The phenomena of revenue management gained importance in recent years due to the variable and discriminatory pricing schemes offered by various companies to their customers. They apply the orderly analytics that predicts the behavior of the consumer at the micro-level and augments the prices and availability of products to the customers thus enhancing the overall revenue for the company. This article explains the system of Revenue Management: with their concepts – scope, future, and benefits. The aim of devising revenue management techniques is to deliver the fine product or service to the appropriate customer at the precise price.
Here explains; Revenue Management: Meaning, Definition, Scope, Future, and Benefits.
The revenue management system is based on analyzing the customer’s perception of the value that the product would provide and make straight the availability, placement, and price according to that perception.
This discipline became the need of every business rapidly. There could be many reasons for this. Even a kid who is out for selling orange juice will have to analyze and predict the appropriate weather and time for selling his product. When we talk about giant businesses, the need for assessing customer demand and subsequently managing that demand is enormous and critical. A revenue management system is an answer to the question of such demand.
History of Revenue Management:
The concept of revenue management is not new to the business world. Every business that is selling some fragile product needs to flex the price of that commodity due to some uncertain environmental change or response to some competitor’s action or customer’s demand. Seats in airplanes, clothes (i.e. for summer and winter), rooms in hotels, etc., all require their strategies to be sold in a manner that maximizes the overall wealth of the company. This field properly originated in the U.S. airline industry at the start of the 1970s. Bob Crandall of American Airline (AA) who put restrictions on discounted fairs.
After that yield management came into practice which is the foundation of revenue management. American Airline, with the help of other airlines, further extended the yield management system by offering low fares to the cost-sensitive passengers and high priced fares to the time-sensitive passengers, giving maximum value to both types of travelers. The impact of practicing yield management was come into knowledge by the year 1985. American Airline reported about 48 percent profit growth. This huge success attracted other industries to develop into the field of yield management.
Definition of Revenue-management:
It is the application of disciplined analytics that predicts consumer behavior at the micro-market level and optimizes product availability and price to maximize revenue growth. The primary aim of revenue management is selling the right product to the right customer at the right time for the right price and with the right pack. The essence of this discipline is in understanding customers’ perception of product value and accurately aligning product prices, placement and availability with each customer segment.
Overview: Businesses face important decisions regarding what to sell when to sell, to whom to sell, and for how much. They use data-driven tactics and strategy to answer these questions to increase revenue. The discipline of revenue management combines data mining and operations research with strategy, understanding of customer behavior, and partnering with the sales force. Today, the revenue management practitioner must be analytical and detail-oriented, yet capable of thinking strategically and managing the relationship with sales.
The Scope of the revenue management system:
There is a wide range of options available to increase revenue through a revenue management system, the following scope below are;
The pricing strategy is related to envisaging the customer’s perceptions about the value of the product and then setting prices to catch that value. Pricing strategy which a company adopts dictates its objectives i.e. what it wants to accomplish. Company then chooses pricing tactics that can respond to the customer’s expectations. Customer price sensitivity analysis, price ratios and price optimizations are examples of such tactics. The carefully selected pricing strategy can increase the total revenue and ultimately the profitability of the firm. Therefore, they can redefine pricing strategy and can build enhanced pricing tactics.
A company can deliver its products with various channels like online or in shops. Different type of cost and revenue are linked to these channels. The customer of a particular nature selects the specific channel for buying. The product for example customers who opt for purchasing online is more price sensitive. Their tools can help to analyze the channels and deciding the appropriate discount. The offers to distribute and retailing channels then to consumers without losing the customers’ perception of the value of the product.
Revenue management tools can help determine the response rate of customers to a particular level of promotional activities. By efficiently promoting the products, a firm can increase its revenues and subsequently the profitability.
The process of Managing Revenues:
The revenue management process begins with collecting data on inventory, Consumer perceptions, and behaviors, product prices, etc. The system employed collects and then store the information mentioned before and uses it to optimize prices, channel selection and amount of price promotional activities required. After the collection of data, segmentation is done by the system to categorize consumers into various groups. After segmentation, the system forecasts the demand by the implementation of quantitative analysis of data like the time-series model and cross-price elasticity.
When the forecast phase is complete, their system comes into the position of giving different options to the company about it. How many different ways can it sell its product to what type of customers? Optimization provides the answer to two questions. First of all, it guides the company about which factor should optimize for price or sales. Secondly, t tells that what optimization technique is relevant and should be opted. For instance, regression analysis for finding out relationships between variables. Discrete choice models for envisaging customer behavior and linear programming. Techniques for setting optimum prices to maximize the total revenue.
Future and Challenges in Revenue Management:
Implementing revenue management in an organization is not an easy task. There can be a lot of obstacles to cultural, organizational and reliability. Issues in information systems already developed like supply chain, customer relationship, and intelligence. Nowadays, it is moving towards more ASP(Application service provider) platforms.
In the future, they will focus on subscription and rent through ASPs rather than developing application systems inside the organization. Future challenges of RM can its placement inside the organization i.e. whether in marketing or finance department. Or, the organization or maybe it will need a whole new department to carry out its activities.
Purpose and Benefits Revenue Management Implementation:
We are discussing above that yield management evolve into revenue management. As it became the standardized practice for the companies, its definition progress. Revenue management is defined as the field which is the concern with answering. The demand questions related to consumer behavior and system and set of methodologies require to make them. Revenue can compare with supply chain management because it aims at lowering. The cost of producing and delivering the products hence increasing the profit, so as the goal of revenue management. There need to be certain business conditions that are essential to successfully implement a revenue management system.
These conditions include customer heterogeneity, production inflexibility, variable and uncertain demand. Management culture, the infrastructure of data and information an so on. Employing a revenue management system benefits the company by unleashing. The hidden demand which can lead to great revenue opportunity. Helps to understand the customer’s choices between price and product characteristics. Increases revenue, suggests discounts on the product when required to build up. The market share and helps in developing a sales-driven organization whose sole focus is profit maximization. Also, read it: Role of Price Perception in Consumer Buying Process.