business

It was a problem that even IDeaS Revenue Optimization Incorporated's super-smart software couldn't figure out.

With the nation's economy reeling after the Sept. 11, 2001, terrorist attacks, hotels were certainly in no mood to purchase an expensive piece of technology, even one that promised to continuously calculate room prices based on shifting demand and occupancy. Things looked grim for the Bloomington-based start-up.

So the company decided to shift gears by using another emerging technology. Instead of selling large, expensive equipment that needed to be installed on-site, IDeaS would distribute its software over the Internet, making it affordable to large and small hotels alike.

Today, IDeaS software calculates most hotel prices in the United States. The company, which was acquired this summer by SAS Institute Inc., is expanding into car parks in London, bus service in Mexico and sports arenas in the United States. Backed by the global resources of North Carolina-based SAS, IDeaS is determined to make its pricing software even more relevant to hotels and resorts around the world that are facing yet another painful economic recession.

"You are facing hard times," said Ravi Mehrotra, IDeaS president, chief scientist and co-founder. "Bad decisions when the economy is weak can hurt you a lot. Which people are going to survive ... and which are going to come out as winners or losers will depend on which people are going to use technology effectively in order to cope with bad economic conditions."

Born in Lucknow, India, Mehrotra graduated from the Indian Institute of Technology in 1978. He emigrated to the United States that same year and later earned a doctorate in electrical and computer engineering from Carnegie Mellon University. Mehrotra taught at North Carolina State University before moving to Minnesota in 1990.

Founded in 1989, IDeaS originally helped Northwest Airlines and US Airways design their dynamic pricing systems. Before then, airlines did not effectively coordinate prices and schedules, Mehrotra said.

For example, an airline identifies a flight that tends to sell out. To generate more money, the airline adds capacity and raises prices, two decisions that seem logical but, taken together, effectively cancel each other out. IDeaS developed a way for airlines to maximize sales by tweaking prices in real time based on departure time, route, capacity and customer type.

"You could lose money if you have sold too many tickets on the Chicago-to-Minneapolis leg even in the highest-fare class at the expense of later turning down somebody who would have flown from Chicago to Minneapolis but continued on to Amsterdam and London," Mehrotra said. "We started out with the aim of [solving] very difficult business problems by injecting science and math in the decision-making process."

Hotels proved a fertile ground for IDeaS, because they were a relatively low-tech industry that needed high-tech pricing, Mehrotra said.

Hotels pay fixed costs regardless of market conditions. In other words, hotels pay for electricity and heat and telephones in rooms whether they're occupied or not. And like airlines, hotels must juggle demand and occupancy when calculating the optimal prices.

When times are good, the hotel wants to raise prices as high as possible without losing customers, said Bill Carroll, a senior lecturer at Cornell University's School of Hotel Administration. When times are bad, hotels need to cut prices, but only enough to stimulate demand, he said.

"You don't want to leave money on the table," Carroll said.

Lowering prices is especially tricky for a luxury hotel, said Melanie Cooke-Kridech, director of revenue for the Mandarin Oriental Hotel in San Francisco. Discount too much, and you cheapen the brand, she said.

During a downturn "it's imperative to adjust prices," Cooke-Kridech said. "You want to be bold but not discount [indiscriminately]. Are you discounting a room when it would have been booked anyway?"

Cooke-Kridech used to determine prices by running spreadsheets. Using IDeaS software is "like having a team of mathematicians look at your books every day," she said.

A hard sell at first

But nobody was interested in such software after the Sept. 11, 2001, attacks devastated the hospitality industry. With the firm on the verge of extinction, IDeaS decided to sell its software over the Internet. The model, now called software-as-a-service, enabled IDeaS to quickly and cheaply distribute its technology to big and small hotels alike. Customers could pay an annual subscription fee instead of spending thousands of dollars for IDeaS technicians to physically install and maintain equipment at the hotel.

"At the time we were doing this, I honestly didn't know how this was going to pan out," Mehrotra, said. "I didn't even know this was called 'software as a service.' "

As it turned out, SAS, the world's largest private software maker, bought IDeaS in August, partly because it was interested in doing the same thing, he said.

Mehrotra declined to disclose the sale price. IDeaS had raised $9 million from Split Rock Partners in Eden Prairie, Morgan Stanley, and Sutter Hill Ventures in Palo Alto, Calif.

Through SAS' global sales force, Mehrotra hopes to expand into new markets. The company's software is helping to manage car parks at London's Heathrow and Gatwick airports, and is determining bus schedules in Mexico. Mehrotra also believes that IDeaS software can help sports teams better market season tickets.

Michael Gorman, Split Rock's managing director, said he doubted whether the company could survive after Sept. 11, 2001. (Split Rock invested $5 million in the firm.) But like its software, the company was able to adapt to changing circumstances.

"It took a lot of time before the technology and market could work together for value to be realized," said Gorman, whose firm first invested in IDeaS in 1997. After the terror attacks, IDeaS "didn't just hunker down, but rather asked, 'How does our strategy need to change?' "

Thomas Lee • 612-673-7744