Managing ‘time expired assets’

Airlines understand that an empty seat is a wasted opportunity. There are huge fixed costs with an aeroplane and lots of costs which will be incurred whether the plane is fully booked or half empty.

Any contribution above marginal cost helps to cover the costs of putting the plane into the air. But at the same time, they don’t wish to compromise their market and give business away. They use a technique called ‘revenue management’ to optimise their seat income for any given flight.

When you fly a segment for $129, chances are you are sitting next to a person on one side of you who paid $400 and on the other side, someone who paid $795. Same seat, same food and same service. The difference is in the conditions of the ticket. Pay one month in advance and get a cheap seat but don’t cancel or you lose all your money. Pay a little extra and you can change the seat with a cancellation fee. If you want absolute flexibility, it is yours but you have to pay full fare. Seats are initially allocated to different categories of prices and conditions to give the maximum revenue per flight. Seats are then reallocated between categories as seats are booked and the airline is better able to predict the take up of each category. The overall result is far better than what could be achieved with a standard fixed price per seat.

The same revenue management techniques are used in the hotel, car rental, theatre and restaurant businesses. If you wondered about the logic behind ‘happy hour’, this is the reason. But what is surprising is how many business could use this technique and how few actually do.

Revenue management is applied to any ‘time expired asset’. Basically any asset which is charged out on a time basis is a candidate. You are paying for the asset already, whether it is a restaurant seat, airplane seat, hotel bed or rental car. If it doesn’t get used, you still have to pay for the time. What you want to do is generate the highest usage possible. In order to do so, you segment your users into categories to match their needs and price points.

The same logic can be applied to many industries. Plumbers could charge different rates for different portions of the day or varying levels of flexibility in appointment times. Shop floor space could be rented out in low season at a different price rather than sit cluttered up with off-season products. Consultants could be charged out at different rates depending on the size of the commitment. Magazines can have different rates for advertising dependent on location, commitment and advance booking time.

You should be examining each asset you have to see if the principles of revenue management could be applied to them. Customers already understand how this works and should be receptive to some innovative thinking. Have a conversation with your regular customers to see what would work for them, which will increase your asset utilisation.

Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the former Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.