Revenue management is the use of analytics to adjust the pricing of individual products and services, thereby optimizing the total amount of sales and profits generated. When properly conceived, revenue management establishes the optimum price for each customer. Possible tactics for adjusting prices include the following:
- Distribution channels. A business can sell its products through different distribution channels in order to reach out to different groups of customers, possibly selling at different price points in each distribution channel. For example, a cruise line could sell at a reduced price through a discount travel service.
- Dynamic pricing. A company can adjust its prices continually, based on ongoing changes in its estimates of demand and the remaining amount of supply on hand. Airlines routinely engage in dynamic pricing, so that the passengers on a flight may pay widely differing amounts for essentially the same seats.
- Overbooking. When a business has a fixed capacity and there is a risk of order cancellation, the company can overbook customer orders. The airline, hotel, and restaurant industries routinely engage in overbooking.
- Promotions. A business can engage in various promotions, using such tools as rebates and coupons, to discount prices for targeted sales periods. For example, a retailer can use coupons to drive sales during what might otherwise be a slow sales period.
In order to keep full-price customers from taking advantage of discount deals that are intended for more price-sensitive customers, revenue management can also include the use of rate fences, which are rules or restrictions that allow customers to segment themselves into certain rate categories based on their needs, behavior, or willingness to pay. For example, a common rate fence used by hotels is to offer a low price, but only if payment is made several months in advance. Since businesspeople are rarely able to plan that far in advance, they are effectively excluded from these deals.
Revenue management also takes into the account the incremental costs associated with each sale. For example, when a hotel sells its excess supply of rooms through several aggregator websites, it makes sense to direct most of the excess supply to whichever of the sites charges the smallest commission.