Revenue Management: The passport to new oceans

They say that with favorable conditions come shared successes, but it is during hard times when you notice the kind of managers companies are made of.

It’s no surprise that in last few years we have lived times of economic deceleration in Peru and while reading newspapers I am surprised to find that non-decreasing results are celebrated instead of growth. Is it that the macroeconomic situation prevents us from growing? From my perspective, this is the best moment to innovate because there is less to lose (in some cases it’s hard be worse off) and since the macroeconomic conditions are no longer pushing us forward we need to develop our own driving force.

It’s in this context that talking about Revenue Management opens us a door to a new ocean, far away from this one that is colored red by the constant competition and handing out of a market that is too small already.

Let’s talk about Revenue management (RM)

RM is a discipline by which one can achieve income maximization by generating a commercial strategy that seeks to charge the right price to the right client at the right time and place. While most managers are focused in an average cost based pricing, Revenue Management presents a pricing focus based on clients’ willingness to pay, and takes as reference the incremental variable cost, an amount that can be much lower than the average cost.

Why a focus on incremental variable cost is the key? I’ll give you an example: one fictional hotel of 100 rooms manages an average cost of US$80 and its prices are defined starting at US$100. The incremental sale opportunity of 8 rooms at $70 with that focus would be rejected because “it’s not business”.

Big mistake! Let’s say that that level of average cost is based on operations at a 50% occupation level and that with that same level of operation expenses 10 additional occupation points (60 rooms) could be catered, just by raising the total expenditure in US$10 by concept of amenities and water and electricity consumption per incremental occupied room. With a focus like this -very close to reality- by rejecting this business we would be losing a US$60 margin per sold room.

We would be then increasing the rooms’ margin by around 48% just with this transaction. So I ask you: are these 8 rooms “not business”?

If to this situation we add that, according to this hotel’s historical information, each occupied room-night generated an average impact of US$15 in outlets’ utility (mainly food and beverages) we would not be longer talking of a US$60 incremental margin per room but a US$75 one. I ask again: Are these 8 rooms “not business”?

After this example, it’s worth asking ourselves… How many of this kind of opportunities to increment our margin are we rejecting every day? Are there new oceans around the corner you are closing the door to by having a traditional focus on revenue management?

Opportunities like this are not exclusive of the hotel sector. Other industries like ground and air transport, cinemas, parking lot, telecommunications, restaurants, and educational, health and financial services have all in common different factors that make them particularly attractive to the application of Revenue management:

· Perishable and fixed in the short-run inventory, in most of these industries the inventory must be expressed in a time reference (which is the most perishable resource there is)

· An identifiable, measurable demand that can be segmented. As long as different kind of clients exist, there will be a great benefit from identifying their maximum willingness to pay and capturing it through a fine strategy.

· Fixed costs are quite superior than variable ones. These industries have all in common that the cost of selling an additional unit is substantially lower than the average cost.

What are you waiting for to use Revenue Management as a passport to new waters? Follow us to receive our next articles.

About the author

With over 16 years of leadership experience driving strategic growth, pricing innovation, and transformational change across multiple industries, Daniela León is driven to contribute to the Community by sharing her experience through this blog. 

Her passion for data-driven insights and cross-functional collaboration, positions her to deliver valuable insights for business transformation.