Revenue Management

Article byWallstreetmojo Team
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Revenue Management?

Revenue Management is a disciplined analytics technique used to predict consumer behavior at the micro-level, which is used to optimize product availability and pricing and maximize revenue growth. In other words, the primary objective is to sell the right product at the right price to the right customer at the right time.

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It is a technique that every business may use to maximize their own return, using their inventory, pricing strategy and analysis of demand and supply to boost the profit earning capacity. Industries like entertainment, hospitality etc, adopt this method because customer demand and satisfaction is extremely important for them.

Revenue Management Explained

Revenue management involves taking steps and framing strategies that will consider factors like demand, supply, competition, prices, etc and help in planning out a business operation that will make optimum use of resources to maximise revenue and return.

Revenue management solutions normally uses innovative sales promotion techniques like discounts, promotional offers etc, that initiate it. Inventory management plays a huge role, whose over stocking will boock capital and increase cost while lack of availability will result in inability to meet demand, both affecting revenue. Companies frequently use various models to understand and analyse the possibility of revenue analysis and prediction for te future based on past data.

Usually, businesses face some essential yet crucial decisions – what to sell, when to sell, at what price, and whom to sell. Revenue management comes into play as it applies various data-driven tactics and strategies to answer the questions mentioned above, which will eventually help maximising revenueMaximising RevenueRevenue maximization is the method of maximizing a company's sales by employing methods such as advertising, sales promotion, demos and test samples, campaigns, references. It aims to capture a larger market share in an industry. Technically, revenue is maximized when MR (Marginal Revenue) equals zero.read more. It combines operations research and data mining techniques with studying customer behavior, which is then used to build various strategies.

Every business must understand the tastes, preferences, and behaviors of consumers and tailor the products to suit their needs so that it is possible to maximize revenue with proper cost control. Every market segment should be given equal importance, and product design, specification, and price should be planned after proper analysis and adjustment.

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Elements

Some of the main key elements of the process of revenue management solutions are as given below:

  1. Inculcate the Culture of Revenue Management: It is essential to incorporate a culture wherein all the employees are well aware of its purpose and benefits.
  2. Keep Pace with the Changing Customer Behavior: Although historical information is vital for revenue management, it is equally important to keep track of changes in customer behavior and habits to build a robust strategy.
  3. Focus on Value Proposition: Sometimes, it is better to focus on creating valuable product/service offerings than lowering the prices because people are usually willing to pay more if offered a better overall experience.
  4. Forecasting – This revenue management system is a method that uses various types of historical data, predictive models, and market analysis that help in planning inventory and production levels.  The marketing efforts are designed to acquire the satisfaction of customers in various segments.
  5. Technology – Updated and advanced technology is necessary so that the solution will facilitate proper revenue management and automated solutions. This will ensure price management and decision making.

Examples

Let us understand the concept of revenue management system with the help of some suitable examples.

Example #1

Let us take the example of a hotel during the festive season. Typically, all the hotels located in the vicinity of the festival venue increase their room prices to a much higher level than those located away from the venue. It is an example of seasonal pricing using the revenue management technique.

Example #2

Let us take the example of an exclusive discount offer at a restaurant. Based on available data, the restaurant owner realized that they don’t have meager Thursday traffic. So, he decided to launch a new offer of a 25% discount for diners on Thursdays. It helped him to attract more diners on that particular day of the week. It is an example of promotions & discounts using the revenue management technique.

Example #3

Let us take the example of dynamic pricingDynamic PricingDynamic pricing is a pricing strategy that ignores fixed pricing and instead uses variable pricing, or in other words, it is a strategy in which the price of a specific product changes in response to ongoing customer demand and supply.read more used in airline ticket sales during peak season. The airline industry typically offers flight tickets at a hiked-up rate during summer, as people love traveling during that time. Again the same tickets are offered at a reduced rate during the offseason. It is also an example of seasonal pricing using the revenue management technique.

The above examples related to the revenue management cycle of different sectors show how to technique is used successfully in each of the cases and how to analysis can be used to derive conclusion regarding the type of strategy to be implemented as per consumers, type of products, seasons, useful sales promotions or discounts, etc.

Strategies

Revenue Management

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#1 – Segmentation and Price Optimization

The customers are classified into different segments based on various criteria. After that, each segment has to be analyzed separately to understand customer behavior in each segment; their preference in terms of pricing and product features. Then different pricing strategies and marketing strategies are built to approach the different customer segments.

#2 – Moment Based Pricing Strategy

The right strategy must be selected for pricing strategies, keeping in mind the current situation. For instance, discounts make sense when the demand is weak, while pricing may be kept higher when the demand is high, and the seller adopts a value-added approach.

#3 – Distribution Channel-Based Strategy

Using the rightA distribution channel is a network of intermediaries that facilitates product delivery from the manufacturer to the end consumer and transfers payments from the buyer to the producer. In other words, it is the route through which a product travels from the production end to the point of consumption. read more distribution channelDistribution ChannelA distribution channel is a network of intermediaries that facilitates product delivery from the manufacturer to the end consumer and transfers payments from the buyer to the producer. In other words, it is the route through which a product travels from the production end to the point of consumption. read more to find the right set of customers while reaching as many customers as possible is important. The strategy’s priority should be to reduce the number of intermediaries to pass the benefit of a lower commission fee on to the customers in the form of lower pricing.

Importance

Let us study the importance of the concept of revenue management cycle as given in the points below:

Benefits

Some benefits of the concept are as follows:

  • It provides insight into the customers’ specific needs and wants, which can be incorporated into the product/service offerings.
  • It helps build a competitive pricing strategy that can draw more customers and offer an edge over the competitors.
  • Used to analyze the market to identify new and potential customer segments;

Limitations

However, let us analyse the disadvantages also.

  • It makes the already complicated job of the manager or revenue management analyst even more complicated.
  • In some cases, the revenue managers are worried about being replaced by the technology-driven revenue management system.
  • The process becomes complex in case the business has a huge line of products and services. The management needs to frame strategies to optimise revenue for each of them otherwise the overall business will get affected.
  • This also involves cost cutting or control. If cost is not handled and kept to its minimum level, even higher revenue will not increase profitability.

Revenue Management Vs Yield Management

The above two terms are frequently used in organizations to explain the earning made. But there are some differences between them as follows:

  • The work of the revenue management analyst involves analysis of a wide range of factors to increase the overall revenue levels of the organization, but the latter primarily applies to techniques implemented to manage prices of products and services so that there is increase in demand and better profits.
  • The former is applies across various industries like airlines, hospitality, car rentals, etc. But the latter is mainly appliesd to industries that involve perishable goods, and their revenues are fixed.
  • The former is meant for a long-term perspective and has an impact on the entire business process. But the latter is for limited time period and thus, it is for short term and for any particular product and service.
  • The former focus on overall development and planning but the latter focus on only the pricing strategies.

Thus, the above are some essential differences between the two concepts.

Recommended Articles

This article has been a guide to what is Revenue Management. We explain the strategies, examples, elements, differences with yield management, importance & benefits. You can learn more about it from the following articles –