28 October 2011

Finding Common Ground Between the CFO and COO–Part 3

[Continued from Part 2]

The concept of market segmentation—segmented down to a single customer, if necessary—has been driven to a large extent by consumers empowered by the Internet. (Here I use the term “consumer” in the broadest sense. In a supply chain, the “consumer” may be a company or even a buyer within a company in the supply chain.)

Consumers no longer need to be satisfied with what is available to them locally, regionally or even nationally. Instead, a buyer has virtually direct access to a whole world of manufacturers, wholesalers, distributors, brokers and retailers offering a huge array of products, services, delivery methods and terms of service.

Many product offerings are configurable via the seller’s Web site to meet specific requirements or tastes. Too, frequently, the various sellers are willing to offer the products via custom-tailored terms, conditions, and delivery methods. We refer to this combination of product plus related delivery terms and options as the “augmented product” of the “offer.”

Product v Offer

Employing Business Intelligence (BI) to Segment Your Market

Business intelligence—regardless of whether it is done with specific BI tools, or just by leveraging the native capabilities of Microsoft® Excel™—can help an business better understand who buys what from the firm, and why. Here are some examples:

Hospitality Industry

A hotel franchise uses BI analytical applications to compile statistics on average occupancy and average room rates to determine revenue generated per room. It also gathers statistics on market share and data from customer surveys from each hotel to determine its competitive position in various markets. Such trends can be analyzed year-by-year, month-by-month or day-by-day, thus giving the corporation a clearer picture of how each individual property is faring.

If these data were extended to include related matters such as

  • Business versus pleasure occupancies
  • Local event calendars by postal codes
  • Other potentially influencing factors

Then the hotel chain could begin to discover who uses their services under what circumstances and, perhaps, why their customers chose their hotels over the chain’s competitors. With this information in hand, the chain would be in an increasingly better position to construct “offers”—preferably irrefusable offers—to their clientele (or prospects) based on dates, reasons for travel, and more.

Take for example a hotel where the occupancy rate is typically below 50 percent on Sundays through Wednesdays. How much time would it take to discover businesses in the region that bring in folks regularly for training, small group conferences or other business purposes during the week.

Having identified these business organizations, making them customized offerings would make sense. For some businesses and business purposes, a discount of 35 percent off the nightly rate might be sufficient to garner the business. For others, a steeper discount might be necessary because the folks to attend their events are typically paying out of their own pockets. So, offer them a flat rate of $69 per night and throw in a free shuttle to and from the airport and to and from the conference sessions.

Since the hotels truly variable cost (TVC) for filling an additional room or ten rooms is very small, almost every additional dollar of revenue gained through such offers will fall directly to the bottom line of the business.

Let us assume that (to make the math easy) a hotel typically rents its rooms for $200 per night (annual average). This hotel’s business intelligence analysis shows that Sundays through Wednesdays during the months of January through April, they are going to have an average of 50 empty (in-service) rooms per night. If this hotel can construct a compelling offer that will fill just half of those rooms (25 rooms) at $70 per night, that would be about 1,733 nights at $70, or $121,310 in additional revenues annually.

If we assume that the truly variable cost (TVC) per additional room per night is $10, then we must subtract $17,330 from this figure to get our throughput of $103,980. That is more than $100,000 in increased annual revenues even though the rooms are being let at far below the “going rate” via the irrefusable offer.

[To be continued…]

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