revenue management system design & implementation project

Georgia Tech Faculty advisor: Dr. Mark FergusonTeam Members:

Narasimhadevara PrabhakarAyanambakkam Nambi Andiran

Bharathram SrinivasanGovindan Praveesh

Industry overviewIndustry overview

Decent growth - Despite the economy

•12.1 million cosmetic procedures

•10 Billion Dollar industry

• 3% increase over 2008

The PotentialThe Potential

How do we build micro-markets?How do we build micro-markets?

Customer Characteristics◦ Size (volume or revenue)? How much demand?◦ Historical market relationships◦ Customer needs (type and mix of products demanded)

Competitor Information◦ Competitor’s price offers◦ Image or “brand equity”◦ Products offered◦ Other services

How is the Demand classified?How is the Demand classified?

Surgical Services

Minimally invasive Surgical services

Spa services

Types of servicesTypes of services

Segment based strategiesSegment based strategies

Customized Pricing model

Capacity based Revenue Management

How is the Demand Captured?How is the Demand Captured?

Free consultation – Quotation of costs - Demand class characterization Win-loss data – For every bid and every segment

Customized Pricing in Competitive SettingsCustomized Pricing in Competitive SettingsThe General ModelThe General Model

Objective: Maximize Expected Profits

( ) )pMaximize p p p

Deal Contribution Function: ) ( )pp Q p c

Bid-Response Function: p

Segmentation Variables:Segmentation Variables:

•Gender of the individual

•The Age group

• Returning customers

•Marital status

• Profession – e.g model, homemaker etc

•Location.

Market SegmentationMarket Segmentation

•Gender – Female patients – 91% of procedures

•Lead Source of Information-Internet, Paper promotion, Referrals. 35% of all patients were referred to the clinic by a former customer.

•The Age group

Age group distribution

Distribution for Lead source

Market Segmentation:Market Segmentation:

•Surgery Fees – compared to state average

•Whether a Return patient? 10 % of all patients are returning patients

•Marital status

•Home maker or career oriented: Affects availability for surgery, thus affects willingness to pay. The 45% of employees are women, and this affects about nearly 60% of women are potential customers.

Distribution ofMarital Status

Fig 3

The Logit Model Price-Response CurveThe Logit Model Price-Response Curve

Probability of winning a bid for a given price p

1( )

a bp c xi ii

a bp c xi ii

ee

p

Price coefficient

intercept Segmentation variables

Finding the optimal priceFinding the optimal price

Generally, we will be looking to maximize the expected profit from every bid:

Expected Profit

Prob weWin the customer over

Unit Margin

Profit(p)= (p)*(p-c)

Most popular procedures: Most popular procedures:

•Surgical cosmetic procedures•Breast Augmentation•Nose-Reshaping(Rhinoplasty)•Liposuction•Eyelid Surgery•Tummy Tuck

•Minimally invasive cosmetic procedures•Botox®

•Hyaluronic acid•Chemical peel •Laser hair removal•Microdermabrasion

High RevenueItem

Rhinoplasty(Nose Reshaping)Rhinoplasty(Nose Reshaping)•Average Fees charged by a surgeon: $4197

•Total Potential Demand available: 220 surgeries on an average/year in Atlanta

•Capacity : 90/year (client estimation)

•The Price optimization Result: 29% increase in revenues

Spa related activitiesSpa related activities&&

Minimally Invasive Cosmetic proceduresMinimally Invasive Cosmetic procedures•Represents 40% of the Total cosmetic procedures opportunity

•Ideal for Capacity based Revenue Management:

•The Spa/Minimally Invasive procedures are similar to treatments at a Barber shop or A beauty Salon.

•There is a fixed capacity on how many customers can be served-40-1 hr slots per week.

•Strategy: Pricing the capacity based on the availability of capacity on Weekdays and Week-ends.

•Customers insensitive to 10% price rise on weekends (Empirical data)

Major customer Segments:◦Customers Specific to Spa/MIC procedures:

Weekend Customers Weekday Customers Practice remains closed on Thursday, Sunday.

◦Returning Customers for whom the minimally Invasive procedures are post-surgery treatments

Spa related activitiesSpa related activities&&

Minimally Invasive Cosmetic proceduresMinimally Invasive Cosmetic procedures

Major customer Segments:◦Customers Specific to Spa/MIC procedures:

Weekend Customers: Weekday Customers:

Week-end customers Week-day customers

The age distribution shift: Suggests older customers have flexibility to move into week-days

Spa related activitiesSpa related activities&&

Minimally Invasive Cosmetic proceduresMinimally Invasive Cosmetic procedures

Results / suggestions:Results / suggestions:Increase price of Weekend services:Dermabrasion:

◦Old Flat rate:$210◦New Price: $240◦New Week day price: $200◦Results:

Total number of slots: 40, 32 week day, 8 weekend.

Total increase in Revenue:15% over the actual flat rate applied to same demand.

Future scopeFuture scope

Designing Packages for Surgeries and Post-op minimally invasive treatments.

Apply Customized pricing to Minimally invasive surgeries that are currently difficult to handle with Capacity based Revenue Management.

Analyze Spa customers for targeted promotions.

ConclusionConclusion

Identified new market for RM

Analyzed market players and segments

Applied Customized pricing

Developed ideas for other industry facets

ReferencesReferences NATIONAL CLEARINGHOUSE of Plastic Surgery Statistics-

American Society of Plastic surgeons Price Optimization Using R- Tudor Bodea, IHG, Dev Koushik,

IHG, Mark Ferguson, Georgia Tech In-Store Experiments to Determine the Impact of Price on

Sales- Vishal Gaur, Marshall L. Fisher Customized Pricing- Mark Ferguson, Georgia Tech Bid Price Response Models- Mark Ferguson, Georgia Tech