Title: The Core Concepts of Revenue Management
1The Core Concepts of Revenue Management
MIST 8990 University of Georgia Terry College of
Business August 19 2005
Presentation by Robert G. Cross
2Revenue Management Defined
The application of disciplined tactics that
predict consumer behaviour at the micromarket
level and optimize product availability and price
to maximize revenue growth.
Robert G. Cross Revenue Management Hard-Core
Tactics for Market Domination
3The Seven Core Concepts
- Focus on price rather than costs when balancing
supply and demand - Replace cost-based pricing with market-based
pricing - Sell to segmented micromarkets not mass markets
- Save your products for your most valuable
customers - Make decisions based on knowledge not
supposition - Exploit each products value cycle
- Continually re-evaluate your revenue
opportunities
4Core Concept 1
- Focus on price rather than costs when balancing
supply and demand
5Focus On Price When Balancing Supply and Demand
- Equilibrium points
- Exist for each market segment and product
- Identify where supply and demand produce optimal
returns
D
Demand
S
Supply
Price
PE30
Equilibrium Point
QE100
Quantity
6Supply Chain Managementvs. Revenue Management
7Response Effectiveness
- Supply Response
- Time lag
- Transportation costs
- Difficult to fine-tune
- Disruptive adjustments
- Price Response
- Virtually instantaneous
- No transaction costs
- Precision friendly
- Seamless adjustments
8Core Concept 2
- Replace cost-based pricing with market-based
pricing
9Traditional Pricing
10Cost-Based Price
Perceived Market Value
Lost Profit
Margin
Lost Sale
G A
Sales/Distribution Costs
Manufacturing Costs
R D Costs
Market A
Market B
11Core Concept 3
- Sell to segmented micromarkets not mass markets
Market Segmentation is the key to market-based
pricing and revenue maximization.
Robert G. Cross Revenue Management Hard-Core
Tactics for Market Domination
12 Sell to Micro Markets
13Micro-Market Segmentation-- A Practical
Application of Micro-Economic Theory
14Single Price Optimization
100
REVENUE 2500
50
PRICE
1
1
50
100
DEMAND
15Price Differentiation - Multiple Prices
100
80
REVENUE 4000
60
PRICE
40
20
1
1
20
40
60
80
100
DEMAND
16Core Concept 4
- Save your products for your most valuable
customers
you should find a way to predict which segments
are willing to pay the most and save those
products for them.
Robert G. Cross Revenue Management Hard-Core
Tactics for Market Domination
17First Come First Servedvs.Revenue Optimization
18Saving Products/Capacity
- How do forecasts enable you to save products for
your most valuable customer - Quantify the price inelastic late booking market
segment - Estimate the remaining demand
- Use price rationing or capacity limitations to
save products for higher profit customers
19Core Concept 5
- Make decisions based on knowledge not supposition
20Rocket Science
ORBIT
Velocity/Altitude
Time
21Revenue Optimization
Revenue
Time
22Humans vis-à-vis Machines
HUMANS
COMPUTERS
- Logical
- Mindless
- Physical Limits
- Indifferent
- Tireless
- Intuitive
- Creative
- Cognitive Limits
- Biased
- Fatigue-Prone
23Core Concept 6
- Exploit each products value cycle
Generate maximum revenue by understanding the
value cycle and optimally timing the availability
and price of the product to each micro-market
segment.
Robert G. Cross Revenue Management Hard-Core
Tactics for Market Domination
24Exploiting the Value Cycle
Retail Clothes Example
VALUE
TIME
25Exploiting the Value Cycle
Standard Markdown Response
VALUE
26Exploiting the Value Cycle
Robust Markdown Response
VALUE
TIME
27Core Concept
Exploit Each Products Value Cycle
VALUE
TIME
28Core Concept
Exploit Each Products Value Cycle
VALUE
TIME
29Core Concept 7
- Continually re-evaluate your revenue
opportunities
30 Dynamically Recalibrate
Customer Demand
Price and Availability
Results In Long-Term Profit Maximization
31Revenue Management-Process Flow
(Information)
MarketSegmentation
(Data)
(Knowledge)
Customer Demand Data
Forecasters
!
Constraints
Optimization
Market
(Wisdom)
Price and Availability Recommendations
32Questions
33The Core Concepts of Revenue Management
- MIST 8990
- University of Georgia
- Terry College of Business
- August 19 2005
Presentation by Robert G. Cross