Revenue Management – Meaning, Benefits, Scope and Future

The phenomena of revenue management gained importance in recent years due to variable and discriminatory pricing schemes offered by various companies to their customers. Revenue management applies the orderly analytics that predict the behavior of the consumer at micro level and augment the prices and availability of products to the customers thus enhancing the overall revenue for the company. The aim of devising revenue management techniques is to deliver the fine product or service to the appropriate customer at the precise price. Revenue management system is based on analyzing the customer’s perception of the value that the product would provide and make straight the availability, placement and price according to that perception.

Revenue Management

This discipline became the need of every business rapidly. There could be many reasons for this. Even a kid whose is out for selling orange juice will have to analyze and predict the appropriate weather and time for selling his product. When we talk about giant businesses, the need for assessing customer demand and subsequently managing that demand is enormous and critical. A revenue management system is answer to the question of such demand.

History of Revenue Management

The concept of revenue management is not new to the business world. Every business that is selling some fragile product needs to flex the price of that commodity due to some uncertain environmental change or response to some competitor’s action or customer’s demand. Seats in airplanes, clothes (i.e. for summer and winter), rooms in hotels etc., all require revenue management strategies to be sold in a manner that maximize the overall wealth of the company. This field properly originated in US airline industry in start of 1970s. Bob Crandall of American Airline (AA) who put restrictions on discounted fairs. After that yield management came into practice which is the foundation of revenue management. American Airline, with the help of other airlines further extended the yield management system by offering low fares to the cost sensitive passengers and high priced fares to the time sensitive passengers, giving maximum value to both type of travelers. The impact of practicing yield management was come into knowledge by year 1985. American Airline reported about 48 percent profit growth. This huge success attracted other industries to develop into the field of yield management.

Purpose and Benefits Revenue Management Implementation

We discussed above that yield management evolved into the revenue management. As it became the standardized practice for the companies, its definition progressed. Revenue management is defined as the field which is concerned with answering the demand questions related to consumer behavior and system and set of methodologies required to make them. Revenue can be compared with supply chain management because it aims at lowering the cost of producing and delivering the products hence increasing the profit, so as the goal of revenue management. There need to be certain business conditions that are essential to successfully implement a revenue management system. These conditions include customer heterogeneity, production inflexibility, variable and uncertain demand, management culture, infrastructure of data and information an so on. Employing a revenue management system benefits the company by unleashing the hidden demand which can lead to great revenue opportunity, helps understanding the customer’s choices between price and product characteristics, increases revenue, suggests discounts on the product when required to build up the market share and helps in developing a sales driven organization whose sole focus is profit maximization.

Scope of Revenue Management System

There is wide range of options available to increase revenue through a revenue management system.

  1. Pricing strategy:  Pricing strategy is related to envisaging the customer’s perceptions about the value of the product and then setting prices to catch that value. Pricing strategy which a company adopts dictates its objectives i.e. what it wants to accomplish. Company then chooses pricing tactics that can respond to the customer’s expectations. Customer price sensitivity analysis, price ratios and price optimizations are example of such tactics. Carefully selected pricing strategy can increase the total revenue and ultimately profitability of the firm. Therefore, revenue management can redefine pricing strategy and can build enhanced pricing tactics.
  2. Distribution channels:  A company can deliver its products with various channels like online or in shops. Different type of cost and revenue are linked with these channels. Customer of particular nature selects the specific channel for buying the product for example customers who opt for purchasing online are more price sensitive. Revenue management tools can help analyzing the channels and deciding appropriate discount offers to distributing and retailing channels then to consumers without losing the customers’ perception about the value of the product.
  3. Marketing:  Revenue management tools can help determine the response rate of customers to a particular level of promotional activities. By efficiently promoting the products, a firm can increase its revenues and subsequently the profitability.

Process of Managing Revenues

The revenue management process begins with collecting data on inventory, consumer perceptions and behaviors, product prices etc. The system employed collects and then store the information mentioned before and uses it to optimize prices and channel selection and amount of price promotional activities required. After collection of data, segmentation is done by the system to categorize consumers in to various groups. After segmentation, system forecasts the demand by implementation of quantitative analysis of data like time-series model and cross price elasticity. When the forecast phase is completed, revenue management system comes into the position of giving different options to the company about in how many different ways can it sell its product to what type of customers. Optimization provides answer to two questions. First of all it provide guidance to the company about which factor should be optimized like price or sales. Secondly it tells that what optimization technique is relevant and should be opted. For instance, regression analysis for finding out relationships between variables, discreet choice models for envisage customer behavior and linear programming techniques for setting optimum prices to maximize the total revenue.

Future and Challenges in Revenue Management

Implementing revenue management in an organization is not an easy task. There can be a lot of obstacles like cultural, organizational and reliability issues in information systems already developed like supply chain, customer relationship and intelligence. Now a days, revenue management is moving towards more ASP(Application service provider) platforms. In future, revenue management will be focused on subscription and renting through ASPs rather than developing application systems inside the organization. Future challenges of RM can be its placement inside the organization i.e. whether in marketing or finance department or the organization or may be it will be needing a whole new department to carry out its activities.

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