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Importance of Revenue Management

Last Updated by Ravinder 28-Sep-2020

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A business is set up on some basic principles or so-called pillars like management, marketing, production, supply and so on but the most important pillar that bears the peer pressure of any business is “Revenue Management”. The ultimate goal of any business is to make profits and to achieve that, a basic understanding of revenue management is very important. It is a very common practice among businesses like hotels, tourism, airline industry, etc. while there are many revenue management software available on the internet but you need to understand what you are doing before starting it. So let’s start with revenue management definition.

What is revenue management?

Revenue management is a strategy for maximizing the profits of any business by understanding the customer’s behavior and altering the price of the product and supply according to it. It is basically trying to provide the best services to the best customers at the best times with the best of your prices. Revenue management is one of the key aspects of hospitality businesses. It is often confused with strategies that try to sell the highest amount of products but it is entirely something else so let’s take a few examples to understand the topic more.

Revenue Management in Airlines Industry

Revenue management in the airline industry, just think of aviation business and let’s see how they apply the concept. Now, the airline industry knows that during any time of the year, people prefer to travel less and stay at one which allows them to keep a regular price for all the flights. But at times of festivals, airlines predict more people will be travelling to their homes or away with families to celebrate.

It allows the airline business to use the concept of revenue management very carefully, so it alters the ticket pricing and decreases it to the best extent that more people choose them over any other airline and they get more bookings which will eventually provide more revenue. The altered price will attract customers to do more bookings, like, if someone was planning to visit their parents living in another state and willing to go alone without his wife for the obvious fares. They will be thrilled to know that prices are less than they anticipated and will eventually dig a little more in their pocket and book one more for his wife.

So, the airline will eventually have two more bookings; one for departure and one for arrival.

Revenue Management in Hotels Industry

Suppose a hotel has 5 empty rooms on Friday, now they know that once Saturday arrives the chance to sell those rooms is nearly zero. This will result in huge losses but to avoid it they can provide a huge discount of 70-80%. That might attract the customers but the hotel will still be losing money not making any.

So they basically apply the principles of revenue management very carefully and slash the price to a percentage that will provide both parties with the best results. Let’s say they drop prices by half but still the profit is marginal so, they drop it by 40%, that way the profits to the business will be good and also the customers will be willing to book rooms for more stays than just one day.

These are the examples that illustrate how hospitality businesses use the concept of revenue management to maximize their revenues. But to apply the strategy, one also needs to know the necessary conditions under which revenue management is used.

Necessary conditions for revenue management

● Predictability - One needs to have some predictability in their business field to understand what risks it bears and the rewards that can be ripped from it.

● Understanding with customers – you need to have a customer base of diverse people with different cultures, different origins who are willing to pay different kinds of prices for the same service or goods.

● Demand – your product or service needs to have enough demand from the customers that it can be sold in a specific period of time and the demand for the product or service needs to be fluctuating with time.

● Diversity in product or services – the product or the service you are providing to the customers needs to have diversification so that customers expect something new.

These are the conditions that make hospitality businesses the perfect example of the revenue management system. These are things that make revenue management important but let’s discuss its importance from both prospective.

Importance of Revenue management

The importance of revenue management is for both the parties that are the business owners and the customers.

On one hand, a customer is always eager to get a discount and spend as low as possible while demanding any service or buying any product. Everybody wants a discount that is enough to put some money back in their pockets. Customers would even spend more than they wanted at the beginning by buying more if the discount is suitable for them. This is the best part of revenue management for customers; they are getting discounts on the products or services that they always wanted. So, that makes revenue management of business also profitable to the customers keeping them happy.

On other hand, as we have already discussed how revenue management is so helpful for businesses, the case here remains the same. Revenue management allows businesses to provide the best services to the best customers at the best prices and at the best times which makes customers happy. Well, happy customers will always result in happy business owners.

So the importance of revenue management is understandable to both parties but nothing comes easy in today’s world and it is not that easy to implement revenue management on any business too, there are various issues that businesses face. Let’s move on to understand what these issues are and how to resolve these.

Challenges with Revenue Management

There are various challenges associated with implementing revenue management to any business but the basic ones are solvable with proper management of the issues so we will only discuss those which need proper focus.

● Communication Gap – there are various parts of any business at any given stage like the marketing and sales team, management team and others too. They always seem to be competing to prove their worth more than the other teams. This puts your business in a tug of war kind of situation. The sales team always wants to sale all the products by giving discounts or any other kind of cravings while the revenue management team will like to put definite prices at that time keeping the discounts for specified times. This will put both teams in jeopardy and will not be good for business.

To avoid this kind of thing, management should always engage with all the teams and understand what they are doing and how it is beneficial to the business. Management should make efforts to decrease this communication gap between the teams.

● Outreach – this is one of the most common challenges with revenue management. You might be willing to provide the best of everything to customers but if the customers are unaware of it, then how will they come to you. The diversity in customers will make it more difficult to reach them as some might use phones and others might not, some might read newspapers and others might not. You need to understand that every channel of the advertisement has its own grasp and power among customers. So, to increase revenue with revenue management, you might need to find the best way to reach the maximum number of customers.

To avoid falling in this pothole, you need to make a proper outreach strategy that targets maximum customers. It is time-consuming that’s why most of the businesses are using the internet to solve the outreach problems.

● Data issues – this might be the biggest challenge with the revenue management system. We have learned that to implement proper working revenue management, you need a lot of data from customers but it is quality over quantity that matters. You might collect all the customer data but it won’t be helpful to revenue management if it is not diverse. The diversity of customers is the key here. Businesses need not look at the past to find the peaks of their businesses but to look at the future and predict the next peaks in advance to maximize the results.

These are the main challenges with revenue management and this is enough to make you understand enough about revenue management.

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Ashok Kumar

Oct 01, 2020

Good

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Admin

Oct 01, 2020

Thank You Ashok

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