Revenue Management for All
Often confused with the simpler and more limited concept of managing online channels with dynamic rates, Revenue Management can be defined as the practice of maximizing a specific revenue or margin variable by acting on a set of levers, such as price, inventory, and sales channels, through a process of data collection, segmentation, forecasting, optimization, and continuous reiteration.
Invented in a somewhat archaic form by British Airways in the late 1970s, later joined by American Airlines, in response to increased competitive intensity induced by the liberalization of airspace in the United States, the technique gradually spread to other industries whose business is based on managing perishable inventory. Marriott Group pioneered it in the hotel industry in the early 1990s, followed by major cruise and car rental companies. Today, Revenue Management is a central element in the commercial strategy of any leading player in these industries.
A Great Effort, Tremendous Return
Implementing a Revenue Management-centered model is a significant challenge that begins with a cultural shift throughout the organization, from top to bottom. Firstly, it means making traditionally intuition- and experience-based decision processes more scientific. Secondly, it radically changes the roles of different functional areas in price and inventory management. Lastly, it profoundly disrupts power distribution within the organization. However, for those making the investment—which goes far beyond resources and tools—the upside is enormous.
In a large Portuguese hotel group, where I led a transition from a deeply traditional commercial model to a “best-in-class” Revenue Management-centered model, I saw revenue increases of nearly 40% in just three years, with no new openings, two-thirds of the inventory obsolete due to lack of investment, and a troubled Chapter Eleven filing in between. Today, I believe that, without the extraordinary effort of the entire organization, we would not have generated enough cash flow to reach the end of that bumpy period, and that group would not exist today.
Known evidence about the effects of Revenue Management, reinforced by this firsthand experience, often makes me wonder why so many hotel groups—even with some scale —do not take this leap, or, even more frequently, dismiss the matter with simple online channel and yield management, taking a small part for the whole. The whole is much more than hiring a revenue manager and buying a suitable tool—it is implementing a deep process of cultural change, organizational restructuring, and commercial reengineering. It’s not for everyone. It’s only for those who want to make more money.
Expanding Horizons
Another question I often ask myself is why there are no experiences applying the same Revenue Management principles to completely new areas that also deal with perishable inventories.
For example, parking lots with a fixed inventory of spaces and operating hours, and a variety of segments with different needs and behaviors—corporate subscriptions, residents, tourists, occasional users, etc. Or, entering more complex areas, public transportation or highway tolls. In these cases too, there are different audiences and an important need to smooth demand, offering price incentives to transfer traffic from peak hours or days. Of course, for reasons of consumer trust and predictability, there are considerations beyond mere profitability. But there is plenty of room for common sense. For example, Uber is known to vary its fares during high demand, but limits the increase to a maximum of 30%.
Aiding in Better Distributing Tourist Pressure
However, for me, the most obvious example, and one I would like to see approached without prejudice, is tourist attractions in cities with high tourist pressure. It would be interesting to think of a model where prices varied within a range based on demand, encouraging visits during off-peak days and hours. It could be managed through an app or portal where real-time wait times and prices for the next hours could be tracked, as well as purchasing tickets online. This would decongest the most popular areas, distribute demand over a longer period, improve the experience with shorter wait times, and possibly even make more money to invest in improving these attractions.
Written by Filipe Santiago
October, 2018
