Meissner Research Group

The Kingsman Prize for 2010 has been awarded to Management Science PhD graduate Arne Strauss. The prize was established in memory of the long-standing scholar of Management Science, Professor Brian Kingsman.

Arne has completed his PhD in three years after obtaining a MSc in Mathematics at Virgina Tech and a Diploma in Mathematics from the University of Trier in Germany. His supervisor, Dr Joern Meissner, identifies him as the most capable PhD student he has worked with so far.

Arne Strauss receiving his Kingman Prize award from Mike Pidd (Head of the Department of Management Science)

Arne’s thesis advances state-of-the-art models in revenue management (RM), an application area concerned with maximising expected revenue from the sale of products that use perishable resources. For example, products might refer to flight tickets and resources to flight legs in an airline network. RM approaches also arise in many other practical industries such as train, hotel, car rental, etc. For any application, a decision maker needs to formulate a decision rule (policy) that determines which products to offer at any point in time throughout the selling horizon. In recent years, increasing effort has been devoted to incorporating the choice behaviour of customers into network RM since demand for a particular product is often observed to be dependent on the offered alternatives. In this context, Arne’s thesis addresses important optimization questions that lead to improved policies by taking the dependence of the offered products into account. His research is of great practical importance and has already attracted the interest of revenue management professionals, leading to a project with Lufthansa Systems.

At the recent OR 52 Conference at the Royal Holloway University of London, the Operational Research Society prize “for the most distinguished body of research leading to the award of a doctorate in the field of OR in the UK” for 2009 was awarded to LUMS Management Science PhD Graduate Arne Strauss, who has since been appointed at LUMS under a PhD Plus Fellowship and will soon start a position as Research Associate under the LANCS Initiative. Arne was supervised by Joern Meissner.

Arne Strauss (right) receiving his OR Society award from Richard Egelese (President of the OR Society) at the Royal Holloway, University of London

In his dissertation, Arne pursues various research objectives within revenue management of a network of resources where customers choose between available product alternatives. Accounting for customer choice behaviour is necessary to accurately represent demand in markets where customers choose between several product alternatives, as it is particular the case if fare products have been simplified so that fare restrictions cannot properly segment customers any more. Such situations occur in many industries that use revenue management, for example airlines, trains, car rentals or hotels. It is therefore important to incorporate customer choice into the optimisation models, however, it also causes the resulting optimisation problems to be highly complex and difficult to solve. Arne develops in his dissertation approximate methods to tackle such problems.

In a market where timing is everything and prices are constantly shifting, one of the main (and obvious) priorities that executives and managers tend to miss is constant reevaluation. With aggressive competitors ready to move in on your customers, a successful company needs to be constantly aware of what is going on in their markets, what they customers want, and where their prices should be. It is not enough to simply know this information once a month or even once a week; in this technologically-reinforced fast -paced world, it is imperative that executives reevaluate their decisions constantly.

The first step in the reevaluation process to realize that you, as the executive or manager, have two valuable resources at your disposal: your employees and your computers. The second step is to trust that each can do their job.

Your computers can be set up, with even the most basic software, to run databases that can process large amount of information, from your current prices, to your prices in certain months, to your competitors’ prices. Having this information is vital, as it will tell you whether your prices are working or failing you at any given point.

A case in point here is simple: if last year’s data tells you that more people will need swimming suits in the summer and spring, push the price up in those seasons. While this may seem overly simplistic, information like this won’t make any difference if your company miss this because the information isn’t always available and isn’t accessible every day. If your competitor suddenly changes prices, you simply can’t wait three months to realize it – and another three months to change your pricing policies to try to take back some of your customers.

The second part of this process is also fairly simple: empower your employees to use these information databases to implement informed decisions. If your employee realizes that your two major competitors have suddenly dropped their prices for a similar product to yours and that you’re going to lose any chance at a profit this quarter because of it, then enable your employees to fix that problem for you. Sure, have then inform you of the problem and the solution immediately, as it happens, but in this day of instant communication with anyone, they shouldn’t have to wait every time something changes – because something will change every day.

This is the central crux of this idea: stay on top by staying informed. Put of all your skills to use by making sure that your company is running as well as it can by keeping informed and by using this constant stream of information to make important decisions on your basic pricing policies, every day.

Like every good rule, there’s always an exception. As previously noted, price wars are truly one-sided affairs. Your and your competitors’ prices falls due to a rush to gain market share, and in turn, the only victor is the customers who learn how to finagle every last penny out of your and your competitors’ remaining profits. But there is one time when using competitive pricing and having the lowest prices all the time actually works. This is called cost leadership.

Cost leaders are simply those companies who can set price based on their placement within the market share. They generally enter new markets by targeting the most price-sensitive customers, literally making their price their greatest attribute. By making their products cheaply and efficiently, cost leaders normally produce only the most basic of options, essentially a lower value option than what the larger (and greater market share holder) companies can make for the same price. By lowering the quality of their products, the cost leader can lower their costs while still maintaining their profits. This is how they can control the price during a price war.

The greatest market shareholders tend to have the advantage with everything but price, as a cost leader can come in and take away profits. Being a cost leader is an enviable position, because they can decide when to wage the price war and effectively win by drawing away customers from the market share leader. If your company already has a large market share, be wary of trying to act like a cost leader. With an already established brand, you can damage your reputation by creating products of questionable quality.

On the other hand, if your company is poised with low production costs, then perhaps you could be the cost leader. To do so, focus on your production costs versus overall return. If there’s a wide enough gap that you could drop your price below your competitors and still maintain a healthy profit – essentially the previously mentioned penetration pricing strategy – then you can become the cost leader. By doing so, your company is likely to not only gain profit but also gain market share and customers from your larger competitive who simply can’t match your price without losing profits.

Remember, price wars are a risky move for any company, but if your company’s profit and loss statements suggest you could become the cost leader, than perhaps it is time to try.

The iPad, Apple’s newest technological wonder, will be released on April 3^rd, just a few short weeks from now, but one thing probably missing from its advertised digital bookstore, iBookstore, will be the books from the world’s sales leader in publishing, Random House.

In the Financial Times article ‘Random House fears iPad price war’, Random House chief executive Markus Dohle said that Random House was still reviewing their options, as they fear that Apple’s pricing policy is of an interest to their stakeholders. The publisher was still in discussions with their agents and authors over the decision.

Random House is a division of Bertelsmann, whose profits declined over the past year, thanks in large part to the recession. And while the company believes they will make gains this year, they are not sure that allowing Apple to control the pricing policy of their e-books is the way to go about it.

Apple’s current e-book policy is that publishers will set the price for their own books, with Apple receiving 30 cents off every dollar. While the other five major publishers (which account for nearly all of Random House’s competition) have already signed on with Apple and their iBookstore, this new pricing scheme is very different from standard publishing policies.

In standard publishing pricing, the publishers sell books to the bookstores at a wholesale rate. The bookstores then make a profit by marking up the books from the wholesale rate. Bookstores can even return unsold books. Even Amazon, one of the world’s top bestsellers and one of the darlings of e-commerce, sells its book this way. While the publishers and Apple both agree that e-books are here to stay, neither is quite sure how to actually price them successfully to make both companies and their customers happy.

In the end, Random House must realize that a price war of any type is not beneficial to their company. If Random House takes Apple’s offer of controlling their own prices, they must quickly realize that trying to price their bestsellers at a price lower than their competitors will only result in spend-thrifty customers and low revenues. And if Random House decides to take Apple’s deal and then prices their books far too low, customers will always expect that price. And they will now be simply a few touches on the touchscreen away from picking up a book from Harper-Collins or Macmillan instead.