December 7, 2022

Linear Programming Revenue Management

Linear Programming Revenue Management

The section will discuss linear programming revenue management. How to do it? And what are the following advantages of implementing it.

What Is Linear Programming Revenue Management?

Linear Programming is a mathematical model of a problem. These models are developed to find the optimal solutions for the problems. It is usually complex and subjective. Linear programming is used to solve problems in operations research and management science.

Linear programming revenue management is the process of maximizing revenue from a multi-product portfolio. The revenue management technique is used by many businesses. Including the following:

  • Airlines,
  • Hotels,
  • hospitals and other service industry

The revenue management technique helps in maximizing the profits by finding. The best price for every product at every time.

For example:

You want to sell cakes, ice-creams, and chocolates in your shop.

 The pricing of each item depends on various factors like its cost, demand, competition, and other factors.

The price strategy should be high enough to earn profits but low enough that customers will buy it. This is the principle of revenue management.

Optimization techniques are applied to linear programming models to find the best prices for every product at every time. This technique also helps in reducing the inventory costs and strategic planning of businesses.

The business can also use this technique to improve customer experience. And customer retention rate by using different pricing strategies at different times of the day or week.

For example: if it’s very hot outside on a weekend day, customers will be more likely to purchase cold drinks like ice cream, cold water, etc than buying hot coffee or hot tea, etc.

Airline companies use this technique to optimize their ticketing and scheduling processes. Why? Air tickets have strict time limits for booking and also, for traveling.

Advantages Of Linear Programming Revenue Management

Linear programming revenue management is a mathematical model. So it helps in maximizing profit from a company’s product portfolio

There are many advantages to using this technique. Including the following:

1. It helps to maximize profit

2. It helps to reduce inventory costs

3. Helps to determine the strategic planning of a company

4. It helps in improving the customer experience and retention rate of a company

5. It is used for the ticketing and scheduling processes of an airline company’s flight. Which are time-sensitive and need strict scheduling and booking policies.

Linear Programming Modeling And The Best Price Rule

A linear programming model is used in revenue management. Also, revenue management model is used in the best price rule revenue maximization. So this rule calculates the revenue across all products concerning each possible price point.

The revenue management model also calculates the lowest possible price. So it can be charged for every product such that there will be no loss of revenue.

This rule is usually called the cost-minimization rule because it minimizes the total cost for every product across all possible price points. But this rule doesn’t take into consideration the demand for each product. Which is a very important factor to consider when pricing a product.

So this rule is not considered a good pricing strategy for many businesses. Who sells a large number of products in their portfolio.

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