REVENUE MANAGEMENT

What is it? And why should you care?

23 Nov 2020

By: Sean Hodges-Colavitto

Anyone who has spent any time working in hotels or airlines will most likely be familiar with the topic of "Revenue Management" or at least have heard it mentioned. But for most businesses in the Tourism and Leisure Industry there are lingering questions... What is it? How can it help my business? Who can use it? Why would I need it? Of course, all these questions can only be answered by reviewing your individual circumstances but there are definitely a few key points that can help you understand if Revenue Management might work for your business.

First off, let's consider what Revenue Management actually is... Revenue Management is essentially the science of collecting data based on your customers buying patterns and then using that information to price and distribute your product in a way that will maximise the revenue generated in any given period.

So how do you know if Revenue Management could help your business? There are a few key principles that we look for, it's important to remember though, not every business will meet every one of these criteria but the more your business meets, the more effective a Revenue Management system application could be.

1. Relatively Fixed Capacity

Can the business scale capacity to meet demand fluctuations? In a hotel for example, it's not feasible to build an extra room when demand outstrips supply and a day spa can't just continue adding massage tables to rooms. 

2. Cost Structure

Revenue Management tends to work best with business who have a high capital cost but a low variable cost. This is because the cost associated to selling another 'unit' is outweighed by the revenue the sale is likely to generate. As an example, an airplane costs a lot to build and fly but once we start selling the flight there is little difference in the overheads such as fuel and staffing if the plane carries 100 people or 600 people. The difference does however come in the variable costs (such as food and drink) of having a seat filled. Therefore, every dollar of revenue generated above the variable cost of selling a seat begins to offset the capital costs.

3. Perishable Inventory

For most business in the Tourism and Leisure industries we consider this to be "time". Is a hotel really selling a bed, or is it selling a 'night', does a day spa really sell a massage, or is it selling an hour of relaxation? Ultimately however, if what you are selling cannot be stockpiled for use at a later point, it is perishable.

4. Advanced Reservations

A key component to a successful Revenue Management strategy is

being able to utilise data. Data comes in all sorts of shapes and sizes,

but the ability to sell your product or service ahead of time and have

an understanding of when it is likely to sell and to who, will be a core

part of your strategy.

5. Time Variable Demand

Seasonality, time of day, day of week, month of year... If your business experiences regular shifts in demand, chances are they can be pinpointed down to a specific time.

6. Segmentable Markets

There are many ways to segment markets, but for the purpose of Revenue Management, we are more interested in the price sensitivity of those markets. Will some of your customers pay more to get what they want, when they want it? Will some of them shift their plans to take advantage of a discount or special offer?

If you're interested in how Revenue Management might be applied to your business whether you're in the Tourism sector or not, connect with SHC Consultancy today for an obligation free discussion. There is every chance you could be making more!

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