What’s it: Revenue management is the adoption of a data-driven approach for predicting consumer behavior to maximize revenue. Companies use sophisticated computer systems to analyze consumer behavior, forecast demand, adjust inventory, and set selling prices. Thus, companies can sell products at the right price, time, package, and location.
Revenue management is popular in industries such as airlines, online retail, and hotels. In such an industry, demand tends to fluctuate from period to period, maybe even daily.
Revenue management goals
The revenue management’s main objective is to maximize revenue by adjusting demand patterns. That way, the company can sell the right product to the right customer at the right time and at the right price.
This discipline’s essence is understanding customer perceptions of product value and accurately aligning product pricing, placement, and availability to each customer segment.
Revenue management attempts to optimize overall results through a complex market segmentation process, price discrimination (e.g., charging different prices to different individuals), and differentiating product packages.
How revenue management works
Businesses face fluctuating and varied demands. Demand rises and falls according to seasonal factors such as holidays. Apart from that, the volume of demand and preferences also varies from time to time. For example, consumers may tolerate prices during the holiday season but not others.
Revenue management explores such patterns. Companies develop data-driven tactics and strategies. From the data exploration, they then estimate aspects such as the number of orders, the number of purchases, and inventory availability. The goal is to predict demand with greater precision.
Then, the company develops a response to optimize demand. They adjust prices, discounts, profit margins, and product packages.
Typically, the areas that revenue management focuses on are:
- Demand segmentation and forecasting
- An appropriate pricing strategy
- Inventory adjustments
- Flexible marketing strategy development
- Exploit the available marketing channels
Demand segmentation and forecasting
The company’s first task is to understand the market. Companies explore data to understand market characteristics, such as:
- Purchase volume
- Buyer time
- Buyer demographics such as age, gender, occupation, and income
- Buyer’s psychographics such as personality, values, opinions, attitudes, interests, and lifestyle
Then, the company categorizes each customer into several small segments and forecasts the demand for each segment.
The company uses the results to adjust prices, inventory levels, and marketing tactics for each segment. The company also performs a price sensitivity analysis to determine the optimal price level and marketing tactics in this stage.
A pricing strategy’s main objective is to anticipate customer value and then set a specific price to reflect that value. The company may set the price according to market conditions and demands. For example, they charge high prices at the peak of the holiday season and low prices for the regular season.
Pricing is dynamic too. I mean, companies adjust and react to changes that occur in demand at any time.
In this case, the company ensures that products are available when consumers demand them. So, not only demand but the company will also predict the optimal inventory. When they set discount prices, for example, they will build up inventory in anticipation of an increase in sales volume.
Develop a flexible marketing strategy
Companies design the marketing tactic and strategy to stimulate targeted demand. Say, during the peak season, the company recorded low sales. The marketing team then examines the source of the problem and develops tactics accordingly.
For example, suppose the source of the problem is that a competitor is pricing more aggressively. In that case, the company may adopt a similar tactic. The company then also increased the number of promotions for demand.
Exploiting the available channels
Companies should adjust price optimization and marketing tactics across various distribution channels. Different channels have different demand characteristics. Likewise, the price sensitivity of each channel is often different too.
For example, customers on conventional channels may be more sensitive than online customers. By shopping online, customers can easily compare the company’s product prices with competitors’ prices without bearing high costs (e.g., transportation costs).