FUTURE OF REVENUE MANAGEMENT Revenue management does far more than by rraul


									                                                             Journal of Revenue and Pricing Management       Volume 1 Number 3


Revenue management does far more than
manage revenues

Steven Pinchuk
Received: 3rd September, 2002

Tel: +1 702 682 8648; E-mail: steve@revenuemanagement.org

Steven Pinchuk is on the Editorial Review      ment is both a science and an art that is
Board of the Journal. Prior to working in      impacting many areas other than ‘revenue’.
revenue management (RM), Steven was            It gathers and analyses data, makes and
an economic adviser to a senior US Sena-       implements numerous decisions and then
tor and then worked on top secret defence      uses this intelligence to control many areas
and intelligence systems. He has done          of the business process, both internally and
day-to-day RM as a director for Club Med,      externally. Then the goal is to assure that
Princess Cruises, Norwegian Cruise Line        the resulting decisions are properly imple-
and Costa Cruises running their daily RM       mented. Many times the critical constraint
operations. He has also been a top RM          on RM’s success is whether senior manage-
consultant as a director for SABRE Deci-       ment will allow all RM techniques to be
sion Technologies, a VP for both OPUS 2        properly applied in a formal and systematic
and PROS Strategic Solutions, and as Pre-      approach, throughout the business.
sident for Optims and his own company,            Classic business education teaches that
Profit Optimization Strategies. Steve’s cli-    profits can be increased in two ways — by
ents have included Carnival Cruises, Prin-     increasing revenues or by lowering costs.
cess Cruises, Caesar’s Palace, Disneyland      An untargeted shotgun blast marketing
Paris, PGA National Resort & Spa, Broad-       approach can result in increased profits, or
way Theater and Owners’ Association and        it can actually lower profits; however, the
others. Discussion of this paper and any       profits are still probably not optimised.
RM topic is encouraged in the free chat        Costs can be lowered and actually result in
rooms and bulletin boards at www.              both lower customer satisfaction and lower
revenuemanagement.org                          profits. Revenue management techniques,
                                               however, when properly applied, adapt
Revenue management (RM) encompasses            microeconomic theories to fit the needs
far more than ‘revenue’ and is doing far       of different markets and industries.
more than ‘managing’ these areas. It is        Revenue management has opened up not
evolving into a management science that is     just one but a whole set of new techniques        Journal of Revenue and Pricing
                                                                                                 Management, Vol. 1, No. 3, 2002,
more accurately described by the words         whose goal is optimising profit instead of         pp. 283–285
                                                                                                 # Henry Stewart Publications,
‘profit optimisation’. Revenue manage-          just focusing on increasing revenues or           1476–6930

                                                                                                                           Page 283
Revenue management does far more than manage revenues

                             lowering costs. Revenue management              price penalty for ‘not buying off the rack’
                             simultaneously works both sides of the          or buying individual products and creating
                             profit equation of ‘revenues–costs=profits’.      their own packages. Revenue management
                             Revenue management is changing many             can actually turn this desire into a more
                             industries and how they interact with their     profitable return for businesses by optimis-
                             markets — and not just by using past rev-       ing the packaging of several products into
                             enue or cost approaches. Revenue manage-        one sale while ensuring that the package
                             ment’s new approaches will spread to            sale does not lower the profit margin on
                             almost every corner of business.                the core elements combined into the pack-
                                Revenue management must identify,            age. Many packages combine ancillary ele-
                             analyse, track and control all the factors      ments into a package in order to optimise
                             that determine revenues and costs in a busi-    the profits for a core element of the pack-
                             ness in order to be a true application of all   age. The following are examples of RM
                             RM’s theories and techniques. Selecting         working both sides of the profit equation.
                             certain factors and ignoring others leads to       Examples of revenue-based RM controls
                             suboptimal results. Revenue management          in packages include casino hotels that give
                             looks at the whole equation and targets         away rooms in order to optimise their
                             optimal profits from every angle at the          gaming revenues by attracting high-level
                             same time. This all-encompassing simulta-       players to their casinos. Casino revenues
                             neous approach to optimising profits,            are so high that rooms become a ‘give
                             under one focus and direction, is only pos-     away’ in casino packages that are aimed at
                             sible owing to the recent advances in soft-     getting people into the casinos, which is
                             ware and computer systems. Combining            the core product of casino hotels. The
                             RM techniques with new systems gives            ancillary profits of the gaming outweigh
                             businesses a much closer grasp of the ‘per-     the need to optimise the revenues from the
                             fect market knowledge’ that economists          room. The room’s purpose is to secure a
                             say is needed to make the right market          more profitable revenue stream from
                             decisions. The formidable task for busi-        another product that is in the package.
                             nesses is to choose the price points to         Revenue management allows this to be
                             accept from the many points where               done analytically so the results are assured
                             demand and supply curves intersect in the       to increase profits and not displace higher
                             many marketplaces that serve a business.        potential revenue opportunities.
                             The RM models break the barriers of time           An example of cost-based RM controls
                             that have ruled markets for centuries. This     in packages includes cruise lines that pack-
                             is accomplished by forecasting demand far       age free or reduced-rate air travel with
                             enough in advance, with a high enough           their cruises. If a Miami-based ship can be
                             confidence level, to allow decision makers       filled with East Coast business, RM will
                             to determine proactively what demand to         stop sales from areas with more expense-
                             accept and reject instead of taking demand      free or subsidised air such as Seattle. Why
                             as it comes.                                    sell packages with higher costs and there-
                                Unlike traditional profit-enhancement         fore lower profit margins when that less
                             approaches, RM excels at applying profit-        profitable demand is displacing higher rev-
                             optimisation techniques to ‘packages’ that      enue demand that has a lower cost struc-
                             combine numerous related products into          ture?
                             one purchase decision. Consumers have              Revenue management not only works
                             conditioned many markets to allow them          simultaneously both the factors affecting
                             to buy just what they want and not pay a        profits, the revenue and cost components

Page 284

of a business’s profit equation, it also has   no way to move an aeroplane and increase
the unique macro-perspective needed to        the number of first class seats for a week.
optimise both the demand and the supply       The resource moves in a fixed proportion
curves. Rental car companies have the         of the various supply curves because the
unique ability and characteristic of being    physical product has a fixed ratio of first
able to change their supply curves to         class and coach seats. Rental car com-
match optimally the expected demand           panies, however, can move more luxury
curves. During the winter, rental cars are    cars into an upscale market event without
moved from New England’s snow and ice         moving more vans. A Disney special
down to Florida’s sunshine and winter         event can bring in more vans and fewer
vacation crowds. While hotels are very        convertibles. Since the rental car industry
fixed assets that cannot be built or moved     can move and adapt its numerous nested
quickly, and aeroplanes are very mobile       supply curves, RM can utilise this unique
and can be moved to follow long-term          capability of this unique industry to opti-
demand curves shifts if they are known        mise profits.
far enough in advance, the supply curve          Revenue management is a sophisticated
for rental cars can be moved. Certain         tool that can adapt to its environment and
segments of a supply curve can even be        seek any avenue to increase profits. Tradi-
moved without requiring all the associated    tional profit-enhancement approaches are
supply curves also to be moved. There is      far more constrained.

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