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Building Blocks of Revenue Management

Posted on October 19, 2021 by

Ben Smith

Ben Smith

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Key Practices to Increase Profitability

Manufacturing and industrial automation companies faced many financial and operational challenges due to the pandemic, including production delays and supply chain issues. Despite a record high positive industry outlook, many businesses are searching for new ways to understand the relationship between customer demand and available resources. This increased focus on revenue management can help businesses of all sizes increase profitability.

Here is a summary of four key revenue management practices and their associated intensity levels. Lower intensity levels rely on anecdotes, on-the-job observations and intuition. Higher intensity levels rely on continuous data collection and sophisticated computational models.

Key Revenue Management Practices

1. Pricing Basis

Pricing basis is the practice of setting different prices for products or services based on what customers are willing to pay. The more mature the pricing basis, the easier it is for the business to maximize revenue from each customer. There are four intensity levels ranging from pricing determined by resources to pricing based on the value of specific attributes. For example, in a resource focused business such as a restaurant there are very few changes to price, and most are made on an ad-hoc basis. In a customer needs business such as a hotel chain, pricing is determined by the attributes or by the customer’s willingness to pay. The goal should be to move closer to practices that result in the highest price point possible.

2. Inventory Allocation

Inventory allocation refers to the practices that determine how inventory is shifted to meet demand. Mature allocation practices maximize revenue from a limited supply of products or services by focusing on the most profitable customers first. The four intensity levels range from ad hoc where changes are made in an unstructured way to systemic processes which involve constant monitoring and adjustments. The practices used reflect the company’s ability to respond to demand trends, manage the release of inventory, and apply judgement to capture opportunities. As a business moves to more sophisticated approaches, it is necessary to capture, analyze and report on essential data points which can be used as the basis for opportunity analysis and decision making.

3. Product Configuration

This concept involves designing a product range that targets different customer segments. The four intensity levels range from physical differences to nonphysical differences. Businesses using physical distinctions to differentiate themselves in the marketplace are forced to rely on different resources to support their products. Those using nonphysical distinctions to differentiate products that are physically similar often do so by offering different sales terms or distribution channels. As a result, the resources needed for production do not change often. Success with product configuration arises from an understanding of customer segments and whether meaningful differences can be created using physical or non-physical differences.

4. Duration Control

The approach taken to manage the overall time to provide a product or service to a customer is known as duration control. The four intensity levels range from reactive improvements that address problems as they arise to stabilizing usage which regulates when customer orders are fulfilled. Duration control is an important part of revenue management because it makes orders more predictable while increasing capacity. Lower intensity practices are reactive and often do not address the causes for variation. As an example, during high demand change will be made to speed up the entire line without adjusting the specific variables needed to meet the demand. Conversely, higher intensity practices focus on managing customer behaviors to prevent unnecessary strains on production. Examples can include penalties for late customer orders, simplifying product options to reduce wait time and safeguards to prevent overbookings.

Contact Us

To progress in the revenue management framework, it is critical to make important decisions about policies, practices and data collection. If you have questions about the building blocks of revenue management or data analytics, we can help. Contact us today to learn more. We look forward to speaking with you soon.

Ben Smith

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Calm & discerning, Ben is a shareholder in the firm’s consulting practice, working to optimize results for middle-market clients.

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