Income management is the application of disciplinary analytics that predicts consumer behavior at the micro-market level and optimizes product availability and pricing to maximize revenue growth. The main goal of revenue management is to sell the right product to the right customer at the right time for the right price and with the right package. The essence of this discipline is in understanding the customer's perception of product value and accurately aligning product prices, placements and availability with each customer segment.
Video Revenue management
Overview
Businesses face important decisions about what to sell, when to sell, to whom to sell, and for how much. Revenue management uses tactics and data-driven strategies to answer these questions to increase revenue. Income management disciplines combine data mining and operations research with strategies, understanding customer behavior, and partnering with salespeople. Today, revenue management practitioners must be analytical and detail-oriented, yet able to think strategically and manage relationships with sales.
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History
Prior to the emergence of revenue management, BOAC (now British Airways) experimented with different tariff products by offering controlled "Earlybird" discounts to stimulate the demand for vacant seats. Taking it a step further, Robert Crandall, former Chairman and CEO of American Airlines, pioneered a practice called yield management, which focuses primarily on maximizing revenue through inventory-based inventory control. Under Crandall's leadership, America continues to invest in production management forecasts, inventory controls and book-entry capabilities. In the early 1980s, a combination of mild recessions and new competition generated by airline deregulation action (1978) posed additional threats. Low-cost and low-cost airlines like People Express are growing rapidly because of their ability to charge less than the American Super Saving rate. After investing millions of dollars in next-generation capabilities that they would call DINAMO (Dynamic Inventory Optimization and Maintenance Optimizer), American announced the Ultimate Super Saver Rate in 1985 that was rewarded lower than PeoplExpress. This rate can not be refunded other than because the advance purchase is limited and capacity is controlled. This result management system targets discounts only for situations where they have an empty seat surplus. Systems and analysts continually re-evaluate discount placements to maximize their use. Over the next year, American revenues increased 14.5% and profits rose 47.8%.
Other industries record American success and implement similar systems. Robert Crandall discusses his success with outcome management with J. W. "Bill" Marriott, Jr., CEO of Marriott International. Marriott International has many of the same problems as airlines do: perishable inventory, pre-order customers, lower cost competitions and broad changes related to balancing supply and demand. Since "result" is an airline term and not necessarily related to hotels, Marriott International and others start calling Revenue Management Practices. The company creates an Revenue Management organization and is invested in an automated revenue management system that will provide daily demand forecasts and make inventory recommendations for each of the 160,000 rooms in the Marriott brand, Courtyard Marriott and Residence Inn. They also create "fenced" logic similar to airlines, which will allow them to offer targeted discounts to market segments that are price sensitive on demand. To address the additional complexity created by stay length variables, the Marriott Demand Forecasting System (DFS) system was created to estimate guest booking patterns and optimize room availability based on price and length of stay. In the mid-1990s, the successful execution of Marriott's revenue management added between $ 150 million and $ 200 million in annual revenue.
The natural extension of hotel revenue management is for car rental companies, which are experiencing similar problems of discount availability and duration control. In 1994, revenue management rescued the National Car Rental from bankruptcy. Their rise from near collapse to profit becomes an indicator of potential revenue management.
To date, revenue management has focused on increasing revenue from Business to Consumer (B2C) relationships. In the early 1990s, UPS developed revenue management further by revitalizing the Business to Business (B2B) pricing strategy. Faced with the need for volume growth in a competitive market, UPS is beginning to build price organizations that focus on discounts. Prices start to erode quickly, however, as they start offering bigger discounts to win business. The executive team at UPS prioritizes specific targeting of their discounts but can not strictly follow the example set by airlines and hotels. Rather than optimizing revenue for discrete events such as purchasing airline seats or hotel rooms, UPS negotiates annual rates for large-scale customers using many services over the course of a year. To reduce the issue of discounts, they formulate the problem as a customized bid-response model, which uses historical data to predict the likelihood of winning at different price points. They call the Target Price System. With this system, they can forecast the outcome of any contract offer on various net prices and identify where they can order premium prices over competitors and where more discounts are required for land transactions. In the first year of this revenue management system, UPS reported a profit increase of more than $ 100 million.
The concept of maximizing revenue on negotiable deals finds its way back into the hospitality industry. The original application of Marriott's revenue management is limited to individual bookings, not groups or other negotiated transactions. In 2007, Marriott introduced a "Group Price Optimizer" that uses a competitive bid-response model to predict the likelihood of winning at any price point, thereby providing an accurate pricing guide to salespeople. The initial system generated an additional profit of $ 46 million. This led to an Honorable Award for the Franz Edelman Award for Achievement in Operations Research and Management Science in 2009.
In the early 1990s, revenue management also began to affect the sale of television advertising. Companies such as Canadian Broadcast Corporation, ABC, and NBC are developing systems that automate the placement of advertisements in proposals based on the estimated number of requests and programmatic ranking estimates. Today, many television networks around the world have revenue management systems.
Revenue management up to this point has been used in the pricing of perishable products. However, in the 1990s, Ford Motor Company began to adopt revenue management to maximize its vehicle profits by segmenting customers to micro markets and creating differentiated and targeted price structures. Prices for vehicles and option packages have been set based on annual volume estimates and projected profitability. Companies find that certain products are too expensive and some are under expensive. Understanding customer preferences across product lines and geographic markets, Ford's leadership creates an Revenue management organization to measure price responses from various customer segments for each type of incentive and to develop approaches that will target optimal incentives by products and regions. By the end of the decade, Ford estimates that about $ 3 billion of additional profits come from income management initiatives.
The general success of the Pricing and Revenue at Ford establishes the discipline ability to solve income-generating problems from virtually any company. Many car manufacturers adopt this practice for vehicle sales and spare parts sales. Resellers have leveraged the concept pioneered at Ford to create more dynamic, targeted pricing in the form of discounts and promotions to match quotes with demand more accurately. Promote planning and optimizing time-aided retailers and increased prediction of promotional enhancements for products and targeted customer sets. The Company has rapidly adopted a price reduction optimization to maximize revenue from end-of-season items or the end of its useful life. Furthermore, the strategy of promoting scrolling promotions and reductions in discounts has enabled the company to increase revenues from newly acquired customers.
In 2000, almost all major airline companies, hotel companies, shipping lines and car rental companies have implemented revenue management systems to predict customer demand and optimize available prices. This revenue management system has limited "optimize" to imply managing the availability of a predetermined price in a predetermined price category. The objective function is to select the best mix of predicted demand based on the existing price. Advanced technology and optimization algorithms have focused on selling the right amount of inventory at a certain price, not on the price itself. Realizing that the control supply is no longer sufficient, the InterContinental Hotels Group (IHG) is launching an initiative to better understand the price sensitivity of customer demand. The IHG determined that calculating price elasticity at very detailed levels to a high degree of accuracy is not enough. The degree of transparency has increased the importance of combining market positions with alternate alternatives. IHG acknowledges that when competitors change their rates, consumer perceptions of IHG tariffs also change. Working with third-party competitor data, the IHG team was able to analyze price data, volume and historical divisions to accurately measure price elasticity in each local market for some length of stay. These elements are incorporated into the system which also measures the difference in customer elasticity based on how far earlier the reservation was made relative to the date of arrival. The additional revenue from the system is significant because this new Price Optimization capability increases the RevPAR by 2.7%. IHG and Revenue Analytics, a pricing and revenue management consulting firm, were selected as finalists for the Franz Edelman Award for Achievement in Operations Research and Management Science for their joint efforts in applying Price Optimization at IHG.
Revenue Management Society ("RMS")
The Revenue Management Society is an industry body representing companies and practitioners working in this field. The public traces its roots back to 2002 when Steve Marchant gathered a group of clients and colleagues to discuss issues of revenue management that were of mutual interest. Initially the club was financed by Consultecom but in 2007 became a Society fully funded by membership. Membership initially consists of companies in the travel and leisure sectors. There are now more than 60 member companies from all over Europe and from many industries. The Community Mission Statement is "To define and promote best practices in revenue utilization and yield management techniques, through discussion and communication between key users of this technique in the Travel, Transport and Leisure industry." To this end, the Institute organizes member conferences, bulletins and supports University research projects
Lever
Whereas results management involves specific actions to produce results through the management of perishable inventory, revenue management includes opportunities to increase revenue. Companies can use these categories as a series of levers in the sense that they are all available, but only one or two can drive revenue in certain situations. The main levers are:
Pricing
This category of revenue management involves redefining pricing strategies and developing disciplined pricing tactics. The main purpose of a pricing strategy is to anticipate the value created for the customer and then set a specific price to capture that value. A company may decide to fix prices against their competitors or even their own products, but the greatest value comes from pricing strategies that strongly follow market conditions and demand, especially at the segment level. Once the pricing strategy determines what the company wants to do, the pricing tactic determines how the company actually captures its value. Tactics involve creating dynamically changing pricing tools, to react to change and continue to capture value and earn revenue. Price optimization, for example, involves constantly optimizing variables such as price sensitivity, price ratios, and inventory to maximize revenue. A successful pricing strategy, supported by an analytic pricing tactic, can drastically improve the profitability of a company.
Inventory
When focusing on inventory control, revenue management is primarily concerned with how best to price or allocate capacity. First, companies can discount products to increase volume. By lowering prices on products, companies can overcome weak demand and gain market share, which ultimately increases revenue. On the other hand, in situations where demand is strong for products but the threat of cancellation of looms (eg hotel rooms or flight seats), companies often order excess to maximize revenue from full capacity. Overbooking's focus is to increase the total sales volume in the event of a cancellation rather than optimizing the customer mix.
Marketing
Price promotion allows companies to sell higher volumes by temporarily lowering their product prices. The revenue management technique measures customer response to promotion to achieve a balance between volume growth and profitability. Effective promotion helps maximize revenue when there is uncertainty about the distribution of customer wants to pay. When a company's products are sold in the form of long-term commitments, such as internet or telephone service, promotions help attract customers who will then commit to contracts and generate revenue over long periods of time. When this happens, companies must also strategize their roll-off campaign policies; they must decide when to start increasing the cost of the contract and how much to raise costs to avoid losing customers. Revenue management optimization proved useful in balancing promotional roll-off variables to maximize revenue while minimizing churn.
Channels
The management of revenue through channels involves the transfer of revenue strategically through different distribution channels. Different channels may represent customers with different price sensitivities. For example, customers who shop online are usually more price sensitive than customers who shop at physical stores. Different channels often have different costs and margins associated with the channel. When confronted with various channels to retailers and distributors, revenue management techniques can calculate the appropriate discount rate for a company to offer distributors through opaque channels to drive more products without losing integrity with respect to public perceptions of quality.
Since the advent of the Internet, distribution and control networks have become a major concern for service providers. When the producer works with a strong provider, sacrifices may be necessary, especially regarding the selling price/commission rate, instead of the capacity to reach customers and a certain sales volume
Process
Data collection
The revenue management process begins with data collection. Relevant data is essential for the ability of the revenue management system to provide accurate and actionable information. A system must collect and store historical data for inventory, price, demand, and other causative factors. Any data that reflects the details of the products offered, prices, competition, and behavior of their customers should be collected, stored, and analyzed. In some markets, specific data collection methods have quickly emerged to serve the relevant sector, and sometimes even become the norm. In the European Union for example, the European Commission ensures businesses and governments stick to EU rules on fair competition, while still leaving room for innovation, unified standards, and small business development. To support this, third-party sources are used to collect data and only make averages available for commercial purposes, as is the case with the hotel sector - in Europe and the Middle East & Areas of North Africa, where key operating indicators are monitored, such as Occupancy Rate (OR), Average Daily Average (ADR) and Available Revenue per Room (RevPAR). Data is supplied directly by hotel and group networks (as well as independent properties) and the benchmark averages are generated by direct markets (competitive sets) or broader macro markets. This data is also used for financial reporting, forecasting trends and development goals. Information about customer behavior is a valuable asset that can reveal patterns of consumer behavior, the impact of competitors' actions, and other important market information. This information is very important to start the revenue management process.
Segmentation
After gathering relevant data, market segmentation is the key to market-based pricing and revenue maximization. Airlines, for example, use this tactic to distinguish between price-sensitive customers and business customers who are price-sensitive. Spare customers tend to book early and flexible when they fly and are willing to sit on the coach seats to save more money for their purposes, while business customers tend to book closer to departure and are usually less price sensitive. Success depends on the ability to segment customers into similar groups based on the calculation of the customer's response to specific products based on the circumstances of time and place. Revenue management seeks to determine the value of the product to a very narrow micro market at any given time and then maps the customer behavior in the margin to determine the maximum revenue that can be obtained from the micro market. Micro markets can be derived qualitatively by performing dimensional analysis. Business customers and leisure customers are two segments, but business customers can be further segmented as they fly (those who book late and fly in the morning etc.). Useful tools such as Cluster Analysis allow the Revenue Manager to create a set of data-based partition techniques that collect groups of objects that can be interpreted together for consideration. Market segmentation based on customer behavior is critical to the next step, which forecasts requests related to segments grouped.
Forecasting
Income management requires estimates of various elements such as demand, inventory availability, market share, and total market. Its performance is highly dependent on the quality of this forecast. Forecasting is an important task of revenue management and takes a lot of time to develop, maintain, and implement. Quantity-based estimates, using time series models, order curves, cancellation curves, etc., project the number of future requests, such as ordering or purchased products. Price-based estimates look for demand forecasts as a function of marketing variables, such as price or promotion. This involves building a special forecast such as a market response model or cross price elasticity of demand forecasts to predict customer behavior at a particular price point. By combining these forecasts with a calculated price and price ratio, the revenue management system can then measure these benefits and develop a pricing optimization strategy to maximize revenue.
Optimization
Although estimates indicate what customers might do, optimization shows how companies should respond. Often perceived as the culmination of the revenue management process, optimization is about evaluating some options on how to sell your product and to whom to sell your product. Optimization involves solving two important issues to achieve the highest possible revenue. The first is to determine which objective function should be optimized. A business must decide between optimizing price, total sales, contribution margin, or even customer age value. Second, the business must decide which optimization technique to use. For example, many companies use linear programming, a complex technique to determine the best outcome of a series of linear relationships, to set prices to maximize revenue. Regression analysis, another statistical tool, involves finding the ideal relationship between several variables through model and complex analysis. The discrete option model can serve to predict customer behavior to target them with the right product at the right price. Such a tool allows companies to optimize product offerings, inventory levels, and price points to achieve the highest possible revenue.
Dynamic reevaluation
Revenue management requires that companies continue to reevaluate their prices, products, and processes to maximize revenue. In a dynamic market, effective revenue management systems continue to reevaluate the variables involved to move dynamically with the market. As the microfinance market evolves, income management strategies and tactics must be adjusted.
In the organization
The suitability of revenue management within the organizational structure depends on the type of industry and the company itself. Some companies place income management teams in Marketing because marketing initiatives typically focus on attracting and selling to customers. Another company dedicates the Finance department to handle revenue management responsibilities because of its amazing bottom line implications. Some companies have raised the position of chief revenue officer, or CRO, to senior management level. This position usually oversees functions such as sales, pricing, new product development, and advertising and promotion. CRO in this sense will be responsible for all revenue-generating activities and directs the company to become more "revenue-focused".
Supply chain management and revenue management have many natural synergies. Supply chain management (SCM) is an important process in many companies today and some that integrate this process with revenue management systems. On the one hand, supply chain management often focuses on charging current and anticipatory orders at the lowest cost, while assuming that demand is primarily exogenous. In contrast, revenue management generally assumes costs and sometimes capacity is fixed and visible to set price and customer allocation that maximize revenue because of this constraint. A company that has achieved excellence in supply chain management and revenue management on an individual basis may have many opportunities to improve profitability by linking the respective operational focus and the focus that customers face together.
Business Intelligence Platforms are also becoming increasingly integrated with the Revenue Management process. The platform, fueled by data mining processes, offers data and a centralized technology environment that delivers business intelligence by combining sophisticated historical and analytical reporting to explain and evaluate past events, provide suggested actions and ultimately optimize decision making. Not synonymous with Customer Relationship Management (CRM), Business intelligence generates proactive forecasts, while the CRM strategy tracks and documents current and past company interactions with customers. However, the mining of CRM information data can help drive business intelligence platforms and provide actionable information to aid decision making.
Develop industry
The ability of revenue management to optimize prices based on expected demand, competitive price and price elasticity has tremendous benefits, and many companies are rushing to develop their own revenue management capabilities. Many industries are beginning to embrace revenue management and
- Financial Services - offers a wide variety of products for various customers. Banks have implemented segmented pricing tactics for loan holders, often using large amounts of data and modeling to project interest rates based on how many customers are willing to pay.
- Media/Telecommunications - promotional driven industries often focus on attracting customers with discount packages and then maintaining them at a higher price. Businesses in these industries often face regulatory constraints, volatility demand, and sales through various channels to business and consumer segments. Income management can help these companies understand the microfinance market and forecast demand to optimize ad sales and long-term contracts. By leveraging advanced analysis, revenue management services are used to target the right demographics through media advertising and improve scheduling capabilities through optimizing ad channels.
- Distributors - encounter complex environments that often include thousands of individual SKUs with different product life cycles. Each distributor must take into account factors such as channel conflict, cross product cannibal, and competitive action. Revenue Management proves to be beneficial to distributors in promotional analysis and contract negotiations.
- Medical Products and Services - handles large demand fluctuations, depending on the time of day and day of the week. Hospital surgery often overflows on the morning of the weekday but remains empty and under-utilized on weekends. Hospitals can experiment with optimizing their service and product inventory based on different request points. In addition, revenue management techniques allow hospitals to reduce underpayment claims and denials, thereby preventing significant revenue leaks.
- Hospitality hotels and services - daily earnings or yield management strategies are popular practices within the hotel sector, especially those that stand out in major and mature hotel markets such as Western Europe and North America. The main operating indicators of the Occupancy Rate (OR), the Average Daily Rate (ADR) and the Revenue per Room Available (RevPAR) are tracked using third party sources to follow direct competitors specify the average demand and price, thereby indicating the penetration rate and performance index. The broader macro-market averages are also monitored. Since the hotel industry is cyclical, revenue managers can confidently maneuver supply and demand statistics to achieve optimal results.
- The Car Rental Industry Mainly used by leading groups such as AVIS, HERTZ, BUDGET, revenue management is currently important for independent parties and franchisees as well. Using pilot tools such as the WeYield app, standalone can now also easily manage revenue management strategies to improve their position and encourage RevCAR; check their value parity and note the demand scenario so they can take corrective action. Independent car rentals that adopt an advanced revenue management system can generally expect an income increase of between 2-4% per year. In addition to increasing revenue, the solution is time-saving for business analysts and results managers.
See also
- Estimates
- Inventory theory
- Linear programming
- Operations research
- Optimization
- Regression analysis
- Results management
References
Source of the article : Wikipedia
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