What is Revenue Management?

How does it Work?

Usually, businesses face some basic 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.

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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.

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 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.

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 optimized pricing and service offerings. It results in optimum utilization 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 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;

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

  • 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.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.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.

This article has been a guide to What revenue management is & its Definition. Here we discuss its examples, strategies, and how it works, along with its benefits, disadvantages, and why it’s important? You can learn more about it from the following articles –

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