Revenue management: what is it and how does it work

Revenue Management: What is it and How Does it Work?

It is essential for every company, whether small or big, to have a revenue management process for sustainable growth. In today’s market, many companies are coming and going. Still, only a few of them can become stable. Implementing high-quality Revenue Management is crucial to get established in the market.

Revenue Management is a business practice used to maximize revenue under certain conditions. In today's blog post, we're going to look at some examples of revenue management that have been around for a long time.

What is Revenue Management?

Revenue management, also known as yield management, refers to a pricing strategy in which the prices of goods/services are set depending on the consumer demand at any point in time. Revenue management is also known as yield management. It is the combination of pricing and strategies to increase production. Many companies have services and products whose costs may vary depending upon the situation. Airline seats, for instance, are sold at different pricing on different days based on what travelers are willing to pay.

The Role of Revenue Management in Supply Chain

Revenue Management is the use of pricing to increase the profit generated from a limited supply of chain assets. Revenue Management has a significant impact on supply chain profitability when one or more of the following four conditions exist.

1. The product’s value varies in different market segments.
2. The product is highly perishable, or product wastage occurs.
3. The product demand is seasonal and other peaks.
4. The product is sold both in bulk and on the spot market.

The role of Revenue Management is limited to the supply chain, but it can be applied to many streams in the company to maximize profits and increase sustainable growth.

The Advantages of Revenue Management

Revenue management (RM) or Yield management has been practiced at the airline (1992), Hotels (1992), and auto rental businesses (1995) for almost two decades, and has recently attracted Interest in other sectors, including the subscription management industry.

Revenue management's primary goal is to sell the right product at the right price to the right customer. After they decided to implement a flexible pricing approach, the airline industry started the practice depending upon the demand to maximize each ticket's value to ensure they recover the losses (empty seats).

Revenue Management can help a company predict products or services demand and customer's wants and needs. It can also help in setting up an effective pricing strategy to maximize profits and minimize losses. There are some of the other benefits of Revenue Management, such as:

1. Revenue Management helps companies understand what their customer expects in their products or services.
2. Revenue Management helps in increasing the products and services demand with adequate & flexible pricing policies.
3. Revenue Management helps a company stay ahead of their competition by creating a competitive pricing strategy to draw new customers.
4. Revenue Management helps in avoiding overbooking that could lead to high-losses.
5. Revenue Management helps improve workflows and adjust the human resources involved in the company's administration or enterprise.

Revenue Management helps companies with the chance of creating a new effective program by coordinating the working divisions of a company.

How to Increase Revenue with the help of Yield Management?

A business needs to follow the right process for attaining sustainable growth and appropriate profit increment to increase revenue with the help of Yield Management. The goal is to increase the revenue and profit; revenue is the total amount generated after the sale of a product or service, and profit is the income remains after accounting all the expenses (production cost, resources, and marketing cost).

For example, if you are selling a subscription-based food product and the production cost of that product is $20, you sell this product for $25 each, so you are making $5 profit on each sale. But, you forgot to add $5 marketing expense to market the product. After adding the $5, your total product’s cost is $25, i.e., the same price you are selling the product for.

Always remember that revenue and profit are two different things. So, how do you increase your revenues the right way using the Yield Management process? A key to becoming a high-performing organization is the ability to find new ways to generate revenues. You can do this in many ways, but we’re going to discuss the seven essential Yield Management processes that can guarantee substantial revenue gains.

1. Offer new products/services

Selling new products and services is one of the effective ways to increase revenue. Put yourself in your customer’s shoes. If you were them and you were buying one of your products, what else would complement it? An example of this would be cross-selling products or services.

2. Increase your customer base

Keep utilizing different strategies that could help in increasing your customer base. For example, create blog posts that educate customers, offer a discount for new customers, promote your business on social media platforms, and offer excellent customer service.

3. Increase your prices

Increasing your prices sounds simple enough, but be very careful and base your price adjustments on research. A company must justify the price increase to its customers to be successful in implementing the new prices. You can do this by increasing the perceived value to differentiate your product from your competitors.

4. Increase repeat purchases

In Addition to increasing your prices, you can also increase repeat purchases or sales by selling more to your existing customers. Establish a good reputation with your customers, and they will be willing to explore new businesses with you.

5. Increase your net margin on sales

If your net margin on sales is low, your business will struggle to examine your customers' profitability. You may find that some segments and customers provide you the highest returns on purchases.

Another excellent approach for increasing revenue is to meet with other business owners who sell a non-competing (or even better complementary) product that can pay off huge - and often long term. And, if what you have is genuinely integral, it also helps your customer. Customers would much rather go to a business that was referred by someone they know and trust rather than finding it through advertisement.

Revenue Management Strategies

Revenue Management is vital for every business because it can help you sell your product or service drastically for higher or lower prices depending upon the demands. It is essential to utilize the amount coming in from revenues to cover the fixed-cost of a product or service. Alternatively, one can apply a Revenue Management strategy for ensuring predictable income and growth.

1. Applying Dynamic Pricing

Understanding and implementing the right dynamic pricing for your product or service is vital. Nowadays, especially if you are in the Hotel or Airline industry, the pricing of a room or a flight ticket changes frequently depending on the demands. You can use your sales history to balance between underpricing and overpricing your product or service prices in response to demand and supply, the same as they do for a Hotel room or a flight ticket.

2. Integrating PMS

A Property Management System (PMS) or Central Reservation System (CRS) allows hoteliers to expand its industry reach and to maximize its product or service bookings and distribution channels.

3. Analyzing Data

Analyze your past data, including sales, customers, churn rates, revenues, profits, cost of production, marketing costs, and any other useful information related to your business that could increase your income. The goal here is to study the data and implement the successful strategies that lead to increased revenue in the past.

4. Tracking Competition

It is crucial to monitor and track your industry’s competition continually. Find exclusive opportunities and avoid failures by following your competitor’s strategy. Don’t mimic your competitors, find out their USP & weakness, and implement your path across it to be ahead of them all of the time.

Conclusion

Revenue Management focuses on driving revenues from Business to Consumer (B2C) relationships. With a Revenue Management System in place you can forecast the outcomes of future demands of your product or service and identify where you could command a price higher or lower in comparison to your competitors to increase revenue.