What Is Revenue Management? An Explanation of How the Strategy Works

It's not a secret that any company or business expects an increase in revenue and the success of its product or brand. There are many factors, the combination of which leads a company to success. In this article, we will talk about one of the most important topics: revenue management.

Revenue management has such a big impact because it directly affects the development of your financial strategy and your profit margin.

In this article, we will consider the history of revenue management, various revenue management tips, features of a revenue management system, and much more.

Revenue management is the ability to sell the right product to the right customer at the right price. In order to do this, analytics data is used, on the basis of which it is possible to predict demand and adjust prices. With this approach, it is necessary to change the terms of the deal depending on the needs of the buyer. It is necessary to adjust the price, quantity of goods, sales channels and time of sales to the needs of the customer. Revenue management is a flexible approach that allows you to extract maximum profit from your business, but you need to constantly analyze information and quickly respond to market changes.

Thanks to various software, this process can be easily automated. However, there are several common factors that will always be taken into account when managing income:

· Predicting demand
· Determining behaviors (such as the times of the year with the highest booking rates)
· Understanding consumer spending habits
· Developing dynamic pricing packages
· Analyzing the competition’s pricing strategy using business intelligence

It is not a secret that any serious business consists not only of calculating the desired profit and performing risk analysis; along with these and other things, rational revenue management plays a significant role. Several decades ago, the main solutions were formulated and developed to systematize revenue management. The first solutions were aimed at analyzing tourist flow, but later solutions appeared for other business areas. For example, when BOAC, the predecessor of British Airways, came up with "Early Booking" at a better price, it became one of those solutions and is now ubiquitous.

Further, after its success in the aviation industry, revenue management was adapted by hotels. This made it possible not only to increase the occupancy, but also to plan the implementation at more favorable prices for business owners, taking into account supply and demand in different situations, such as public events, seasonality, weekends, etc.

In the following decades, up to the present day, revenue management has been accepted as one of the main tools for analysis and a way to increase companies’ income and reduce the risks of misuse of company budgets, which in turn contributes to stability in development and expansion of businesses in general.

Revenue management has some common financial key performance indicators (KPIs) and metrics, but the most important thing is to find the KPIs that work best for your business and situation.

This metric is used in the hotel/lodging business to determine the average rental revenue earned for an occupied room per day. It is used to determine the general operating performance of the establishment.

This metric is also used in the lodging industry. It is the average occupancy rate at any given time. Thus, it is possible to understand ‌occupancy rates not for a certain period, but in general.

This is perhaps the most important metric. It includes the income that each room brings, including when it is empty.

The ARPA KPI takes a different perspective than the previous metrics: It looks at revenue per customer account rather than per asset. It’s usually calculated as monthly recurring revenue divided by the number of accounts generating that revenue.

This metric is used in the transport business, and more often for airlines. The bottom line is that ‌revenue from passengers is taken and divided by the total number of miles traveled by each seat in the airline's fleet. Miles per seat correlate with fuel consumption and time in the air. This indicator decreases when ‌seats are empty.

There are several effective revenue management strategies in which the price remains unchanged. We will talk about the prices themselves a little later, but for now, we will focus on equally important tools.

Before making a hotel room, flight, or other service available, study the situation in the micro market at the moment. Maybe some important events are coming soon, and it would be better to reserve seats for large-scale events first, in order to increase profit and not miss out on profitable customers.

Various aggregators take most of the customer base, and with it a percentage of your income. If you place your offers on third-party sites, then think about exactly how much you are ready to offer. How many seats, rooms, or apartments, and for how long.

Selling the middle night for a one-night stay could make it harder to fill that room on the other two nights. One possible way around this problem is by requiring a minimum length of stay, either around a special event or even all the time.

This term is used for airlines, but it can also be applied to any other transportation business. The bottom line is that the two routes are combined and are not sold separately. If there is a shortage of seats on some flight because it is crowded, and in a hub city the subsequent flight is empty, it will be more profitable for companies to sell a ticket to the passenger who chooses a long way (for two flights), instead of the passenger who chooses only one flight to the hub city. Thus, some of the passengers from the first crowded flight will be on the second flight and fill the empty seats.

Revenue management is a whole science, and reading one article will not be enough to master this skill. But there are some basic tips on how to manage income.

Your revenue management strategy can constantly change, and the market itself is constantly changing, so like in any other area, you will always have to stay on top of the latest trends in revenue management.

Sometimes the only way to find out the reliability of information is to test it in practice. Don't be afraid to make mistakes; they can serve as a further foundation for successful revenue management

Exchange knowledge and information with other companies and business partners who are engaged in revenue management. Some information may not be publicly available; it will be distributed only in narrow circles. Such inside information can be especially useful and valuable.

Many people, when they manage income, focus on profit here and now. This is not bad, but do not forget about where your strategy will lead you in a few years.

Due to the fact that revenue management involves the constant collection of information, there are several functions and metrics that you can use to get a clear picture of the market and demand.

The RMS that you use is important. If it is a good service, then you will be able to track performance indicators for the revenue manager. You need basic indicators of where you are now and where you have been to build a further strategy.

At the stage of collecting market data, it is important to get the most reliable and up-to-date information about your competitors. A first-class RMS will track information about your competitors without having to subscribe to their emails.

Sometimes it may be useful to impose some restrictions, more precisely to prescribe them in your RMS so that the program does not allow certain actions, such as contracts with sales channels.

With perfect data on what you’re charging, and approximate forecasts for what you think demand will be — which an RMS can help you develop as well — the software will often be able to estimate what your revenue will be going forward. You can use this for “what if” analysis, but remember that ‌predictions are only as good as the data upon which they’re based.

When choosing an income management system, first of all, it is necessary to take into account your industry and specifically your business. Make sure the system is suitable for your company.

Some people purchase paid software services that they do not use later, precisely because the functionality turned out not to be particularly necessary for their business. For many, a simple approach is enough.

Many users like cloud technologies for data security and easy software updates, while other companies already have data storage and protection solutions and prefer not to deal with software that changes frequently.

There is no one unambiguous solution that is suitable for all companies. The revenue management system will vary depending on the enterprise.

Revenue management allows you to extract maximum profit from your business. Thanks to revenue management, you will be able to make profitable deals with customers, and offer them the products and services that they really need.

Without revenue management, running a successful business is almost impossible, so it is very important both for developing your business and for increasing your income.

Revenue management and yield management are two similar concepts. Best practices for yield management can also be applied in revenue management. Here are a couple of things to keep in mind when managing profitability:

1. You must have a fixed amount of "inventory" (goods that you sell).
2. You need to understand how many products have expired. The point is, when the unsold inventory expires, it’s worthless.

In this article, we have analyzed revenue management and its applications in detail. We hope the article was useful for you and you found the necessary information. Building a business strategy is always a lot of work, and revenue management takes up a big part of it, so this is a factor that definitely should not be ignored. Price Intelligence Software can be useful in revenue management.

Price management is primarily concerned with price, whereas revenue management is not concerned with prices. With revenue management, the approach to sales changes, while the prices remain unchanged.

The revenue manager coordinates all processes regarding the revenue management strategy. This area, like marketing, for example, is quite complicated, and it requires a dedicated person to lead this process.

In total revenue management, businesses take a holistic approach to managing all aspects of revenue, including pricing, demand, and distribution. This comprehensive approach allows businesses to optimize their revenue across all channels and touchpoints.