The Revenue Management Toolkit

Going back to the drawing board on all the tools available to grow your company's revenue.

By Ryan Biesecker

Revenue managers have a tough job. In today's world, no two companies organize their various revenue management, marketing, analytics, and business intelligence teams the same way. While it's up to executive management to clearly define the roles of these various teams, let's talk about what tools these kinds of teams have at the ready to work towards their common goal: growing revenue.

Forecasting and Planning

Before we get into some of the core drivers of revenue management, I want to start with a touchstone that brings it all together. Think of planning and forecasting as the blueprint and level of your toolkit respectively.

Start with planning as a long-term goal-setting tool for all the teams that drive profitability for your company. Planning teams should be collaborating with all stakeholders to set goals and expectations and to dissect post-mortem performance. This work will centralize the facts, and keep all teams pointed towards mutual key performance indicators (KPIs). The last thing leadership needs is different versions of the master blueprint on different teams.

Once your plans and KPIs are established, build a robust forecast that aims to truly predict where the business will land for each KPI in the near future. Forecasting helps to set more targeted expectations for all teams impacted. Without it, companies will have a hard time understanding the difference between natural growth and growth driven by various initiatives. Use regular reporting and collaborative meetings to discuss both the predictions and actual performance.

A plan may have looked good and felt right on your blueprint months ago, but the level will tell you precisely how far you are from reality.

Pricing

Next, and probably the heaviest hitter in dollar-for-dollar revenue growth, pricing. Pricing is the hammer of our toolkit, no tool belt would feel right without it. When we talk about pricing strategy, there can be a lot of layers to it. In this instance, we're going to separate discounting and other techniques, which are very similar to pricing, and talk about those in different sections below.

Revenue equals average price multiplied by units sold, and price is always on your consumers minds whether consciously or not. Gauging how much and when to increase the prices can be one of the most challenging tasks for any business.

Revenue comes down to the everlasting interplay between price and volume. Price elasticity of demand, also known as price sensitivity, is the measurement of that interplay. Price sensitivity is the best tool to predict how your consumers might react to a given price increase.

While price elasticity is already a difficult enough figure to chase down in many instances, additional strategies add layers of complications. Pricing teams will ask themselves and leadership many questions that can drive overall revenue growth:

• Should certain product be free to incentivize trials?

• How can we stratify prices to allow customers to segment themselves?

• Should we charge an extra fee for certain services like delivery?

• Should we undercut, match, or price above competitors?

• Will a price increase now come at the cost of volume later?

• How much growth did the price increase drive vs other initiatives?

By striving to answer as many of these questions as possible, pricing teams can grow revenue, and even EBITA, by double digits. Before getting lost in those questions, don't forget the adage "when you only have a hammer, everything looks like a nail". Think about all the other tools in your belt, and make sure you're using the right one.

Yield Management and Booking Curves

Yield is sometimes equated with revenue management, as it was the primary tool pioneered by the airline and hotel industries at the inception of modern revenue management. Think of yield management as all the dozens of screws, nails, bolts, and other fasteners that will ultimately hold a complex structure together.

Yield management comes down to the study of booking curves. Booking curves are exactly what they sound like: a visual representation of the number of bookings against the the number of days out from those arrivals. See Image 1 below for an example of a booking curve for a single arrival day.

Image 1: Example Booking Curve for a Single Day

Once a booking curve is established and becomes predictable, a yield team will modify pricing for certain windows within that curve. For instance, $A 50+ days before arrival, $B 49-25 days before arrival, $C 24-8 days before arrival, and $D 7-0 days before arrival. These tools are used to incent advanced purchases, and maximize revenue depending on the mindset of the consumer.

Now multiply that by the number of products and arrival days, and you start to get an idea of how challenging yield management can get. Yield makes the most sense for date-based products such as airlines, trains, and hotels. Note that many other industries are beginning to shift to date-based pricing, such as theme parks and restaurants, to take advantage of the revenue impacts of effective yielding.

Channel Strategy

No matter the size of a company, there are often many different channels available to sell products through. An entrepreneurial craftsperson might sell their handmade goods at both local craft markets and through an online store like Etsy. A popular skyscraper may sell observation deck tickets in person, online, through tour operators, via international travel agents, and more all at the same time.

Think of channel strategy as all the different bits for your power drill. There's no perfect bit for every project, so you need options and often deploy an array of bits for certain projects.

Channel strategy also comes down to the core principle of pricing: rate vs volume. A company may be willing to lower the price of their goods sold through a certain channel, as long as the incoming volume is high and drives incremental traffic. On the flip side, a stylish, "underground" product may purposefully only sell through one channel to maintain its exclusivity and limit supply. The latter strategy will keep prices high, but limit volume. Leadership should always weigh the impacts that certain initiatives will have on brand image.

Promotions and Discounts

Discounting may feel similar to standard pricing, but consumer behavior often proves this assumption wrong in practice. Promotions and discounts are the power saw of the revenue management toolkit: very effective when used well, and downright dangerous when used poorly.

Loss aversion is a powerful mindset that drives consumers' predictable responses when it comes to price increases. Think "I came in expecting the same $40 ticket I buy every year, and now the price is $50. The seller just took $10 from me!" This is why a pricing manager should expect some level of volume loss whenever price is increased.

So let's say that $10 ticket increase was too much for the customers to handle. The company can simply undo it and everything will go back to normal, right? Unfortunately, consumers aren't often that forgiving. Tracking down consumers and communicating that price decrease is also the most difficult part. Enter, the promotion!

The base assumption of any promotion is similar to the concepts reviewed in the channel strategy section above. A seller must be willing to lower their price in order to drive incremental volume. Strategic marketing and pricing managers know that fencing is the best way to manage that. Fences are characteristics of a promotion, such as product types, product locations, customer locations, purchase periods, redemption periods, "purchase with" requirements, and more.

Without fencing, what's to stop customers who would have otherwise paid full price from taking advantage of the situation? This is called cannibalization. These fences allow sellers to not only track the promotion's performance, but also to incentivize incrementality and to disincentivize cannibalization.

And more!

Revenue management can go even further. Bundling, dynamic pricing, loyalty, consumer research, and dozens of other specialty practices can drive monumental changes to how a company reacts to their consumer. Once a consumer is better understood, their story can be told, and the company can meet the consumer where they are to find the right price at the right time.

A good revenue manager is always willing to add another tool to their kit, as long as it fits a need.

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Ryan is a long-time data analysis and strategic management expert from his time supporting Disney Parks and Resorts, a global fast food franchise chain, high-speed rail, cruise lines, observation towers, family entertainment centers and more. He is based in Seattle, WA and specializes in pricing, forecasting, and revenue management for food and beverage operations, but loves the broader travel and leisure industry. In his free time, you might catch him as a Game Master in a tabletop game, cooking up a comforting meal, playing video games with friends, or reading a book in the park.