You know how airline prices are sometimes cheaper when you book flights on a Wednesday instead of a weekend? Airlines were the first industry to understand the power of segmented pricing to yield more revenue than across-the-board pricing—a strategy known as revenue management.
Fortunately, as a midsize business owner, you can easily apply revenue management to your own operations to increase revenue. This article will explain how to get the most from your customers, including who your target customer is, the ideal time to sell, and what products (or packages) you can create to drive more sales. It will also lightly touch on dynamic pricing, forecasting, and price optimization.
What is revenue management?
Revenue management is the practice of applying data and analytics to calculate consumer behavior to maximize revenue. While the underlying principles of revenue management have been the same for decades, with today’s technologies like QuickBooks, you can analyze massive datasets and deliver pricing recommendations and business intelligence in real time.
The five “rights” of revenue management
With revenue management, it’s all about optimizing the time, place, and considerations of the purchase. As such, revenue management is selling the right product or service to the right customer at the right moment at the right price on the right channel.
Do you know the five “rights” of revenue management?
- Selling the right product
- To the right customer
- At the right time
- At the right price
- On the right channel
What is yield management?
Yield management is the predecessor to revenue management and shares similarities with it. However, Yield management has a narrower focus—it’s concerned only with maximizing revenue through inventory control. For instance, when it comes to selling a fixed resource like a hotel room, yield management will prescribe that the room can be sold for different prices based on the time of year, the level of demand, the number of rooms already sold, and a range of external factors. In contrast, revenue management goes deeper and involves predicting consumer behavior by using customer segments and optimizing prices for different types of products.
Which industries benefit from revenue management?
Revenue management techniques work for industries all across the board. Back in the 1980s, American Airlines was the first company to master the art of revenue management. The practice was then adopted by the rest of the airline industry, hoteliers, independent hotels, travel agents, and hotel revenue management, along with the greater hotel industry and hospitality industry. The Marriott International hotel business was the first to optimize room occupancy, room rates, length of stay, cancellations, and overall revenue per available room (RevPAR) using revenue management. Today, industries all over the map use revenue management, from financial services to manufacturing to entertainment to retail.
What should you sell with revenue management?
You’ll want to determine what products and services will yield the most revenue. You’ll also want to focus on dynamic variables—the effect that market conditions, high demand, and competitor pricing have on profitability. As such, it’s important to have strong inventory control. Understand what is fixed inventory versus perishable inventory and manage it accordingly.
Who should you sell to with revenue management?
Developing customer personas and profiles will be invaluable to identifying and targeting the right customers. This involves mining data for consumer trends and behavior. Additionally, market segmentation is needed, where you define variables and create filters to categorize customers.
When should you reach your customer with revenue management?
Reaching your customer at the right time is imperative to success. To do this, evaluate your historical data to determine the relevancy of what you’re selling and who you’re selling to. Also, use demand forecasting, which involves creating educated performance projections based on historical data and current factors. Finally, make sure to stimulate demand—leverage customer personas and demand forecasting to develop strategies to increase demand.
What’s the optimal price with revenue management?
There are several to-dos you’ll want to tackle when determining how to price your products. The first is creating a pricing strategy, which is where you’ll evaluate pricing and develop or revise tactics to increase value. Another is implementing dynamic pricing, where you calculate and adjust prices in real time. You’ll also want to steer clear of pricing cannibalism, which is just as nefarious as it sounds—slashing prices or introducing a new product to “eat up” market share of a market in which you’re already established. When you create incentives and promotions this way, they can backfire and negatively impact sales and revenue. For instance, if you’re selling olive oil and mark it at 25 percent off but keep all your other oils undiscounted, consumers may develop the perception that your olive oil is low-quality and not buy it.
How can you reach the right customer with revenue management?
Designing a strong marketing strategy is the key to success. Determine what distribution channels are optimal based on different customers, cost of channel, market factors, and the type of product or services you offer. Additionally, you’ll want to collaborate with your sales team to compare sales and revenue objectives.
How can I make revenue management work for my business?
Making revenue management work for your business is fairly straightforward, with three primary steps your revenue manager can take:
1) Evaluate revenue growth and set goals. You should understand where your current revenue is coming from. Then set goals for growing that figure.
2) Establish a revenue management process and best practices. This involves some of the things we’ve touched on earlier in this article. Come up with a strong marketing and pricing strategy, use demand forecasting, collaborate with your sales team, and stay away from any efforts that undermine your goals.
3) Use a tool to help with automation. There are advanced systems and solutions, like QuickBooks, that can help your business create great revenue management strategies and maximize your bottom line.
QuickBooks can help you automate your data and metrics, so you can calculate your customers’ behavior and realize the full potential of revenue management. Ready to start maximizing your key performance indicators and profit? Try QuickBooks today.
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