RM and microeconomics concepts: Why would revenue increase?

Following our series of enlightenment of various RM concepts, let’s illustrate one - interesting -element in the use RM practitioners make of price discrimination in: Generating revenue where it is not “expected”, and getting customers to buy services when others don’t. This tactic also illustrates one of Robert G. Gross’ core principles for RM: “Sell to segment micro-markets, not to mass markets”.

Let’s set a business case.

A car park management company is willing to increase its revenue, and change its pricing policy. Currently, they have a fixed fare: $2.40/hour. They would like to draw an estimation of a new pricing policy:
· From 6am to 11am and 3pm to 6pm: $2.40/hour
· From 11am to 3pm and 6pm to 10pm: $3.60/hour
· From 10pm to 6 am: $1.50/hour

Those fares are not the result of any marketing research/interview/survey. The following graphs represent Supply and Demand curves…necessary to evaluate the revenue, and the revenue reached under each pricing strategy.

The park has a total capacity of 150 cars.

Single price optimization


Price discrimination (3 prices)


The incremental gains reach +45% with the change in pricing. The projection is not realistic in the sens that most of the time a car park is not full all day long, but our goal is to show that theoretically, if demand can be segmented, revenue can be boosted.

Let’s make the jargon clearer

In the readings we have been through, we have noticed that the use of the various concept related to Revenue Management can be misleading. This may relate to a language issue, or a lack of consensus to bring up a definition and a hierarchy between words. In a publication from the French “Institut du transport aérien”, Jean-Paul SINSOU proposes an explanation we inspired ourselves from:

Revenue management is the revenue optimization system for an entire company, gathering all the markets: This is a concept of coordination among different markets (eg: Airlines and connecting flights). Yield management aims at maximizing revenue for a given market (Paris-New York on the 7th of August with American Airlines), based on overbooking (to compensate no shows), booking class nesting (to spread demand over off-peak periods) techniques. According to these definitions, Revenue Management is managing the network or the “relationships” between markets.

We can say that a company I carrying out a price discrimination strategy when it charges different prices for a same good (or service) based on customer demand and perceived value. Two levels can be distinguished in a price discrimination strategy: (1) uniform pricing, meaning that if prices may vary depending on customer segments, locations, etc, they do not vary through time (2) dynamic pricing, where prices vary through time, due to different variables, conditions and situations.

Arguably, the boundary between uniform and dynamic pricing is bleary, but these two concepts are useful to evaluate the sophistication of a pricing system. Price discrimination is one aspect of a RM system, which generally requires several constraints  and prerequisites. One may rely of one or more of the above mentioned tools to implement and run a price discrimination strategy: For the time being, in our blog, we have explained and illustrated the peak load pricing, and will develop all the other concepts along the way.

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.