King of the return: finance directors may be instrumental in determining corporate strategy and exercising cost control, but it's well worth focusing more closely on the revenue side of the profit equation. Steve Marchant explains why.
| Author | Marchant, Steve |
| Position | How To Achieve Effective Revenue Management |
Many sectors, including transport, travel and telecoms, are concerned mainly with the sale of perishable goods and services. Firms in these industries can increase their profits significantly by applying the principles of revenue management. This is the term that's used to describe the process of achieving the maximum return. It requires information systems and pricing strategies to allocate the right type of capacity to the right customers at the right place at the right time. And it calls for a combination of market segmentation, inventory control, forecasting and pricing (see panel 1).
Revenue management started in the airline industry during the late 1970s after its deregulation in the US, when the established carriers were forced to protect their high-0yield business from aggressive new competitors. It has been practised widely by airlines for 30 years, but it has been slow to spread to other sectors, despite the financial benefits it offers. It has now been adopted widely by hotel, cargo and car-hire businesses and, more recently, by tour operators.
Most industries are facing increasing price and margin pressure. Traditional solutions such as cost-cutting will always play a role, but on their own they're unlikely to create a lasting competitive advantage because companies will be following similar strategies and may take it in turns to be market leader, often with lower prices and profits. Revenue management can lead to a sustainable advantage and this advantage is generally enhanced if your competitors choose the same route. It usually works best when a company's capacity is fixed or semi-variable and the revenue-earning potential of each unit of capacity is perishable.
Revenue management is a way of controlling price and capacity, which are generally (if not absolutely) known, and demand, which is Par less well known. Accurate forecasting techniques are therefore required to predict future demand based on historical data and current sales trends. Advanced methods can be used to strip out the effects of price changes and capacity constraints.
The revenue improvement that's attainable increases with the precision of your forecasts, so it's important to use the most appropriate technique of the many that are available and to feed this with the most up-to-date and accurate information. Choosing a forecasting system is not straightforward and the one you choose depends on a range of factors, the key ones of which are:
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