Revenue management definition
/What is Revenue Management?
Revenue management is the use of optimized pricing to enhance revenues. The intent is only to increase revenues when doing so will also increase profits. When properly conceived, revenue management establishes the optimum price for each customer.
Revenue Management Best Practices
Possible tactics for enhancing revenue levels include the actions noted below:
Add distribution channels. A business can sell its products through different distribution channels in order to reach out to different groups of customers, possibly selling at different price points in each distribution channel. For example, a cruise line could sell at a reduced price through a discount travel service, while selling at full price through its own website.
Institute dynamic pricing. A company can adjust its prices continually, based on ongoing changes in its estimates of demand and the remaining amount of supply on hand. Airlines routinely engage in dynamic pricing, so that the passengers on a flight may pay widely differing amounts for essentially the same seats. Hotels also employ dynamic pricing; for example, they raise room rates when there are major events in town that they know will increase the demand for rooms. Similarly, some grocery stores employ comparison shoppers that report on the prices in competing grocery stores, and then push pricing adjustments out to LCD pricing displays at grocery locations - the result is ongoing shifts in grocery prices to better compete with other companies.
Selectively implement overbooking. When a business has a fixed capacity and there is a risk of order cancellation, the company can overbook customer orders. The airline, hotel, and restaurant industries routinely engage in overbooking. Doing so can annoy customers when they find that there is no available capacity, so organizations have to be careful about the level of overbooking in which they choose to engage. Nonetheless, this approach can ensure that all possible capacity is booked, thereby maximizing revenues.
Initiate promotions. A business can engage in various promotions, using such tools as rebates and coupons, to discount prices for targeted sales periods. For example, a retailer can use coupons to drive sales during what might otherwise be a slow sales period. Or, promotions may be used at the beginning of a selling season in order to sell more goods at full price.
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Offer bundling. A firm can offer a set of related products to its customers for a discounted price. For example, a travel business could offer a vacation bundle that includes airfare, a hotel room, and a rental car. This approach locks up all related purchases that a customer might want to make, thereby maximizing the seller’s revenue. In exchange, the seller offers a modest discount in order to entice the customer into the bundled deal.
Offer cross-selling. Present customers with an option to make additional purchases that complement their initial purchase. For example, a hotel can offer its customers breakfast for an extra $20, while a bookstore might offer its customers a leather bookmark for an extra $2. As long as the cross-selling relates to products that customers believe to be useful, they may view cross-selling as an added benefit. This can be a difficult revenue management tool, since cross-selling can be viewed by customers as being annoying, which can reduce their long-term loyalty to the seller.
Offer up-selling. Many businesses try to sell higher-priced versions of the products in which customers have initially expressed an interest. This is quite common in car dealerships, where the sales staff routinely tries to draw the attention of customers to more expensive models. Similarly, a hotel might offer its customers an upgrade to a suite from its standard room. Up-selling can result in substantial increases in profits, especially when the products to which customers are being directed have a higher profit margin than what they were originally interested in buying.
Employ rate fences. In order to keep full-price customers from taking advantage of discount deals that are intended for more price-sensitive customers, revenue management can also include the use of rate fences, which are rules or restrictions that allow customers to segment themselves into certain rate categories based on their needs, behavior, or willingness to pay. For example, a common rate fence used by hotels is to offer a low price, but only if payment is made several months in advance. Since businesspeople are rarely able to plan that far in advance, they are effectively excluded from these deals. Similarly, higher-priced business class plane tickets allow their purchasers to reschedule flights for free, while this option is not available when lower-cost seats are purchased in the economy section.
Invest in branding. Use enhanced product quality and expanded marketing programs to increase customer appreciation for and awareness of the company’s brands. Doing so makes it more likely that customers will want to purchase its products, even if the company’s price points are somewhat higher than those of the competition. Branding only works if substantial investments are made in it for an extended period of time, and the firm’s products are sufficiently distinctive.
Set up a loyalty program. A classic revenue management technique is to set up a customer loyalty program. By encouraging customers to buy directly from the company, the firm can avoid selling to wholesalers and retailers at lower margins. This approach also allows the company to market directly to its end customers and interact with them, which may result in new ideas regarding how to better service customers.
Sell direct. A company can set up a direct sales channel, rather than selling through wholesalers and retailers. A common approach is to set up an Internet store, while rolling out physical stores may also work (though the capital cost is higher). The advantage of selling direct is that the company does not have to give away a portion of its margins, as is the case when selling through other parties. However, there are also costs associated with selling direct, which can offset some or all of the profits generated.
Use incremental cost analysis. Revenue management also takes into account the incremental costs associated with each sale. For example, when a hotel sells its excess supply of rooms through several aggregator websites, it makes sense to direct most of the excess supply to whichever of the sites charges the smallest commission.