Pricing Science - History

History

Pricing science has its roots in the development of yield management programs developed by the airline industry shortly after deregulation of the industry in the early 1980s. These programs provided model-based support to answer the central question faced by deregulated airlines: "How many bookings should I accept, for each fare product that I offer on each flight departure that I operate, so that I maximize my revenue?" Finding the best answers required developing statistical algorithms to predict the number of booked passengers who would show up and to predict the number of additional bookings to expect for each fare product. It also required developing optimization algorithms and formulations to find the best solution, given the characteristics of the forecasts. And for airlines operating hundreds to thousands of flights every day, and selling tickets for daily departures 300 days into the future, the computational challenges are extreme.

The yield management programs provided dramatic financial benefits to their early adopters in the early- to mid-1980s, and the approach spread rapidly to firms in the related sectors of hotel, rental car, and cruise line industries. While there are important differences between these industries, the dominant drivers of the solutions were the perishable nature of the resource being sold, demand patterns that were time-variable, and the limited capacity available for sale. For a good overview of pricing science methods and applications related to yield or revenue management, see Phillips and the references cited therein. Williams shows the connection between many of these problems and standard micro-economics.

Beginning in the early to mid-1990s, these successes spawned efforts to apply the methods, or develop new methods, to support pricing and related decisions in a variety of other settings. Yield management has been applied successfully to broadcast and cable television, online media, oil and gas producers, sporting and theatrical providers, online media, apartment and timeshare rental properties, credit card, and retail settings.

Since about 2000, the application of pricing science to the problems of quoting prices in business-to-business transactions has taken off, with adopters reporting financial benefits comparable to the earlier gains in the travel industry. Instead of optimizing the offers available in response to very dynamic capacity, these business-to-business applications provided the means to optimize offers based on the particular characteristics of the transaction being contemplated and the customer. Applications have included business services providers, industrial product manufacturers, and distributors of products ranging from technology to food to office supplies.

Even airlines and other early practitioners began to revisit their original assumption that prices were a "given," a simple input to their optimization technology. The growth of low-cost carriers offering restriction-free pricing, "name your own price" channels, and auctions all stimulated this interest in applying science to the pricing side of the business.

As the applications of scientific methods to these business problems expanded, the discipline of pricing science became more rigorous and methodological. Initially, statistical and optimization methods were adapted by practitioners and theoreticians from the engineering and operations research disciplines. The discipline was typically referred to as operations research and specialization in revenue or yield management methods was viewed as a specialty in the larger discipline of Operations Research and Management Science. INFORMS, the professional body of the larger discipline, has a section devoted to this specialty, the Revenue Management and Pricing section.

As the applications spread from yield management to more general pricing applications, the term Pricing Science has become much more common to refer to the discipline and Pricing Scientists to refer to the practitioners.