smart, they should be doing the same. Airlines do it, hotels do it, rent-a-cars do it, parking lots, golf clubs, event organizers and restaurants are doing it. Even your own wholesaler clients are doing it. What are you waiting for?

Basic recipe

I realize all this sounds at first difficult to execute (even to understand) for people used to work for ages in the same old way. In fact, it is a difficult process to adopt! But in today’s hiper-competitive environment, there is no escape: either your DMC adapts or it will slowly fade away, buried by smarter rivals. It’s a question of survival to implement revenue management strategies, and I would hate to see your competitors outsmart you, so here’s the basic recipe for revenue management:

  1.  If you didn’t so far, start collecting ALL your client’s and booking data. If possible, recompile older data (bookings and sales from past years). Put it together in spreadsheets, if you’re not familiar with databases.
  2.  Conduct proper segmentation, finding out which segments are more profitable, which offer volume, demographics, types, etc. The idea is to find patterns, not to over-classify!
  3.  Try mixing the above data collection, to discern which segments are more willing to buy what, when.
  4.  This is very important, as much as the previous points: you need to study what’s being QUOTED as well, not necessarily booked. Check which destinations, hotels, tours, etc. are requested the most by each segment.
  5.  Putting together all of the above, you should be able to see repetitive patterns: those are the ideal spots to apply dynamic pricing. Mark up or down, depending on demand perceived or expected.
  6.  Adding to the mix your own website and social media data, as well as government stats, trade publications, etc., you’ll get the best outcome possible: accurate demand forecasts. But this is not something you can do with pencil&paper system!

Yes, it’s a lot of hard work, and results will not be immediate… but will be permanent, allowing to get higher income as well as optimize resources. Think about it: having revenue management in place will assist in determining better special offers, hence marketing expenditure will be right on target: the right offer, to the right segment, at the right time. Simultaneously, it can support operations and planning: knowing in advance your possible volume of sales and traffic, your dispatch office will be able to efficiently assign vehicles and staff, book tour guides… and you’ll be able to buy hotel rooms in advance, as if it was the nineties again.

Hey, I did my best to put all this as simple as possible: if you’re still scratching your head but grasped the idea, drop me a line or get in touch. I’ll be glad to help you towards your first pricing strategy! Bear in mind that there’s a simply to use tool that automates all that: REVVA!

Marcello Bresin