Revolving [Door] RM: Shifting from Inventory to Service Centricity

Ricardo Pilon is an experienced aviation expert building the bridge between strategic business management, organization design, and the application of deep technology and applied psychology.

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RM's evolution from (digital) inventory and pricing to service-centric customer commercial optimization - in a new organization - is imminent.

In mental health, a revolving door can be a syndrome. This revolving door syndrome refers to patients’ tendency to get better but always end up relapsing.

It usually involves severe disorders (schizophrenia) but can also apply to disorders that underpin complex Attention Deficit & Hyperactivity Disorder (ADHD), such as Obsessive Compulsive Disorder (OCD), General Anxiety Disorder (GAD), or Learning Disorder (LD).

(Image: TMX, Australia)

I often found that Revenue Management (RM) has this revolving door syndrome. Because it cannot seem to free itself from the mindset that it manages revenue, but that the name RM refers to a department that doesn’t. ‘Revenue Management’, if it existed, would be an organization that optimizes all sales and margins of all revenue streams and deal with end customers.

It would be at a different level (with higher-quality revenues) elevated beyond inventory, sales and cash registers.

But there is more.

It is ironic that in the late 1910s, airlines started off as retailers, and that today they struggle to become retailers once again.

What happened?

Other priorities are what happened.

Airlines wanted to take advantage of economies of scale and economies of density. They needed to distribute further, wider, and deeper into foreign markets. That was necessary and enabled because of industry deregulation that started in the ‘70s coupled with higher capacity aircraft (e.g., B747).

"Airline organizations are still linear, with functions that are ‘assembly-line’ driven, while customer demand servicing is anything but."

Airlines obtained more freedom to fly into, over, and through other countries to build high-penetration networks, which is the foundation of the hub-and-spoke system (refer to article).

And so, computer reservation systems (CRS) and global distribution systems (GDS) sprang to life, as they benefited from an industry-standardized messaging format.

This helped the creation of economies of market dominance (which we mostly feel when we fly non-stop between two regional or overseas cities, but we have more non-stop long-haul & connecting flights as a result of it, too).

But airline organizations have not fundamentally evolved while technology and customers did. The internet, IoT and Customer in all Channels (CiC) specifically.

What I mean is that airline organizations are still linear, with functions that are ‘assembly-line’ driven, while customer demand servicing is anything but. 

None of the functions were originally designed around customers ‘pulling’ a service. It was about pushing out responses to booking requests, related to transportation. All the way to check-in and boarding.

This was engineered around safety. And it has worked. That was before the internet and IoT, and frankly, before customers that control information themselves and demand nothing less, in real-time.

However, the same applies to silos and thus to pricing and revenue management.

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‘Inventory’

RM was always about inventory. RM was traditionally also about wholesale.

Before the CRS, the GDS and Passenger Services Systems (PSS), all of which started in the late 1960s to early 2000s, airlines were more like retailers. They also had ‘stores’, although it was more about selling and issuing tickets.

That notion of stores is something I have been adamant about returning but in a modern context and with blended reality (i.e. digital) experiences to retail more with a broad and deep array of services. Perfect for wine tours, museum exhibitions, jungle adventures, ecotours, etc. 

Now hold that thought, other than that airlines need to deal with customers about real things, not selling things.

Revenue managers are gatekeepers and indirectly control pricing levels. Pricing does the differential part (establish service & price points between observed segments).

It’s a derivative and indirect mechanism because:

• RM does not sell, but they can block what is available for sale.
• RM does not deal with end customers, but they sure can upset customers.
• RM does not care about passenger emotions, but the lack of communication about pricing and availability undermines customer understanding, trust, and satisfaction.

All of the rules in RM were designed by people that did not sell to customers. And it’s made to be too mechanical. And now they are supposed to enable retailing?

For instance, you may find a fare, book it, and realize you don’t want to leave on a Saturday but a Sunday. But your ‘ticket’ (access to a seat) is not available on Sunday because it is a different ‘product’, and there’s not only a change fee but a different fare type applies because there is no Saturday night stay.

It is imposed segmentation, but often wrong anyway because businesspeople also move dates due to the fares that appear.

Or it becomes very tedious to find an available fare and you have to juggle different departure and arrival times because fare rules and minimum stays still apply in international markets.

There is no customer logic. Ultimately, that undermines your business model and opens the door for novel competition.

Sometimes, the airline itself cannot drop prices in a fare class because of a minimum advance purchase of 30 or 90 days apply which is more days than to the date of departure.

The customer just wants to book the promotional fare without hassle.

The most frustrating is when you purchase a full-fare business class seat and the airline changes equipment, and you get downgraded. Or there is a fare difference between one wide-body to another wide-body aircraft (e.g. B777 or A350), which the customer cannot control.

Even if there is a difference, who is going to communicate and explain it?

So, RM is ‘inhumane’, and despite refined tweaks (including the branded fares or including ancillary products in the predictive and prescriptive forecasts), RM is not helping itself.

The revolving door.

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Stop Stacking

The main problem is that the stackable approach is a technical solution to a conventional (upselling and cross-selling) and mathematical problem.

So, you sell a seat, you add insurance, you add seat selection, a hotel room, and you buy merchandise. If you want, you can buy some (flight) flexibility in another ‘bundle'. But as for the rest, it’s a laborious exercise.

"The real problem to solve is not how we can include more elements or introduce more dimensions to better control what we sell to whom, but how we service customers based on how they communicate they want to be serviced."

The mathematical problem entails selling products that have limited inventory (seats, rooms) vs. services that can be sold à l’infini and trying to figure out which customer segments exist based on historical data and current shopping behavior. But they’re all approximations of an artificial exercise.

That’s because we don’t dare include the customer in the real-time design and servicing of it all.

The real problem to solve is not how we can include more elements or introduce more dimensions to better control what we sell to whom, but how we service customers based on how they communicate they want to be serviced.

I call this turning the commercial functions into a service-centric customer organization that is supported by customer-centric offers and orders.

The chart below highlights how I see it evolving.

(Source: Ricardo V. Pilon, with thanks to Kambr, an Amadeus Company’s graphical help)

Optimizing a Business Model, not a Functional Model

When we move toward 2030, revenue management may still be a term, but commercial optimization is more about optimizing a business model with a wider scope. What RM does today should no longer be a reference for what optimizing revenues entails?

It’s not conventional RM (inventory & pricing) anymore, it’s immersed into a Customer Organization that manages customer service and satisfaction using all the conventional array of products and services harmoniously.

To give one example, it’s driven by and includes loyalty management.

So, what is this System in that Organization?

A customer revenue management system is an overall System with a big “S” in a new organization. It includes elements of some conventional functions, but coherently.

It is executing a service-centric business model around individual customers.

There are two airlines today where I see it could be implemented. This is the description I give it:

[Note: No coincidence that I use Harvard’s 9 bricks of a business model]

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Forward

In order to get there, we must:

• Make improvements today that are goal-centric and not misaligned with that vision (above).
• Start organizing the silos toward enterprise workflows where common problems must be solved (e.g. loyalty, pricing, RM, retailing, ancillary).
• Encourage vendors to create bespoke solutions with a holistic enterprise service-driven architecture, not only ‘local’ services.

Revolving

Airlines and pricing and revenue management must jump out of the revolving door to have a bigger perspective.

They must be pulled out of their current screens and processes by organizations in charge of customer satisfaction and customer engagement. The workflow would be goal-centric and thus commercially optimized service-centric.

The service-centric customer [commercial optimization] organization has all these elements; therefore, organization redesign is of the utmost importance to execute and succeed in retailing.