Revenue Management aims to maximize revenue by understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment.
An early advocate was Robert Crandall, former Chairman and CEO of American Airlines. Simply put the goal was to maximize the revenue generated from every seat. Ideally that meant pricing so that no seat ever went empty (spoiled inventory), and never discounting a fare to a customer that would pay more.
Robert Crandall, former Chairman and CEO of American Airlines
If I have 2,000 customers on a given route and 400 different prices, I'm obviously short 1,600 [prices].
The practice, which Crandall referred to as "Yield Management" proved very successful for American, increasing revenue and (far more significantly) profits. It would eventually become the standard throughout the airline industry.
The practice also started to spread to companies in other industries that faced similar challenges such as perishable inventory, customers that booked in advance, low cost competition and wide swings in supply and demand. One of the first was Marriott International, and by the mid nineties the practice of Revenue Management was adding between 150 and 200 million in revenue annually.
As with air travel the practice of Revenue Management quickly became the standard throughout the travel, leisure and hospitality industries. When you see countless different airfares or room rates you are seeing Revenue Management in action.
But it goes even farther than that. When you see a resort offer discounted rates during the off-season, and higher rates during the peak season, you are seeing a very simple form of revenue management as the resort tries to match their price to the value you attach to their product. The same thing with an early bird restaurant special - the restaurant recognizes that you place a lower value on eating dinner at 4:30, and they are prepared to offer you a discount so that the “inventory” (that seat at that time) doesn’t “spoil”. When a movie theater offers a medium sized drink or popcorn twice the size of the small for just fifty cents more… again a simple form of revenue management as they recognize that you won’t pay as much for the twelfth sip of soda as you would for the first and price accordingly.
Revenue management can be used by almost any retailer and represents an incredible opportunity to increase profits.