The Core Concepts of Revenue Management

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The Core Concepts of Revenue Management
MIST 8990 University of Georgia Terry College of
Business August 19 2005
Presentation by Robert G. Cross
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Revenue 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
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The 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

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Core Concept 1

• Focus on price rather than costs when balancing
  supply and demand

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Focus 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
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Supply Chain Managementvs. Revenue Management
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Response Effectiveness

• Supply Response
• Time lag
• Transportation costs
• Difficult to fine-tune
• Disruptive adjustments

• Price Response
• Virtually instantaneous
• No transaction costs
• Precision friendly
• Seamless adjustments

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Core Concept 2

• Replace cost-based pricing with market-based
  pricing

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Traditional Pricing
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Cost-Based Price
Perceived Market Value
Lost Profit
Margin
Lost Sale
G A
Sales/Distribution Costs

Manufacturing Costs
R D Costs
Market A
Market B
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Core 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
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Sell to Micro Markets
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Micro-Market Segmentation-- A Practical
Application of Micro-Economic Theory
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Single Price Optimization
100
REVENUE 2500

50
PRICE
1
1
50
100
DEMAND
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Price Differentiation - Multiple Prices
100
80
REVENUE 4000
60
PRICE
40
20
1
1
20
40
60
80
100
DEMAND
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Core 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
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First Come First Servedvs.Revenue Optimization
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Saving 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

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Core Concept 5

• Make decisions based on knowledge not supposition

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Rocket Science
ORBIT
Velocity/Altitude

Time
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Revenue Optimization
Revenue

Time
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Humans vis-à-vis Machines
HUMANS
COMPUTERS

• Logical
• Mindless
• Physical Limits
• Indifferent
• Tireless

• Intuitive
• Creative
• Cognitive Limits
• Biased
• Fatigue-Prone

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Core 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
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Exploiting the Value Cycle
Retail Clothes Example
VALUE
TIME
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Exploiting the Value Cycle
Standard Markdown Response
VALUE
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Exploiting the Value Cycle
Robust Markdown Response
VALUE
TIME
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Core Concept
Exploit Each Products Value Cycle
VALUE
TIME
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Core Concept
Exploit Each Products Value Cycle
VALUE
TIME
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Core Concept 7

• Continually re-evaluate your revenue
  opportunities

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Dynamically Recalibrate
Customer Demand
Price and Availability
Results In Long-Term Profit Maximization
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Revenue Management-Process Flow

(Information)
MarketSegmentation
(Data)
(Knowledge)
Customer Demand Data
Forecasters
!
Constraints

Optimization
Market
(Wisdom)
Price and Availability Recommendations
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Questions
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The Core Concepts of Revenue Management

• MIST 8990
• University of Georgia
• Terry College of Business
• August 19 2005

Presentation by Robert G. Cross