Revenue management is the science behind offering the right product at the right price to the right customer at the right time. By finding ways to evaluate a customer’s willingness to pay, revenue management scientists have developed algorithms to adjust a product’s price based on its demand. Originally created by PROS to optimize airline ticket pricing, revenue management systems can now apply to every industry.
Specifically helpful in industries with varying levels of willingness to pay, a revenue management system can help ensure that sellers capitalize on an increase in demand. For example, things like plane tickets and hotel rooms are often more expensive during holidays and other high travel times of the year so the price for a seat or a room during those windows of time goes up. Conversely, having empty seats or unoccupied rooms always results in losses so, sometimes prices drop during spans of low anticipated traffic or at the last minute if a product isn’t yet sold. Many airlines and hotels have corporate agreements to fill seats and rooms at a lower price to ensure maximum occupancy.
Since many of the corporate agreements created to guarantee all products are sold also come with a lower price point, relying solely on these corporate agreements could result in a full plane, for example, still costing the airline money. Instead, airlines use formulas and algorithms – which have evolved into PROS Dynamic Pricing Science – to find a price point that customers are comfortable with, therefore minimizing the need for the airline’s corporate safeguards. With more customers willing to pay full price, companies can be more proactive in their revenue management and pricing strategy.
When it comes to revenue management pricing, there are many dynamic factors at play. However, there are four major variables that consistently influence revenue management: price, inventory, marketing, and channels. Think of each factor as a wedge of a pie chart with constantly changing barriers. The level of influence for each factor varies constantly depending on the scenario.
The most obvious factor in revenue management is the price. Identifying the amount a customer is willing to pay for a product is the first step in selling it. By following market conditions, customer demand, competitor prices and a plethora of other factors to determine the right price, investing in data-driven pricing optimization can be very profitable.
In terms of inventory, revenue management systems drive how to allocate and price capacity. A strategy may involve providing discounts to increase sales volume with the goal of selling all inventory. This is also what creates the idea of overbooking. Most notably used with airlines in their yield and revenue management strategies, because of the threat of cancellations, they implement a strategy of overbooking to make sure that all seats are filled.
Discount and promotional opportunities also play into revenue management. Usually activated initially to increase sales volume, in environments that involve long-term subscriptions or commitments, the real strategizing around revenue management comes in determining how to roll customers off of promotions and keep them comfortable paying full price.
The last major factor to consider in revenue management pricing is the sales channel. Which sales channel is used can indicate certain details about the customer like price sensitivity or willingness to buy. Some revenue management strategies enforce different prices or promotional opportunities depending on which sales channel is used, all with the hopes of providing options most likely to be attractive to the customer profiles most likely to use said channel.
Understanding how price, inventory, marketing, and sales channels work together to influence revenue management, the next big question is how to actually go about implementing it and determining if your company is equipped to engage. While many of the benefits of revenue management may seem attractive, be aware that they do require some processes and resources to keep it working.
First off, revenue management is a data-centric idea. Without relevant data and, quite possibly, more importantly, relevant historical data, revenue management won’t function as well as it could. It’s important not only to collect detailed information about the products but also about the customer. Details that can suggest insights into a customer’s behavior or purchasing habits are invaluable to this process, especially segmentation.
Segmentation requires a solid understanding of certain markers that indicate a customer’s likeliness to do one thing over another. Look for factors that influence willingness to buy or price sensitivity. It often requires a few years of analysis to identify what those markers are for your company but, once you know them, use them as dividers in your yield and revenue management strategy.
PROS is an industry leader in revenue management technology. Not only does PROS’ identify key factors in optimizing revenue but they leverage over thirty years of data science, analytics and machine learning to predict market trends and forecast more accurately without additional data input. By using methods rooted in science, PROS’ revenue management tools are able to include even more factors like brand loyalty and scheduling behaviors to create consistently profitable revenue models.
Having that historical data will make it easier to forecast future behaviors. Forecasting is one of the most critical components of revenue management. Using past info and trends to predict the upcoming is invaluable if done right, but also dependent on the prior parts of the process like data collection and segmentation. Once forecasting is under control, the next step is to strategize what to do about it. Whether that means offering promotions to certain segments of people or targeting another segment of people differently, revenue management and pricing is powerful on its own but becomes transformational when that power is a trusted part of a company’s strategy.
About the AuthorMore Content by Aditi Mehta