Revenue management

This chapter introduces the core principles of revenue management (RM), a strategic approach to maximizing revenue through the optimal allocation of limited and perishable capacity across various customer segments. It outlines the conditions under which RM is applicable, such as fixed capacity, low marginal cost, market segmentation, and the ability to sell in advance. The historical development of RM is reviewed, beginning with foundational ideas that led to modern capacity-control practices. The chapter focuses on quantity-based RM, where the central decision involves determining how much capacity to protect for higher-paying customer segments. Key concepts such as booking limits, protection levels, and fare-class nesting are explained, including their role in minimizing spoilage and dilution. Mathematical models, including the two-class model and its extension to multiple fare classes, are introduced to the reader. Practical implementation is demonstrated through Excel-based tools that allow decision-makers to calculate optimal protection levels and booking limits using real-world data. The chapter concludes by exploring how demand uncertainty and fare ratios affect the results, offering both conceptual understanding and actionable methods for applying RM in a range of industries.