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January 18, 2024
Hi and welcome to the fascinating world of Revenue Management (RM)!
Imagine a place where strategic thinking and number crunching come together to create magic for businesses, particularly in bustling sectors like tourism and hospitality. Ever wondered why the cost of a hotel stay or a flight can vary so much? Or how businesses adapt their pricing to meet the ever-shifting market demands? Well, you've come to the right spot to find out.
Pricing, Revenue Management, yield, dynamic pricing : What do all these marketing terms mean?
We're going to dive deep into the world of RM. But let me tell you, it’s more than just playing around with price tags. We're talking about a clever approach that tunes into customer behavior and market trends to come up with the best strategy. This journey is based on the broad experience of the WeDploy team. Whether you're a professional looking to refine your skills or new to the idea of Revenue Management, we've tailored this article to help you understand and apply these principles effectively in your business.
So, are you ready to embark on this adventure with us? Let’s unravel the mysteries of Revenue Management together and see how it can really transform the way businesses thrive and succeed.
Let's kick things off by getting to the heart of what Revenue Management really is. Picture this: It's 1998, and Robert G. Cross, known as the 'father of Revenue Management,' comes up with a definition that still rings true today. But to truly grasp this concept, we need to step back in time a bit further, to the 1970s in the United States.
The origins of Revenue Management are often traced back to the airline industry following the Airline Deregulation Act of 1978 in the US. This pivotal change removed government control over fares, routes, and the entry of new airlines into the market. Suddenly, airlines found themselves in unknown territory—a competitive marketplace where they had to set their own prices and manage their seat inventory efficiently to stay afloat. With increased competition and the freedom to price their own services, airlines needed a strategy to optimize their revenue.
Revenue management is the art of optimizing customer capital in order to maximize revenue.
- Robert G. Cross, Revenue Management: Hard-Core Tactics for Market Domination
Think of it as a fine balancing act where businesses aim to sell the right product, at the right time, to the right customer, and through the right channel, at just the right price.
But how does this all play out in real life? Well, one of the key strategies in Revenue Management is what we call 'dynamic pricing.' This isn’t just about hiking prices; it's about smartly adjusting them (up or down) based on how much supply and demand you have.
Let's look at two main things in Revenue Management: what you're selling (supply) and who wants to buy it (demand).
First, think about your services. For a given hotel, what's your availabilities for a 2 night stay on an Easter week-end ? What about your competition in the neighborhood ? This helps you know where you stand in the market.
Next, think about demand. This is about who wants to buy what you’re selling and when they want it. For example, how many people are looking for a holiday trip during Xmas holidays ? What's the audience on the radio early on a weekday morning ?
Knowing both – who wants what and when – is obviously important for good Revenue Management.
Totally ! Pricing and Revenue Management activities are sub-streams from a marketing discipline. Quick reminder on this chapter - Marketing Definition :
We're having here 4 elements in the equation : [Volume of Customers] x [Product Sold] x [Repeat/Frequency] x [Price].
Naturally, the price will be somehow the focus for a Revenue Manager, impacting indirectly the volume.
Well, pricing can be either "static" or "dynamic". Static means the price doesn’t change much – it stays flat. Dynamic pricing is when prices go up or down based on what people want and how much of it is available, like we talked about with supply and demand.
Take a shop selling clothes or a car company, for example. They usually have fixed prices for their stuff. It’s okay if they don’t sell everything today because they can still sell it tomorrow. These products are physical and can be stored.
But what about services like hotel rooms or plane seats? You can’t "store" a hotel room for another day if it doesn’t get booked today, right? This is what we call perishable. For things like this, changing the prices can help either get more people to buy (when prices go down) or make the most out of high demand (when prices go up). This idea of changing prices for services that can't be stored is where Revenue Management kicks in.
Let's take a look at where Revenue Management (RM) is used. As we just saw earlier, it started with the airline industry in the United States with deals like 'Super Saver Fares' for American Airlines. Soon after, other industries began to use RM too. These included car rentals, hotels and cruise ships.
But now, you’ll find RM in lots of other places as well. It’s used in parking lots, trains, buses, theaters, and amusement parks. And it doesn’t stop there. More unique places like hospitals, bars, restaurants, and various public spaces (like museums, casinos, festivals, sports events, car garages, and even in advertising and daycares) are using it too.
Quite simply, the positive effects of Revenue Management revolve around 4 axes:
Boosting Revenue: By adjusting prices, we can make the most of peak seasons [=filter the demand] and also drive sales during slower times [=stimulate the demand]. This is about smartly matching prices to what our different customer groups can afford, aiming to get the best possible revenue from what we have to offer.
Understanding Customers Better: By dividing our customers into different groups based on their habits and preferences, we get to know them better. This helps us predict what they'll need, how much they're willing to spend, and how to keep them happy and coming back.
Staying Ahead of the Game: A big part of our job is to encourage customers to make their bookings early to secure business. This approach, associated with an 'ascending pricing,' helps us manage risks better by knowing in advance how busy we’ll be and ensuring we have the right number of staff to provide great service.
Perceived Value: If practiced correctly, ascending pricing is helping to boost the perceived value. For instance, I'm booking a hotel stay for 100€ a month in advance. Come check-in day, that same room goes for 200€ due to high demand and limited availability. Having secured their stay at half the price, I'm perceiving this early booking as a smart save, heightening my satisfaction with the deal.
Let's stop it for a second. Before diving into Revenue Management, it’s important to consider three key challenges that professionnels are encountering :
Resources investment: Launching a Revenue Management initiative isn't without cost. It requires investment in both human capital and technology, not to mention potential ongoing expenses. These can vary a lot. If you're looking at solutions, you might be paying a fee for each transaction or a monthly charge per room. When it comes to salaries, the amount will hinge on how experienced your staff needs to be. A recent European benchmark pointed out that you might expect to pay around €50,000 a year for a qualified professional, which could mean nearly €90,000 annually for the employer when all is said and done.
Complexity: The landscape of Revenue Management is ever-changing, with new technologies, players, and collaborations constantly emerging. Keeping abreast of these developments is essential for harnessing the full power of RM. It's a field driven by data, not instinct, demanding a methodical approach to learning and evolving. As the volume and detail of data available grow, so does the complexity of processing it—gathering, cleansing, organizing, analyzing, and ultimately, making informed decisions based on it.
RM Culture & Comprehension : Beyond the systems and strategies, the success of RM hinges on the people behind it. Ensuring that your team fully grasps and endorses your Revenue Management approach is essential. Just as important is transparent communication with customers to clarify pricing changes, ensuring they understand the reasons behind paying €75 one month and €95 the next. This level of clarity is what helps maintain trust and keeps customer satisfaction high.
Revenue Management revolves around several activities. We will mention 3 blocs : Organization & Process, Pricing, and finally Technology.
Some are more recurring or time-consuming than others, but all are essential for the proper execution of an RM.
In chronological order:
1/ Know your market
Start by examining the service you provide and your global environment. Who needs it? What gap does it fulfill? How do customers view your offering, and who else is competing for their attention?
Consider: Are we offering something unique? How do our services align with what our customers are truly looking for? Who are the competitors?
2/ Segment your demand
Identify the various customer groups that engage with your services. Understand their common characteristics to tailor your approach.
Ask yourself: Can we categorize our customers into distinct groups? What are the shared desires, needs, habits, acquisition channels or booking lead time within these groups?
3/ Find the right tools & Train the teams
Assess your current workflow and identify areas for improvement. Explore whether there are existing tools that could streamline your operations, and ensure your teams are up-to-date with RM practices.
Reflect on: Are our current tools and processes efficient? How can we enhance our team's RM skills and awareness?
4/ Create your Budget
Set financial goals beyond the usual forecasts. Define what success looks like for your structure and set clear ambitions.
Plan ahead: What financial milestones are we aiming for? How does our budget reflect our strategic ambitions?
5/ Open Sales
Review your pricing strategy to ensure it's aligned with your overall goals. Secure important dates to prevent lost opportunities.
Evaluate: Is our pricing offers poised to meet our goals? Have we protected key dates or periods from being undersold/oversold ?
6/ Forecast
Look ahead to anticipate demand for the coming months. Assess potential risks and be alert to opportunities that may arise.
Forecast: What does demand look like for the next quarter? Are there risks? Opportunities?
7/ Yield Rates & Restrictions
Make adjustments to rates and restrictions as needed, especially if you detect unusual patterns.
Adapt: Are current trends signaling a need for change in our strategy? What's our Business-On-the-Book ? Are we ahead or behind the patterns ?
8/Analyze & share performance
After landing and period achieved, review the outcomes and the way you built it. Share successes and lessons learned with your team to refine future strategies.
Review: What worked well, and what didn't? What key learnings can we disseminate ?
We have just seen that the scope of action of a Revenue Management service is actually quite broad, transversal, and ultimately goes beyond price changes and inventory protection. So, is it correct to associate Yield Management and Revenue Management?
There is no gross mistake in using the term Yield Management. It's not incorrect, but let's say that the term is no longer entirely appropriate because it restricts the fields of application, focusing solely on Rates & Restriction Management. Let's review the elements shared today.
As we saw in the historical part, the use of the term Yield Management dates back to the years 80/90s. The work done by airline operators greatly helped to democratize and massify the use of tools and systems.
We talked about yield in terms of supply and demand : adjusting fares and rates to optimize revenue from observed demand on a given date or period.
This is the crux of the matter, however, additional activities now enrich what we call Revenue Management : segmentation, forecast, budget... It is natural that beyond maximizing revenue, attention is then paid to other strategic aspects such as distribution or acquisition. We're thinking mid and long term, rather than short one for Yield Management.
And this is why the terminology has evolved: RM tackles a spectrum of actions a bit more significant than that of Yield.
"While Revenue Management involves anticipating consumer behavior through market segmentation, demand forecasting, and price optimization for different types of products, Yield Management is more specifically about optimizing revenue through inventory control."
~Livio Moretti, Distribution Strategy
Thus, the use of the term Yield Management is not to be banned but should be refined depending on the context. The notion of Revenue Management will be preferred when discussing pricing with Marriott Hotels or Disney Parks. A well-established system is present with these actors, for example, with segmentation, forecasting, and a distribution strategy.
Conversely, if you are a non-professional in the Short Term Rental industry (STR) adjusting your rates for the summer of 2024, you are practicing Yield Management.
As we went through the dynamic terrain of Revenue Management, it's clear that its applications and strategies are ever-evolving, shaping the future of various industries. From airlines to museum, RM continues to redefine the art of maximizing revenue. But what's next? How will concepts like Total Revenue Management further transform the landscape? What about Net Revenue excluding all acquisition and commissions fees?
Are you curious about what lies ahead in Revenue Management? Do you wonder how the principles of Total Revenue Management might change the game for your business? WeDploy is here to explore these possibilities with you. Whether you're thinking about implementing Revenue Management Systems or ready to intensify your RM strategies, our expertise is just a conversation away.
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