Active revenue management is growing in prevalence and prioritization across industries — and for good reason. Ongoing market uncertainty now requires companies to be more intentional about how they analyze revenue potential and plan their pricing strategies in order to maximize profit and achieve growth.
At the same time, advances in technology and the availability of data provide new opportunities for companies to understand market position, forecast what’s ahead, and leverage data tools to make smarter business decisions.
In this guide we’ll dive into what revenue management entails, why it’s important, and the keys to implementing it effectively at your organization.
- Revenue management optimizes pricing against supply and demand to maximize revenue and profit.
- Yield management is a key part of revenue management that optimizes profit on a specific, fixed asset at an equally specific, fixed time.
- Compset data provides an important baseline for pricing and strategy setting.
- Value analysis is another key component of revenue management that aims to understand customer perceptions of the market.
- Revenue management platform solutions provide critical capabilities like automation and real-time data visibility.
What is revenue management?
Revenue management is often defined as selling “the right product to the right customer at the right price and the right time.” In other words, it’s the strategy of optimizing pricing against supply and demand in order to maximize revenue and profits.
Popularized in the 1980s by the airline and hospitality industries, revenue management is now used by all kinds of companies to track revenue streams over time and inform other revenue-impacting activities such as demand planning, inventory management, sales, financial forecasting and more.
While revenue management can be implemented by any organization, it makes the most sense to utilize when the following are true:
- The company is selling a fixed asset (ex: hotel rooms, airline tickets, restaurant reservations).
- The asset you’re selling expires in some way (i.e. you can’t sell an airline ticket for a day that has passed).
- There is variability in customer demand and willingness to to pay for a product or service.
- Demand is directly connected to a variable (or variables) that companies can use to analyze it (ex: tax prep software will naturally be more in-demand in March and early April).
Effective revenue management requires the collection and analysis of relevant data related to customer behavior, market activity, competitive landscapes, and sales performance. Chief Revenue Officers (CROs), revenue managers, and other members of the finance team use this data to create a holistic assessment of future revenue potential.
How is revenue management different from yield management?
Revenue management is often used in relation to or even interchangeably with yield management. While two are indeed related, they’re not the same thing, and it’s important for finance teams to understand how they’re different.
Yield management aims to optimize profit on a specific, fixed asset during a specific, fixed time — for example, airline tickets during the holiday season when demand is at its peak. The number of tickets an airline can sell are limited, as is the window during which demand will be high. With this in mind, airlines use yield management to implement dynamic pricing and time ticket sales intentionally.
Revenue management is a more comprehensive, all-encompassing strategy that maximizes revenue and profit across offerings and over the long term. Yield management, then, is a key part of revenue management — not a totally separate function.
Keys to Effective Revenue Cycle Management
A compset is a set of data around your most important competitors. While one of the core principles of good revenue management is that pricing should not be based solely on compsets, they provide an important baseline for pricing and strategy setting.
Maintaining an accurate compset also enables companies to understand customer perceptions of the market, intentionally set their pricing position against competitors, and continually align with market-wide pricing shifts.
A value analysis assesses the perceived value of your offerings compared to competitors. While your actual asset may be the same, different variables and inherent traits impact how much a consumer is willing to pay for it.
Airlines are an easy example: budget airlines sell tickets at more affordable prices because the quality experience is lower. If they tried to sell tickets at the same price as their full-service counterparts, they would continually lose out to those competitors. The same principle can be applied to hotels: a highway motel couldn’t price a room at the equivalent of a 5-star resort.
It’s important to note that this does not mean more budget-friendly options are less valuable. Value depends on context, and it means something different across customer segments. For many buyers, the low price is the value factor, while for others the luxury amenities are what’s most important.
Price and quality are not the only two variables that impact value, either — many others come into play depending on the product and industry. In the hotel industry, for example, location, weather, and check-in times are all important customer considerations.
Today’s speed of business and the massive amount of available data have made automation essential for revenue management. Automation can be leveraged to curate and analyze data (often supported by AI capabilities), generate reports, and extract key insights that inform strategy. Revenue managers can also set rules and alerts to notify them when specific impact factors have changed (ex: a market-wide pricing shift or sharp increase in demand).
Revenue management is not a “set it and forget it” kind of strategy. The nature of pricing and sales is constantly-evolving, and your approach to revenue management should be the same. A platform solution is the best way to maintain the kind of real-time visibility required to make smart decisions related to revenue.
Benefits of revenue management platforms include: centralized data, a single source of truth for all stakeholders, real-time updates, and data visualizations that tell a story to inform strategy.
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