AN OVERVIEW OF

REVENUE MANAGEMENT
Adapted from the works of
Robert G Cross, 1998
Dr. Ronald A Nykiel
&
Other Industry Practices
 Revenue Management Origins
• Oldest profession in the world
• Time variable - most valuable
• Smith, 1776 -
– Invisible hand that guides consumers and suppliers,
each acting with enlightened self interest, to make
efficient use of scarce resources
• Hayek, 1945
– ...Special circumstances of the fleeting moment….
 The Essence of Revenue Management
“When your strategy is deep and far reaching,
then what you gain by your calculations is much,
so you can win before you even fight.
When your strategic thinking is shallow and near-sighted,
then what you gain by your calculations is little,
so you lose before you do battle.
Therefore it is said that victorious warriors win first
and then go to war,
while defeated warriors go to war first
and then seek to win”
The Art of War - Sun Tzu
 What is Revenue Management?
• Economists define RM as a means of allocating
efficiency that maximizes economic wealth
through dynamically fore-casting the self-seeking
activities of each individual consumer
• RM is the application of disciplined tactics that
predict consumer behavior at the micro-market
level and optimize product availability and price
to maximize revenue growth
 What does RM do?
• Ensure that companies sell the right product to
the right customer at the right time
for the right price
• Integrates business processes that brings
together people and systems with the goal of:
– Understanding the market
– Anticipating customer behavior
– Responding quickly to exploit opportunities that
present themselves in a dynamic environment
 Core Concepts of RM
• Focus on price rather than costs
when balancing supply and
demand
• Replace cost-based pricing with
market based pricing
• Sell to segmented micro-markets,
not to mass markets
• Save your products for your
most valuable customers
 Core Concepts of RM
• Make decisions based on knowledge,
not supposition
• Exploit each product’s value cycle
• Continually re-evaluate your revenue
opportunities
 Tactics for Market Domination
• The Use of Price Balancing
– CONVENTIONAL WISDOM:
In times of high demand for your product, increase
productive capacity. If demand falls reduce capacity
– ENTROPIC EVENT:
Demand fluctuations grow in frequency and intensity
– RM TACTIC:
Address short-term fluctuations first with price,
then with capacity
 Tactics for Market Domination
• The Use of Market Based Pricing
– CONVENTIONAL WISDOM:
Set prices to cover costs and provide an acceptable
profit margin
– ENTROPIC EVENT:
Non conformist consumers determine the price they
are willing to pay; market provides numerous choices
– RM TACTIC:
Forget CBP. Set prices consumers will accept in a
price flexible environment; reduce costs, if necessary,
to meet margin requirements
 Tactics for Market Domination
• The Use of Segment Pricing
– CONVENTIONAL WISDOM:
Prices should be set to sell the greatest number of
units at the highest possible price in the mass market
– ENTROPIC EVENT:
Consumer individualism shatters the mass market
– RM TACTIC:
Different segments demand different prices. To
maximize revenue and stay competitive, prices must
vary to meet the price sensitivity of each market
segment in the served population
 Tactics for Market Domination
• Favor the most valuable customers
– CONVENTIONAL WISDOM:
Sell products and services on a “first-come,
first-served basis”
– ENTROPIC EVENT:
Traditional business practices don’t satisfy investor
demands for aggressive revenue growth
– RM TACTIC:
Understand demand at the micro-market level as
accurately as possible, and save products for the most
valuable customers to achieve optimum revenues
 Tactics for Market Domination
• Forecast at the micro-market level
– CONVENTIONAL WISDOM:
General observations can be made about future
consumer behavior based on intuition and personal
observation
– ENTROPIC EVENT:
Non conformist consumers are continually
fragmenting the market and changing buying behavior
– RM TACTIC:
Forecast demand at the micro-market level to gain
knowledge of subtle changes in consumer behavior
patterns
 Tactics for Market Domination
• Maximize revenue through optimal timing
– CONVENTIONAL WISDOM:
Decisions on product availability and pricing are
made on experience, gut-feel, tradition and
rule of thumb
– ENTROPIC EVENT:
Rapidly changing market conditions defy
conventional approaches
– RM TACTIC:
Generate maximum revenue by understanding the
value cycle and optimally timing the availability and
the price of the product to each micro-segment
 Tactics for Market Domination
• Arm the soldiers fighting the micro-market wars
– CONVENTIONAL WISDOM:
Information in the hands of a top manager ensures
that the best decisions will be made for the company
– ENTROPIC EVENT:
Breakdown of the mass market occurs, and the need
for fast-response at the micro-market level increases
– RM TACTIC:
Give decision support tools to the workers in the
trenches to make dynamic decisions at the micro-
market level. Increase responsiveness of the system.
 RM Boundaries/Parameters
• Micro-economic perspective, now supported by
real-time data enables more precise decisions
• Sell the right product to the right client
• Enables TRM and enables company to enhance
performance through a combination of attitudes
• Learn how to best deal in the real time with ever
changing micro-markets by quantifying changes
 TRM:Boundaries/Parameters
• Enable “Technical Revenue Marketing”
– Gather & analyze data continuously
– Identify & use new market segments
– Open newer & pro-active distribution channels
– Pro-actively create newer products & services
– Look for newer means & methods to generate
revenues by using marketing management tools
 RM Boundaries/Parameters
• Focus on consumer and their markets rather than
internal corporate perceptions and economies
• Discover and segment demand niches which
allow both higher and lower prices
• Open and close inventory using prices to
effectively change your appearance and position
in the marketplace
 Revenue Management

… is all about doing ‘SMART’ business

smartly!!!