Better Management Of Revenues

Revenue management is defined as the strategy or technique used by a number of industries

to effectively manages their resources in order to maximize their revenues. There are three basic conditions regarding revenue management:

1. There is a fixed amount of resources available for sale.

2. The resources sold are perishable. This means that there is a time limit to selling the resources, after which they cease to be of value.

3. Different customers are willing to pay a different price for using the same amount of resources.

This concept is very important in businesses where the recurring costs are much higher than the variable costs. Normally, when you have much lower variable costs, the greater are the chances that the company will have more additional revenue. A good example of this is the passenger airline industry. The number of people that an airplane can hold is said to be fixed. It shouldn't be the other way around where the basis of pricing shall be, what airline is providing what kind of service. As you know, when the airplane flies and there are empty seats, these vacant spots do not convert to revenue, and the chance of earning is completely lost. In order to cope with the possible loss, airlines would charge more on chance passengers.

Meanwhile, if the resources that exist are considered to be not perishable or fixed, the challenge lies on the logistics, such as in inventory. If all of your customers are willing to shell out money for a fixed price using similar amounts of resource, your goal is to make sure that you don't end up holding too much inventory, which could be a cost for you. You want to sell them as fast as possible. But how do you exactly convince your customers to pay more?

There are two ways for this. One is through market segmentation and the other one is through pricing. When you're operating an airline, for example, you may want to implement certain rules such as limit for length of stay, restrictions with regards to purchases, and require fees whenever passengers will change or cancel their tickets. They could also learn to repackage their inventory to various kinds of products. You can also learn to manipulate the price and the availability of certain products. You can make use of forecasts for this. The usual trend is to increase the price during on-peak seasons and lower it when it's already off-peak.

by: Lawrence Perry

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