Building the pre-requisites to a Revenue Management System

Dear Reader,

Through the threads we started on various RM related group on the professional media LinkedIn, we wanted to know what the community of professionals would think of the application of Revenue Management principles (ie a “RM System” of a kind) to a wider range of companies (in terms of size and sector) (Linkedin group ). A lot of very interesting replies came up, and the bottom line is that many professionals think SMEs could implement RM, but that according to their experience, companies’ management only show a limited interest to complex RM systems:Cost of implementation, return on investment, software solutions cost, dedication of managers to run the system… However, some professionals think those trends are changing, and they take advantage of it to implement RM systems in many companies. In this blog, we also believe that companies can have a mixed approach: We think that they make some simple steps to trigger the optimization of their revenue, without being obliged to implement a complex IT infrastructure.

This feedback from the community made us step into the shoes of a business owner, and wonder if there are pre-requisites to the implementation of RM (whether it is a rule of thumbs applied on Excel as in our previous article, or an advanced RM system) in an organization. Beyond the generic term of perishability, let’s have a look at what the two main theorists, Kaylan T.Talluri and Garrett J. Van Ryzin, highlighted on the subject:

• Customer heterogeneity: Customers must have different buying decision criteria

• Demand variability : Demand has to be impacted by seasons (the customer flow is not homogeneous)

• Production inflexibility: You have limited and constant resources for sale available ( ex : Limited number of rooms in an hotel)

• Price as “non signal” of quality : Customers must not assess the value of the offered product based on the price (as per the luxury industry for example)

• Data and information system infrastructure: Knowing your customers, their habits, and how to make them access what you are selling are key success factors.

• Management culture: How is the company’s management open to implementing solutions to optimize the revenue stream? Do they believe this kind of preoccupation can go beyond the sales department?

Those six pre-requisites can be relatively hard to fulfill depending on your activity / sector / size, and rely on several sub-concepts. Ideally, assessing the elasticity of your demand for example, would require the measurement of the demand variability from a reliable data collection. However, there is a world between theory and being able to build a system which will face that in a corporation. A good way to bridge the gap is to rely on a simplified but easily manageable approach, as presented in our article on Peak Load management.

A multitude of SMEs fulfill the above pre-requisites, but - and that is understandable - with approximations. If many companies can identify their customers, they often display a limited knowledge: Limited number of surveys, quality of historical data, and lack of marketing integration…

At a larger scale, Revenue Management systems seem a priori to need rigor and precision in the setting of its parameters: Knowing that the pre-requisites match your business does not mean you can start a RM System. In the next articles, we will tackle those issues and try to determine what compliance level is needed for each pre-requisite, and how can simplified RM tools meet some smaller scale demand management issues.

RM aims, among many goals, at providing support for pricing decision and demand management. Fulfilling properly the pre-requisites is a first step; however there is a long way to reach this new management system. As explained on this previous article, it implies an evolution of the business model and of the organization.

We will develop a draft of an implementation process of a larger scale RM System in a further article.