What Is Revenue Management And How To Implement It
The theory surrounding revenue management is fairly simple, maximise revenues. In practice, this is a strategy that will squeeze every last dollar out of your business. Often referred to as yield management, there is so much more to revenue management than meets the eye. Using the latest technology it is possible to predict, with a high degree of accuracy, the behaviour of clients under certain circumstances. It is then simply a case of adapting prices to hit that perfect price tipping point, between too expensive and affordable.
A brief history of revenue management
Revenue management is a strategy used as a matter of course by numerous industries, such as the airline sector. Many people are not aware that the early variation of revenue management (often referred to as yield management) was originally coined by the airlines back in the 1980s. So, what is revenue management and how does it work?
American Airlines realised that offering discounts on pre-booked tickets, up to 21 days in advance, was a useful way to cover flight costs. The earlier the booking, larger the discount which led to increased demand. However, this also left scope to increase prices nearer the flight date on what tickets remained. The majority of later flight bookings came from business travellers who often worked on relatively short-term timetables. As a consequence, many of them were unable to take advantage of early booking discounts.
Which industries benefit most from revenue management?
In reality there are few businesses which would not benefit to a certain degree from a revenue management strategy. However, there are specific industries where the benefit is significant, which include:
- Cruise liners
- Car rental agencies
- Sports facilities
The main characteristics of industries which benefit most from revenue management are as follows:
- Fixed capacity
- Advance reservations
- Seasonal/time variable demand
- High fixed costs
- Perishable inventory
- Segmented customer base
- Element of variable costs/prices
In order for any business to receive the full benefit from a revenue management strategy, there needs to be a degree of flexibility with regards to costing and pricing. For example, in the hotel industry, it is possible to reduce staffing levels during quiet times. This therefore reduces the cost per room and gives greater flexibility with regards to real-time pricing.
As Patrick Landman of Xotels commented:
“Revenue management is selling the right room to the right client at the right moment at the right price on the right distribution channel with the best commission efficiency.”
How to use data to maximise revenues
The key to revenue management is the use of historic and real-time data to forecast consumer behaviour. There are many different software packages available today but the key is the data feeds. If you are able to feed accurate data into the system, you can maximise your revenues in real time. Before we take a look at examples of revenue management, also referred to as dynamic pricing, it is important to recognise the different elements of data required.
Monitor your competition
The hotel industry is a perfect example of a fast-moving fluid market where room prices can change minute by minute. It is therefore important to monitor your competition, with particular focus on local competition as well as national pricing trends. When setting prices you also need to take into account your target market – there is no point trying to compete with a budget hotel if you are a boutique outfit.
Appreciate client routines and habits
We know that history has a habit of repeating itself in many areas of everyday life and business. Over time some of these habits and routines can change but it is still very important to take them into account. For example, customers may be willing to pay a little extra for a hotel room if they are taking a Christmas break. They may also appreciate a number of additional services such as a Christmas menu and access to external/internal Christmas events.
Know your income channels
The vast majority of businesses which will benefit from revenue management have a specific type of clientele. They tend to include:-
- Corporate accounts
- Direct accounts
- Wholesale accounts
When looking at revenue management, each marketing/income channel will require its own specific strategy. If we look at the hotel sector, corporate clients are often creatures of habit and there may be scope for discounts in exchange for regular business. It is important to appreciate and adapt to the specific characteristics of each income channel.
Markets are constantly emerging and changing, as a consequence market trends come and go on a regular basis. For example, bricks and mortar retail businesses have seen significant competition emerging from the online arena. This is something which began fairly quietly, built up speed and now dominates the retail market. Any bricks and mortar retailer which failed to respond to the online threat would likely have seen a significant hit in turnover and profitability. It is also important to take into account wider market trends including:-
- Economic trends
- Seasonal trends
While some business strategies will be more effective than others, it is very difficult to grow a business in challenging economic times. So, when looking to forecast client behaviour in the short, medium and longer term it is important to take into account all relevant information.
Unfortunately, there are numerous industries which tend to focus on new customers as opposed to servicing existing clientele. Many people forget that attracting new customers may take significant investment in marketing. The servicing of existing customers carries no such costs and it is very important to “treat them fairly”. Whether a retailer, airline or hotel company, customer loyalty can be very fickle these days if the customer feels ignored. Don’t forget, your competitors are only a click of a keyboard away from offering your customers a better deal.
Automation is good, the personal touch is better
The key to any successful business is heavy automation in the background and a strong personal touch at the face of your business. Crunching data, taking online bookings, organising deliveries and automating other manual actions saves time and money. This is time and money which can be used to focus on building your business. However, whether you are a retailer, a hotel company or an airline, your customers still want the personal touch; they want you to notice them.
Implementing revenue management strategies
As we touched on above, there are various information channels which will prove invaluable when trying to predict customer behaviour going forward. Artificial intelligence systems are now at the cutting-edge of business, able to analyse huge amounts of data and use various indicators to predict future patterns. While many people are still sceptical of artificial intelligence, this is a concept which has been around for decades and is now part of our everyday life. The fact that we rarely realise this, is something of a double-edged sword.
The key to any successful revenue management strategy is to be flexible, up-to-date and look to make real-time pricing changes. The quicker you react to events and market trends, the more chance you have of catching the eye of potential customers.
Examples of revenue management
The hotel industry is a sector which routinely makes use of revenue management strategies, artificial intelligence and the analysis of big data. We will now take a look at two examples where revenue management can be used to maximise income.
Local concert increases demand for hotel rooms
As there is always a fixed level of accommodation in any one area, local events such as music concerts can lead to a significant spike in demand. Using historic data, taken from previous events, and real-time data, hotel companies are able to accurately predict the correct pricing point for their capacity. For example, let’s assume there is a hotel with 50 rooms and a daily room rack rate of $300. As a consequence of increased demand for the local event, it may be possible to charge $350 per room.
The figures for this particular scenario are as follows:
50 x $350 = $17,500
If we compare this to the normal room rack rate, the traditional yield would be:
50 x $300 = $15,000
So, as a consequence of predicted demand for local hotel accommodation due to the concert, this creates an above average yield:
($17,500/$15,000) x 100 = 116.66%
This is a perfect example of taking into account local events, predicted demand and using real-time data together with historic data to calculate the value tipping point.
Increasing revenues during quiet times
No hotel will ever be fully booked all of the time, but with there are ways and means of adjusting pricing in real-time to maximise revenue. Let us assume that on a relatively quiet day a hotel would normally attract 20 customers leaving 30 rooms free:-
20 x $300 = $6,000
This equates to a yield of:
($6,000/$15,000) x 100 = 40%
However, what if historic data suggested that a reduction in the room rack rate to $250 would attract 35 customers as opposed to 20? The income calculation is very different:
35 x $250 = $8,750
This equates to a yield of:
($8,750/$15,000) x 100 = 58.33%
This is a perfect example of using real-time data and artificial intelligence to find a new price point in the quiet times. The overall yield is increased from 40% to 58.33% simply by reducing the room rate from $300 down to $250.
Additional income streams
The above examples perfectly illustrate the power of real-time data, artificial intelligence and flexible pricing. In addition, revenue management software will also be able to predict additional income streams such as food and beverage spending per customer. As we touched on above, revenue management strategies work best where there are significant fixed costs and, in a perfect world, additional income streams.
There are numerous issues to take into consideration when looking at revenue management strategies and how best to maximise income. Historic data is extremely useful, real-time data is priceless but for many it is the use of artificial intelligence to analyse this data which brings premium revenues. In the past many businesses would have had numerous income streams, which often worked in isolation, as opposed to in tandem. In the above hotel examples, this illustrates how to maximise hotel capacity by varying prices, leaving scope for additional income from other income streams.
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