Revenue Management: The Parking Lot Dilemma

You can think of revenue management as analogous to parking your car on a very busy shopping day. In the U.S. a day called “Black Friday” is the busiest shopping day of the year, with millions of people getting out as early as 1:00am to get the best products first, and parking spaces can be hard to find.

Imagine it’s Black Friday–you are driving through the parking lot and immediately see a parking spot. You may think, “Great, it’s a spot, I can park my car, get to the store, and buy my new big screen flat panel TV.” But then you might think, “Well, this parking spot is really far away from the store. I wonder if I can find a closer spot?”

You face a dilemma: Should you park your car in the first spot you find, or should you continue to drive and look for a spot closer to the store entrance?

You look down the rows and do not see any other parking spaces closer to the store. Now it’s really a difficult decision. If there are any closer spots, they are unknown to you. Should you take the first parking spot, or should you continue to look for a closer spot? Chances are that if you drive down the lot and circle back to the first spot, the driver behind you will have parked his or her car in that spot. In other words, if you don’t take this spot, somebody else will, and it will be gone.

As a revenue manager, you make many decisions in settings similar to this one. From a revenue management perspective, the question you would ask yourself is: “Should I accept the early discount request (take the first parking spot), or should I wait for a later arriving, higher paying request (continue to look for a closer spot)?” If you leave the first revenue opportunity, somebody else may take it. There may be a better revenue opportunity in the near future—or there may not.

See our post from a few weeks ago on creating a demand-control chart to organize your occupancy and forecast the best rates for future dates so that you will be better prepared for these types of requests.