revenue management

revenue management

The Strategic Role of Revenue Management in Business Operations

1. Introduction to Revenue Management

Recent literature reviews and empirical studies offer strong evidence that implementing revenue management (RM) systems can have a positive impact on the operational and financial results of a business. The benefits of a well-executed Revenue Management System include the following: increasing revenue, maximizing profits, increasing customer satisfaction and loyalty, improving the reservation process, increasing productivity, balancing demand and supply to improve operations, offering fair pricing strategies, putting extra inventory back into the market, minimizing business risk, and contributing to a company’s long-term success.

In the 80s, yield management began in the airline industry with the aim of managing demand and allocating capacity at the right price at the right time. Yield management focused primarily on maximizing revenue. Nowadays, almost all industries with a variable inventory, such as hotels, cruise lines, car rental companies, tour operators, entertainment venues, among other types of businesses, have implemented yield management methodologies in response to the increase in price pressure of their products or services, and a demand for higher returns from investors.

2. Key Principles and Strategies in Revenue Management

Companies use the following set of general strategies: 1. Strategic use of restrictions to encourage customers to self-control demand intensity or trajectory. 2. Strategic use of price to destimulate or depress inconveniently timed demand, or to differentiate prices to match the underlying demand distributions. 3. Legitimate offering of product or service to some or all of the underlying demand without restrictions, reducing the elite of five-star customer relationship management efforts with the ultimate potential to change the fit of both the customer and the product offering for mutual profit at a future time or the current profitability of the customer spending in non-restricted time periods. These strategies are used in the context of a strategic revenue management challenge that combines elements of a traditional profit-maximization opportunistic use of pricing to fill a hypercompetitive margin. The company’s overall strategic objectives are combined with a debranded visibility of the niceties or attributes of each of the periodic transaction opportunities from specific customers. The sum of the transaction opportunities is conducted to be visible for the sum considered cannot the product to service-not-service opportunities currently presented.

The airline, hotel, and manufacturing solutions share important similarities in the detailed role of price as a basic component of strategic profit management, in their ability to accommodate intermittent customer demands, in the necessary use of nightly processes, and in the strategic ways in which they use the underlying probability of the future, the value of future customer demand to meet demand today. In a strategic or a dynamically competitive situation, it is important to recognize important principles of overall optimization and recognize that if a firm is computer-rich and has a hard-to-impose high degree of activity, cost may often be an arbitrary cost choice. Meeting profitability objectives for a manufactured sale may require code scheduling the note which fluoresces the maximum strategic potential in inventory flow depressed or dedicated manufacture. Some element of demand strategization may be possible, such as increasing the price of current demand and merchandising the effect of the higher price, or increasing the subjective value of the manufacturing entrepreneur or virtually mobilizing. Overall, the goal of revenue management is to carry out efficient corporate or operational profits to an increasingly monotonous element on behalf of finding customers which they value and can and will agree to pay for, from the perspective of the overall firm. Regardless of the size of the firm or its particular place within a business, these principles of overall optimization should serve as strict guidelines.

Over the past 30 years, industries with an incredibly diverse set of challenges have successfully applied the principles of revenue management. Airlines use revenue management to optimize each flight leg across a network of dozens of different cities. Each leg has a diversity of different lengths and cost structures. The hotel business uses revenue management to optimize its room sales for stays in increments of less than a day or for many days, and to work with airlines and their own direct sales efforts to prospectively control the percentage of transient guests. Many manufacturing firms use strategic revenue management to simultaneously increase profit on current periods’ production while positioning for increased firm profitability later in the contract period or in future contract periods. All these examples offer a common strategic use of revenue management. They demonstrate that a company in different industries can use revenue management to manage the profitability of current transactions to meet an overall company’s strategic objectives while matching its ability to accommodate the constraints of leisure or commercial customers.

3. Technological Innovations in Revenue Management

The survey of technological innovations should be interpreted in the context of some broader trends in revenue management decision support. The technology explosion has not endowed these new systems with any particular philosophy or approach toward revenue management. They carry forward what is probably the central challenge of revenue management decision support: to assist companies in implementing systematic strategies that apply real rigor to the stewardship of their assets and derive maximum profits. With that as the de facto objective, the net effect of the explosion is likely to be improvement in the use of the technology. Issues such as selectivity and business process improvement will continue to be the central challenges of implementing revenue management. These technologies are not a substitute for clear goals and vision, solid business cases, and strong internal organizational structures and business processes.

This chapter surveys a range of technological innovations that are impacting the practice of revenue management. It is organized into three sections: access to information, data organization and prerequisite analysis, and decision tools. This chapter focuses on surveying these new developments, and providing some context and examples for each.

The last decade has seen an impressive explosion of innovation in the information and decision support systems that are available for revenue management applications. This has been driven in part by the availability of new technology platforms for decision support solutions, in part by the increasing power of the desktop computer, and in part by realization and recognition in a wide variety of industry sectors of the power of revenue management as a tool for improving operational performance.

4. Implementing Revenue Management in Different Industries

The goal in optimizing revenue with revenue management techniques is to predict and modify demand. In doing so, operations are strategically better able to determine not only when the consumer chooses to buy the offered products but also how much of the offered products they choose to buy at what point in time, and at what price. Redistributions that occur among those who, when, what, and at what trade-off provide the leverage to add demand, extract the highest prices the consumer is willing to pay. In the process, the operation extracts the highest possible revenue for the capacity that is available. Simply raising the bar insulates the quality factor. In addition, an operational model predicts how many rooms need to be held for anticipated demand and which levels to be available for sale at which times, the system is then adjusted to optimize the revenue management tools. The daily and the one, hour, or near-min by-moment decisions are relatively simple to understand and, ultimately, are what makes the revenue management system so much more powerful than the traditional yield management system.

Although the strategic use of revenue management has elevated discussions about the importance of revenue management and revenue management techniques among practitioners, too often our very focus on this strategic implementation of revenue management techniques has obscured the fact that the day-to-day tactical applicability of revenue optimization techniques is just as important as long-run strategic applications. Indeed, the power to apply revenue management techniques to day-to-day, hour-to-hour, or, in some cases, minute-by-minute decisions is perhaps the single characteristic that most differentiates the revenue management system from the traditional yield management system. Since the capacity to apply revenue management techniques as an integrated and continuous process, and to a wide range of specific decisions on a nonseasonal basis, is the single most striking aspect of the revenue management system, this chapter examines the broader and the more common tactical application of revenue management techniques.

5. Challenges and Future Trends in Revenue Management

First, we modeled the hotel revenue management forecasting process. A pooled cross-section analysis of 48 hotels was conducted to study the influence of a hotel’s system structure and demand forecasting process on revenue management benefits. The findings reveal a complex interaction between system selection and revenue management. Although stand-alone systems improve results, greater uncertainty and complexity are present when conducting analysis, which influences margins between results from more complex, advanced decision processes and costs. Also, models validate a synergy between forecasting capability and system integration, serving as a basis for guiding strategic direction. Therefore, the results could aid managers in identifying their current system circumstances and assessing the necessity to make changes in system structures and the demand forecasting process to use the revenue management concept in a real business model.

In revenue management systems, demand forecasts are used to anticipate the demand for future sales periods in order to estimate the marginal revenues of selling inventory units available for sale to the market. Accurate demand forecasts are a key input for revenue management control systems because they directly affect the results and economic benefits expected from systems implementation. Several authors have described their experience with demand forecasting in the specific context of hotels. However, none of these studies verified the impact of demand forecasting on system complexity or evaluated the impacts of system considerations on demand forecasting and the economic benefits of the integrated decision process. To investigate the relationships among demand forecasting, system structure, complexity, and economic benefits in a revenue management system, we performed an integrated research effort. Our research question was as follows: what is the strategic role of forecasting in hotel revenue operations?