White Papers

8 Breaking Down Willingness-to-Pay in RM www.pros.com In PROS RM Advantage, there are three key steps to the optimization process: • Demand/Fare Transformation (marginal revenue transformation) Generates WTP-adjusted fares • Network Optimization (Linear Program) Generates the displacement costs to account for the network effects • Leg Optimization (Dynamic Program) Generates the bid prices based on the fares and displacement costs from the previous two steps PROS RM Advantage uses the properties of the network optimization and dynamic program where the transformed fare and demand can be used, without any changes to the traditional formulation. This means that the primary focus on the WTP Optimization is the calculation of the transformed fares and demand. The transformation process is a marginal revenue calculation called the Concave Envelope Data Transformation (CEDT). The algorithm assesses those fare classes that are on the efficient frontier. An efficient class, one on the efficient frontier, is one that should be open under at least one available capacity scenario to maximize revenue. A class lying below the efficient frontier, called inefficient, is a class that should never be open for sale under any available capacity scenario and thus the class is closed or inherits the availability from the class below it. The intention of this process is to identify classes where the revenue is diluted so much that it results in a negative margin, thus in a revenue maximization process, it is optimal to close the class. Once this step of closing classes has occurred, the system next performs a demand and fare transformation. The purpose of this step is to provide an estimation of the actual amount of demand expected at each class and the relative value of that class, given the incremental revenue achieved in that class. The transformed demand is calculated as the incremental demand if one additional class is open for sale. The transformed fare represents the incremental revenue per passenger if one additional class is open for sale. Once the transformed fare and demand are calculated, they are sent to the Linear Program for network optimization and the dynamic program for leg optimization. The resulting outputs from the optimization are the flight/leg/compartment bid prices and the ODIF/ POS level transformed fares. Figures 4-6 show an example of this calculation of transformed fares and demand. Willingness-to-Pay Optimization FIGURE 4 The demand (as calculated from the forecast), daily fare, and calculated cumulative revenue. These represent the input into CEDT. $2,000 $3,000 $3,300 $3,250

• Cover