Revenue Management

AN OVERVIEW OF REVENUE MANAGEMENT Adapted from the works of  Robert G Cross, 1998 Dr. Ronald A Nykiel & Other Industry Practices

Revenue Management Origins  Olde Oldest st prof profes essi sion on in the the world world  Time ime vari variab able le - most ost val valua uab ble  Smith, 1776  ± Invisible Invisible hand hand that that guides consumers consumers and and suppliers, suppliers, each acting with enlightened self interest, to make efficient use of scarce resources

 Hayek, 1945  ± ...Special ...Special circumstance circumstancess of the fleeting fleeting moment« moment«..

The Essence of Revenue Management ³When your strategy is deep and far reaching, then what you gain by your calculations is much, so you can win before you even fight. When your strategic thinking is shallow and near-sighted, then what you gain by your calculations is little, so you lose before you do battle. Therefore it is said that victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win´ The Art of Wa

Sun Tzu

What is Revenue Management? Man agement?  Econom Economist istss defin definee RM as a means eans of alloca allocatin ting g efficiency that maximizes economic wealth through dynamically fore-casting the self-seeking activities of each individual consumer   RM is the the appl applica icatio tion n of discip disciplin lined ed tact tactics ics that that  predict consumer behavior at the micro-market level and optimize product availability and price to maximize maximize revenue growth

What does RM do?  Ensure Ensure that that com compan panies ies sell sell the the right right produc productt to the right customer at the right ri ght time for the right price  Integr Integrate atess busine business ss proces processes ses that that brin brings gs together people and systems with the goal of:  ± Understa Understandi nding ng the marke markett  ± Anticipa Anticipatin ting g customer customer behavio behavior  r   ± Respondi Responding ng quickly quickly to exploi exploitt opport opportunit unitie iess that that  present themselves in a dynamic dyn amic environment

Core Concepts of RM  Focu Focuss on on pri price ce rath rather er than than cost costss when balancing supply and demand  Repl Replac acee cos cost-b t-bas ased ed pric pricin ing g with with market based pricing  Sell Sell to to seg segm mente ented d micro micro-m -mar arke kets ts,, not to mass markets  Save Save your your prod produc ucts ts for for your  your  most valuable customers

Core Concepts of RM  Make Make dec decis isio ions ns bas based ed on on kno knowl wled edge ge,, not supposition  Expl Exploi oitt eac each h prod produc uct¶ t¶ss val value ue cycle cycle  Cont Contin inua ually lly re-e re-eva valu luate ate your your rev reven enue ue opportunities

Tactics for Market Domination  The Use of Price Balancing  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: In times of high demand for your product, increase  productive capacity. If demand falls reduce capacity  ± ENTRO ENTROPI PIC C EVEN EVENT: T: Demand fluctuations grow in frequency and intensity  ± RM TACT TACTIC IC:: Address short-term fluctuations first with price, then with capacity

Tactics for Market Domination  The Use of Market Based Pricing  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: Set prices to cover costs and provide prov ide an acceptable  profit margin  ± ENTRO ENTROPI PIC C EVEN EVENT: T:  Non conformist consumers determine the price they are willing to pay; market provides numerous choices  ± RM TACT TACTIC IC:: Forget CBP. Set prices consumers will accept in a  price flexible environment; reduce costs, if necessary, to meet margin requirements

Tactics for Market Domination  The Use of Segment Pricing  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: Prices should be set to sell the greatest number of  units at the highest possible price in the mass market  ± ENTRO ENTROPI PIC C EVEN EVENT: T: Consumer individualism shatters the mass market  ± RM TACT TACTIC IC:: Different segments demand different prices. To maximize revenue and stay competitive, prices must vary to meet the price sensitivity of each market segment in the served population

Tactics for Market Domination  Favor the most valuable customers  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: Sell products and services on a ³first-come, first-served basis´  ± ENTRO ENTROPI PIC C EVEN EVENT: T: Traditional business practices don¶t satisfy investor  demands for aggressive revenue growth  ± RM TACT TACTIC IC:: Understand demand at the micro-market level as accurately as possible, and save products for the most valuable customers to achieve optimum revenues

Tactics for Market Domination  Forecast at the micro-market level  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: General observations can be made about future consumer behavior based on intuition and personal observation  ± ENTRO ENTROPI PIC C EVEN EVENT: T:  Non conformist consumers are continually fragmenting the market and changing buying behavior  behav ior   ± RM TACT TACTIC IC:: Forecast demand at the micro-market level to gain knowledge of subtle changes in consumer behavior   patterns

Tactics for Market Domination  Maximize revenue through optimal timing  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: Decisions on product availability and pricing are made on experience, gut-feel, tradition and rule of thumb  ± ENTRO ENTROPI PIC C EVEN EVENT: T: Rapidly changing market conditions defy conventional approaches  ± RM TACT TACTIC IC:: Generate maximum revenue by understanding the value cycle and optimally o ptimally timing the availability and the price of the product prod uct to each micro-segment

Tactics for Market Domination  Arm the soldiers fighting the micro-market wars  ± CONVEN CONVENTIO TIONA NAL L WI WISD SDOM OM:: Information in the hands of a top manager ensures that the best decisions will be made for the company  ± ENTRO ENTROPI PIC C EVEN EVENT: T: Breakdown of the mass market occurs, and the need for fast-response at the micro-market level increases  ± RM TACT TACTIC IC:: Give decision support tools to the workers work ers in the trenches to make dynamic decisions at the micromarket level. Increase responsiveness of the system.

RM Boundaries/Parameters Boundaries/Parameters  MicroMicro-eco econom nomic ic persp perspect ective ive,, now now supp supporte orted d by by real-time data enables more precise decisions  Sell Sell the the rig right ht pro produ duct ct to to the the right right clie client nt  Enable Enabless TRM TRM and enable enabless comp company any to enhanc enhancee  performance  performance through a combination of attitudes  Learn Learn how how to to best best deal deal in the the real real time time with with ever  ever  changing micro-markets micro-markets by quantifying changes

TRM:Boundaries/Parameters  Enabl Enablee ³Tec ³Techn hnic ical al Reve Revenu nuee Mark Market etin ing´ g´  ± Gather Gather & analyze analyze data data conti continuou nuously sly  ± Identif Identify y & use new marke markett segment segmentss  ± Open newer newer & pro-act pro-active ive distrib distributi ution on channel channelss  ± Pro-activel Pro-actively y create create newer products products & services  ± Look for newer newer means means & methods methods to generate generate revenues by using marketing management tools

RM Boundaries/Parameters Boundaries/Parameters  Focus Focus on on consu consume merr and thei theirr mark markets ets rathe ratherr than than internal corporate perceptions and economies  Discov Discover er and segm segment dem demand and niches niches which which allow both higher and lower prices  Open Open and and clo close se inv inven ento tory ry usi using ng pric prices es to to effectively change your appearance and position in the marketplace

Revenue Management « is all about doing µSMART¶ business business

smartly!!!