Revenue management has become an important part of most of the organizations worldwide, especially those utilizing perishable resources. Revenue management has a very strong link with customer profiling since it compliments revenue management. Through the application of several principles that we will discuss, revenue management or yield management as it is known, has eased corporate survival given the current circumstances. Moving on, we will be discussing the different procedures and strategies such as demand management strategies, capacity management, pricing, forecasting and discount allocation which are used to successfully incorporate yield management.
Yield or Revenue management is a practice used in several service industries. It outlines the different ways to allocate limited resources amongst its customers based on the fact that there is a variety of customers and limited yet perishable resources. Revenue management also forecasts consumer behavior and then it reacts in accordance with this behavior to maximize profits and revenue. The aim is to arrive at the optimum revenue level given the capacity or revenue constraints. The intention of revenue management is to provide the right service at the right time to the right customer and at the right price. For e.g. a hotel owner would want to ensure that all his hotel rooms are occupied, he would target business and leisure travelers based on their needs and requirements and provide different levels of services at different rates to maximize revenue.
This concept analyses the factors of service, customer, price and time in detail in order to derive suitable outcomes. The service deals with the type, how and when it is delivered, whether reservations and advanced bookings are made or not. The customer section deals with the type of customers i.e. for e.g. leisure travelers or business travelers based on the demand characteristics of a customer. The timing essentially deals with the timing of the service delivery and the timing of the customer demand. Lastly, the price is usually based on the timing and the demand characteristics.
Principles of revenue management
Revenue management has made a striking change in many service industries and amongst these the benefits of revenue management have been seen in the airline industry the most. Revenue management is based on a few principles that have enabled organizations to increase revenue and profits. These include the following:
The first principle outlines that the demand of the service can be divided into various segments of the market and the price charged also varies according to the segment. For e.g. in a hotel, the markets are divided into leisure, business etc where business travelers are charged higher prices and the more sensitive leisure travelers are charged lower or discounted prices.
The fact that the organization has a fixed capacity in terms of resources is another important principle. The resources are fixed and cannot be increased in the short run. For e.g. the hotel has a fixed amount of suites and rooms. They must be utilized efficiently to maximize revenue.
This principle highlights the fact that the resources sold are perishable i.e. that there is a time limit to sell these resources and once that has been surpassed these resources lose their value. For e.g. the hotel rooms are charged on a per night basis. With the breakeven occupancy rates at assuming 75% if they fall below that each empty room will be a perishable resource for that day.
Low Marginal Servicing Costs
The cost of selling an additional unit is lower than the price charged i.e. an additional sale would contribute to profits. For e.g. the hotel room charges are the same but the marginal cost of a room for the hotel owner is way less than that price charged.
The company can face advanced sales in the form of reservations and bookings. For e.g. the hotel rooms are booked in advance and this enables the company to accept or reject the booking and charge different prices based upon the demand characteristics.
Uncertain Demand Forecasts
The company is able to predict future changes in demand easily and flex its operations and services in accordance with that to maximize revenue. For e.g. the hotel room occupancy would vary according to the seasons, day of the weeks, rates etc. At peak seasons, the occupancy might be 100% but at off-peak seasons it might fall.
Using these principles, a company can manage its revenue or yield effectively and utilize its resources effectively and efficiently.
Customer profiling is an important part of revenue management. As highlighted in the principles, each principle revolves around the customer, hence, it is imperative for any organization that has adopted revenue management to undertake customer profiling as well. It is crucial to understand the customer in terms of his/her wants and needs, price he/she is willing to pay, how much of the service the customer requires and what is important to gain customer loyalty and maximize revenue in both the short and the long run.
Customer profiling is handled through four basic steps and we will continue with our hotel example. Firstly, the characteristics based on which the profiles are set would be determined. For e.g. the size of the market, the buying habits, what services are required, how much will the customer be willing to pay, whether he/she is a leisure or business traveler and the cost to serve the client? Next, based on these characteristics, a profile is built of the customers. Customers are grouped together and then compared. The data is then used to look for different trends and patterns that would help the organization forecast better and pick out most loyal customers. Thirdly, the profiles established in the second part are used to further narrow down customers based on specific characteristics and then a customer analysis matrix is formulated. Lastly, the matrix is used to rate the customers and evaluations are made based on these ratings. The results of these analyses will outline which customers would contribute most to the hotel’s revenue and which customers have potential to grow. Therefore, customer profiling enables companies to discover which customers are profit contributors, those that have a profitability growth capability, characterize customers based on different segments and lastly, provide a marketing mix and offering that is specifically designed for target customers in different categories.
Revenue management procedures
Successful yield or revenue management is attained through various procedures and implementing these procedures is not an easy task. These procedures have enabled several hotels around the world to maximize occupancy rates, provide accurate statistical data for analysis and forecasting and customer profiling through market segmentation, customer characteristics etc. The following are the different revenue management procedures that are essential to successful yield management.
Demand management, as the name suggests, deals with the area of controlling or creating demand for a product or service. For e.g. if the hotel rooms are over-booked than the hotel would stop advanced booking for some time period; conversely, if the hotel is under-booked, than new packages and deals at attractive rates would be introduced. Demand forecasting forms a major part of this category since demand is directly related to an organizations revenue and profits. Mostly, demand portrays a pattern, either cyclical, seasonal or in trends. These can be projected earlier and demand figures can be estimated in order to manage demand efficiently which will enable efficient revenue management. For e.g. if the hotel rooms are fully occupied in the summer holiday season, demand would be expected to shoot in that period in the following years. However, a deviation rate is set, for e.g. the hotel may target a 97% demand in the summer season but this may be flexed by + or – 20% if such situations arise. Therefore, the uncertainty is eliminated by producing the best possible demand forecasts given the degree of unpredictable variation. This uncertainty is then incorporated in the decision making process to aid revenue and demand management.
Pricing is the element through which organizations generate revenue. Prices are applied to products and services based on several different categories. These prices are based on the market segmentation, seasonal pricing, psychological pricing etc. These have a direct affect on a company’s revenue management. There are various different ways of pricing the services or products a company produces. First, there is segmented pricing, where all the different segments of the market are charged a different price for the product/service. For e.g. the business travelers booking a room at the hotel would not be as price-sensitive as compared to the leisure travelers. Thus, the hotel can charge a higher price of the business travelers. Moreover, different buyers have different purchasing powers; therefore, they will be charged prices accordingly. For e.g. some leisure travelers might prefer the deluxe suites over the standard suites. Purchase timing and location will also play a part in pricing. For e.g. with reference to purchase timing, if a booking is made a month prior to the stat it will cost cheaper rather than if the booking is made a day or two earlier. The quantity of purchases will also lead to discounts in the form of bulk buying therefore revenue can be maximized. Moreover, especially in the case of service industries, prices also vary as compared to the peak and off-peak seasons where peak season prices are high and off-peak season prices are low. These various pricing techniques allow the company to maximize revenue to a great extent.
Earlier we established that the resources in a given industry or company are limited therefore they must be utilized efficiently and effectively. Resource availability depends on the demand patterns of customers. If occupancy rates are at the peak, it would be hard to arrange for a room and if occupancy rates are below average, resources are being wasted in terms of empty rooms. Therefore, as compared to the demand schedules and customer profiles, the capacity should be allocated efficiently and effectively so as to minimize the chances of stock outs. The current demand and future demand should be dealt with shrewdly so that no customer is denied service due to the lack of availability of rooms. The resources should be balanced equally amongst the variety of product and customer combinations.
Discount allocation is another technique used to maximize revenue. Evidently, discounts attract customers, and the more the customers, the more the revenue. This however depends on how much leverage a company can give to discounts so that profits are not eliminated. Revenue management is largely dependent on these discounts and allowances in order to generate more revenue than expected. Hotels and airline industries always shout out their seasonal discounts, best bargains, promotions etc in order to attract customers. Since they have a very low marginal cost, they can afford to allocate a certain discount on several different product categories. For e.g. in off-peak seasons, many hotels have several off-peak promotional packages available to customers at fancy discounts.
Forecasting is a very important tool to improve revenue management. This is done through the help of customer profiles and past data in which trends and patterns are analyzed and future outcomes predicted based on this analysis. Future demand forecasts are obtained through customer trends and previous data and prices are charged and resources are allocated in accordance to these forecasts to maximize revenue. The main purpose of forecasting is to safeguard revenue management against uncertainty and risk. Since risk is a part of every organization it should be anticipated earlier in order to minimize its effects on revenue.
We have established that revenue management has a very strong link with customer profiling and there are various ways in which customer profiling can help organizations better manage their revenues. Revenue management is based on several principles which include segmented markets, fixed capacity, low marginal servicing costs, perishable resources, advanced sales and uncertain demand forecasts. These principles create a need for efficient and effective revenue management by firms in order to increase market share and make higher profits.
Customer profiling is used to create a database of customer wants and characteristics and flex operations in such a way so that these customer wants and needs are satisfied. Customer profiling helps organizations make accurate predictions of demand and certain customer wants. It then flexes its services to better suite customer requirements and charges a respective price for the services to maximize revenue. Successful yield or revenue management is attained through various procedures. These procedures include demand management, pricing, capacity management, discount allocation and forecasting. Each procedure is linked to customer profiling and then to revenue management.
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