Revenue Management is the application of analytics that predicts consumer behaviour at the micro-market level to optimise product availability and price to maximise revenue growth. The primary aim of a revenue management strategy is selling the right product to the right customer at the right time for the right price. The essence of this strategy is in understanding customers' perception of your product's value and accurately aligning product prices, placement and availability with each customer segment.
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Revenue Management Opportunities
You need to develop a disciplined pricing strategy to anticipate the value created for customers and then set specific prices to capture that value. Your company may decide to price against your competitors but the most value comes from pricing strategies that closely follow market conditions and demand, especially at a segmented level.
Once a pricing strategy dictates what your company wants to do, pricing tactics determine how you actually capture the value. Tactics involve creating pricing tools that change dynamically, in order to react to changes and continually capture value and gain revenue.
Price optimisation, for example, involves constantly optimising multiple variables such as price sensitivity, price ratios, and inventory to maximise revenues. A successful pricing strategy, supported by analytically-based pricing tactics, can drastically improve your firm's profitability.
When focused on controlling inventory, revenue management is mainly concerned with how best to price or allocate capacity. Firstly, you can discount products in order to increase volume.
By lowering prices on products, you can overcome weak demand and gain market share, which ultimately increases revenue. On the other hand, in situations where demand is strong for a product but the threat of cancellation looms, (e.g. hotel rooms or airline seats), you could overbook in order to maximise revenue from full capacity.
Price promotions allow companies to sell higher volumes by temporarily discounting the price of their products. Revenue management strategies measure customer responsiveness to promotions in order to strike a balance between volume growth and profitability. An effective promotion helps maximise revenue when there is uncertainty about the distribution of customer willingness to pay.
When your products are sold in the form of long-term commitments such as telephone services, promotions help attract customers who will then hopefully commit to contracts and produce revenue over the long term.
When this occurs, you will have to decide when to begin increasing the contract fees and by what percentage to raise the fees in order to avoid losing those customers. Revenue management optimisation proves useful in balancing promotion roll-off variables in order to maximise revenue while minimising churn.
Different channels may represent customers with different price sensitivities. For example, customers who shop online are usually more price sensitive than customers who shop on the
Different channels often have different costs and margins associated with those channels. When faced with multiple channels to retailers and distributors, revenue management strategies can calculate appropriate levels of discounts for companies to offer without losing integrity with respect to the public perception of quality.
Effective Revenue Management
Revenue management requires that a firm must continually re-evaluate their prices, products, and processes in order to maximise their revenue. In a dynamic market, an effective revenue management strategy constantly re-evaluates the variables involved in order to move dynamically with the market. As micro-markets evolve, so the strategies and tactics of revenue management must be adjusted.
Pricing Strategy: Tactics and Strategies for Pricing with Confidence, Warren D. Hamilton 2014
Pricing: The Third Business Skill: Principles of Price Management, Ernst-Jan