What is revenue management? Importance and strategies
Revenue management is a business strategy that combines analytics, customer segmentation, market research and pricing. The benefit for business is it helps you maximise revenue generated from products and services.
In this guide, we'll look at how revenue management works, the benefits for business owners, and how it flows through to pricing and sales.
What is revenue management?
Revenue management is a pricing and sales approach that uses intensive market research, customer segmentation, and a range of pricing strategies to maximise profitability.
While it's more common in the hospitality industry, revenue management strategies are used in a variety of sectors, helping businesses set the right price for the right customers at the right time to optimise the potential value of every sale period.
Previously, revenue management was based on historic data and manual calculations which limited its use; however, new analytics technology, along with accessible real-time data, has made the process far more efficient and useful.
Why is revenue management important?
Revenue management is important because it can boost profitability, particularly if your business supplies time-sensitive products or services.
For example, airlines and hotels can only sell seats or rooms for a specific date until the previous day.
With revenue management, you can maximise the value of that product, even if that means selling some at a lower price.
5-step revenue management process
The typical revenue management process involves five key steps — data collection, analytics, forecasting, optimisation and evaluation.
1. Data collection
Data collection is the most important part of the revenue management process.
At this stage, you pull in as much business data as possible, including historical sales and revenue data, CRM information, customer demographics, competitor analysis, browsing data and reports from your marketing team.
The more accurate and up-to-date your data, the more useful it will be.
2. Segmentation and analysis
Customer segmentation is a way of dividing your audience into smaller groups based on factors like behaviour, demographics (such as age, gender or income), geographics (where people are located), preferences and even psychographics — that is, personality, interests and values.
If you're running a business, you probably use segmentation in your marketing to target customer groups with precise messages and offers.
It's a way to deepen your understanding of customer groups, so you can send them the right messages and maximise their conversion potential.
In revenue management, segmentation is used as a way to set prices at the right level.
By analysing different customer groups and estimating what they're willing to pay for your product or service, you can maximise profitability without putting customers off.
Segmentation analytics can also help you understand when and how specific customers are likely to buy your product or service, which feeds into marketing and targeting decisions down the road.
3. Forecasting
Forecasting uses data to predict your future performance — including predicted sales volumes and revenue, sales levels for specific products or services at specific times and surges in demand at certain times.
Forecasting is key to the revenue management process, informing your decision-making around price fluctuations, inventory management and staffing levels.
4. Optimisation
The optimisation stage is where you put all your analytics, segmentation and forecasting to use.
The data helps you optimise pricing over time based on customer demand in various segments, production costs and competitor pricing.
Depending on the pricing strategy you choose, optimisation can involve changing prices daily or even hourly — or it can mean using a different price offer on each sales channel.
For example, your data might show that online shoppers tend to buy earlier at a lower price, while last-minute buyers are prepared to pay a higher price to secure their purchase.
As a result, you could offer discounts online but charge the full price for over-the-counter purchases.
5. Evaluation
When you launch any new strategy, it's essential to evaluate your progress and make changes as needed.
Revenue management is no different — a key part of the process is evaluating sales performance post-optimisation — this will tell you whether your approach is making a difference.
If some strategies seem to be more effective than others, you can tweak your approach to focus on those.
Revenue management pricing strategies
There are several pricing approaches that you can use to support your revenue management strategy.
Competition-driven pricing
With a competition-driven pricing strategy, your price levels are set to match or undercut your competitors, either through intensive competitor research or automated price tracking.
This approach can boost revenue by increasing your market share, as you'll be able to pull in more price-driven customers.
Segmentation pricing
This approach involves varying prices for different market segments based on how much these groups are willing and able to pay.
The simplest example is a movie theatre selling tickets at lower price points for children, students and seniors.
While some tickets will make less profit, the overall number of tickets increases, boosting overall profitability.
Forecast pricing
Forecasts can be used to drive pricing decisions as part of your revenue management strategy.
With this approach, you use historic data and analytics to project future demand for specific products or services and use that information to maximise income over time.
For example, hotels use forecasts to project high-demand periods and increase prices during those times.
Penetration pricing
Penetration pricing can be used to boost your customer base when you launch a new business or product, maximising revenue over time.
You set prices at a lower point during the early stages, pulling customers away from the competition and proving the value of your product or service.
For example, you could offer a month's free subscription or a one-off discount for new customers to get people on board.
Dynamic pricing
Dynamic pricing involves continual price shifts in response to market changes, demand, competitor prices and other factors.
Some businesses use automation to adjust prices by the hour or even by the minute, while others use forecasts to shift prices weekly or to make seasonal changes.
As part of a broader revenue management strategy, it can help you maximise the value of sales at any given time.
Value-based pricing
Value-based pricing sets prices based on perceived value, rather than the cost of providing the product or service.
As part of your revenue management strategy, it can help you maximise the profitability of every sale.
This approach requires a lot of market research and a good understanding of your customers' wants and needs.
Revenue management KPIs
Revenue management KPIs include total revenue, EBITDA, CLTV, ACPA and MRR. Here's what the acronyms mean for your business.
Total Revenue
Total revenue appears as the top-line figure on your income statement.
It's the sum total of all the money your business makes in a sales period before any production or operational costs are subtracted.
As a KPI, it can help you track income fluctuations over weeks, months or years, so you can refine your revenue management strategy.
EBITDA
EBITDA stands for earnings before interest, taxes, depreciation and amortisation.
You use this KPI to get a broad measure of operational profitability for a sales period, excluding the effects of finance, accounting and tax requirements.
EBITDA focuses on the earnings from core business operations.
Customer lifetime value (CLTV)
Customer lifetime value (abbreviated as CLV or CLTV) is a measure of the value each customer represents over their time with your business.
Tracking CLTV over time can help you understand whether you're increasing your customer base or boosting the value of your existing customers.
The CLV/CLTV calculation looks like this:
CLTV = Customer Value x Average Customer Lifetime
Average customer lifetime equals the expected time the customer is associated with your business, and is calculated on historical data from previous customers.
Average cost per acquisition (ACPA)
Average cost per acquisition (ACPA) is a way to figure out how much it costs to draw in a new customer. If you're launching a new revenue management strategy, it can be a way to measure the effectiveness of your approach.
ACPA = Cost of acquiring customers / number of new customers
Cost of acquiring new customers is made up of the marketing and sales costs devoted to increasing your customer base.
Monthly and annual recurring revenue (MRR/ARR)
Monthly recurring revenue (MRR) and annual recurring revenue (ARR) figures tell you how much predictable revenue you can expect every month or year — it's a crucial measure of sustainable profitability.
For example, if you have 1000 subscriptions at a rate of $15 per month, your MRR would be $15,000. Of course, you can earn revenue on top of your MRR, but it tells you the minimum you can expect.
Customer and revenue churn rate (CRR/RCR)
Churn rate is a way to track the loss of revenue or customers over time. Revenue churn (RCR), sometimes called MRR churn, is the revenue lost over time — for example, as a result of cancelled subscriptions or other customer loss — as a percentage of total revenue.
Customer churn (CRR) is a measure of customer loss, expressed as a percentage.
The customer churn calculation looks like this:
(Lost Customers During Time Period / Total Customers at Start of Time Period) x 100
Revenue management best practices
Best practices for revenue management include collaborative working, experimenting with different strategies, and thinking long-term.
Collaboration
To be effective, a revenue management strategy should involve collaboration between several teams within your business.
Depending on your business structure, this could include marketing, operations, sales, IT and production teams.
A collaborative approach ensures that you consider perspectives from all relevant business areas, making it more likely that your revenue management plan will be successful.
For example, the sales team might help set sales targets, the marketing team can offer insight into segmentation and effective marketing strategies, and the operations team can make sure projected product volumes are available.
Experiment
Your new revenue management strategy probably won't be perfect right away.
It's important to be flexible and trial different approaches to find out what works for you.
For example, you might start with a revenue management plan based on segmentation pricing, then find that dynamic pricing gives you more flexibility and control.
Think long-term
Revenue management isn't a short-term fix — in most cases, you won't see an immediate jump in revenue. Instead, it's about putting strategies into place that will increase revenue in the long-term.
How to choose a revenue management system
Choosing a software system for revenue management is like choosing any other system — you need to be thoughtful about your needs, wants and budget.
While most specific revenue management software is designed for the hospitality and travel sectors, more general ERP software may have features that can support your revenue management as well.
Here's what to look for when you're assessing a potential system:
Your business needs
Every business has different needs when it comes to software. Consider:
Integration – will your new system connect with your current software stack?
Features – do you need pricing automation, data analytics, inventory management tools or all of the above?
Price – is the new solution worth the price?
Cutting-edge systems
ERP software is fast moving, so it's crucial to choose software that's up to speed and has an open architecture. Look at integrations, automation capabilities, data access and updates.
User Interface
User interface (UI) is about how easy and intuitive the software is for your team.
A clunky, difficult UI can put people off, meaning they won't use the system.
On the other hand, a clean, clear, simple interface can mean minimal staff training and a smoother implementation.
Vendor support
Will your software provider offer ongoing support as and when you need it? Are there local support teams available?
Revenue management FAQs
What is the most important step of revenue management?
The most important step of revenue management is market analytics.
If you don't understand the market and don't have data to support your understanding, it's impossible to target the right people, set the right prices, and maximise revenue.
How is revenue management different from yield management?
Revenue management and yield management are similar in some ways, but different in scale.
Yield management is about maximising income from a single, specific revenue source — for example, hotel rooms or airline seats — by changing price levels over time.
Revenue management is a broader strategy that uses customer data, market trends, demand fluctuations and other factors to optimise pricing and product levels and boost revenue.
What are the differences between pricing and revenue management?
While pricing strategies are part of revenue management, they're not the same.
Every business has a way to price products or services, even if it's a basic static approach like cost-plus pricing.
Revenue management is more complex and tends to involve price shifting driven by data analytics.
Get smart about revenue management with MYOB
Want to sell the right product to the right person at the right price and the right time?
That's what revenue management is about — and it can help you maximise profitability in your business.
MYOB Advanced Business is a flexible cloud ERP platform, with a range of features that can support your revenue management work, including data analytics, inventory management, customer management and more.
To learn more about MYOB Advanced Business, contact our ERP solution specialists.
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