Revenue Management

What is Revenue Management?

Revenue Management refers to a disciplined analytics technique used to predict consumer behaviour at the micro-level, which in turn is used for optimizing product availability and pricing, with the ultimate objective of maximizing revenue growth. In other words, the primary objective is to sell the right product at the right time at the right price to the right customer.

How does it Work?

Usually, businesses face some basic and yet crucial decisions – what to sell, when to sell, at what price to sell, and whom to sell. It is where revenue management comes into play as it applies various data-driven tactics and strategies to answer the questions mentioned above, which will eventually help in 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 the study of customer behaviour, which is then used to build various strategies.

Revenue Management

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Examples

Example #1

Let us take the example of a hotel during the festive season. Typically, all the hotels that are located in the vicinity of the festival venue increase their room prices to a much higher level as compared to those hotels that are 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 owner of the restaurant realised that they don’t meagre traffic on Thursdays. So, he decided to launch a new offer of 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 fight tickets at a hiked up rate during the months of summer as people love travelling 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 revenue management technique.

Strategies of Revenue Management

#1 – Segmentation and Price Optimization

The customers are classified into different segments based on various criteria. After that, each segment has to be analysed separately to understand customer behaviour 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

For pricing strategies, the right strategy must be selected, keeping in mind the current situation. For instance, offering discounts make sense during times 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

It is important to use the right distribution channel to find the right set of customers while reaching as many customers as possible. The priority of the strategy 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.

Why it’s Important?

All businesses have fixed overheads. These need to be incurred irrespective of the level of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more and the corresponding revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more. In such a scenario, revenue management can come handy as it can ensure that the costs are comfortably met by maintaining an adequate revenue stream through dynamically optimised pricing and service offerings. It results in optimum utilisation of the available resources, such as perishable inventory of hotel rooms, to generate the maximum amount of revenue from the business. Effectively, it allows the management to make an informed and data-driven decision.

Benefits

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

Disadvantages

  • It makes the already complicated job of the manager even more complicated.
  • In some cases, the revenue managers are worried about being replaced by the technology-driven revenue management system.

Key to Successful Revenue Management

  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, but to build a robust strategy, it is equally important to keep track of the changes in customer behaviour and habits.
  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 they are offered a better overall experience.

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