Price fencing in the practice of revenue management: An overview and taxonomy

Abstract

Market segmentation is a key strategic element in the practice of revenue management (RM). After being identified, market segments should be kept separate to prevent demand spillover from high priced segments to low priced segments and the associated revenue loss. Tools to restrict customer migration across segments are referred to as ‘fences’. This paper represents one of the initial efforts to organise the characteristics of fences and to extend the research to more general RM settings. We first present a general picture of fencing in the world of RM and discuss business issues related to the segmentation process, segmentation enforcement and the implementation of fencing in RM. Next, we provide a survey of segmentation variables and use them to develop the discussion of the corresponding fences in the practice of RM. We categorise fences based on purchase patterns, product characteristics and customer characteristics, and lay out a taxonomy, and provide examples using the taxonomy. We suggest that management can look at their particular business situation and decide whether or not fencing is applicable. If fencing is essential, the manager must consider each of the elements listed in the taxonomy and then decide which descriptor best fits the situation. The next step is to choose the optimal fencing decisions (that is, price, inventory and cost devoted to fences) and apply them to the situation in order to improve the firm's financial results.