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Revenue Management (With examples)

Updated on June 17, 2015

Revenue Management is the "art" of maximizing Profits by maximizing the Revenue. Usually disregarding the Costs, since you can assume they are fixed or not so important to the equation.

Revenue Management or Yield Management departments use all available data possible to predict the future sales and to define the optimal price. The goal is always to reach the maximum point of revenue.

This is a method used due to a limited number of supply, and since there is a limited supply, the optimal price of sale has to take into account that it is not possible to sell more than the supply.

Revenue Management is applicable in many business, such as a Coffee Shop, Pub, Hotel, Parking, Airlines, etc...

Since examples are the best way to show how Rev. Man. can be used, I will write a few so you can better understand it.

If you still have any doubts, feel free to comment.

Revenue Management in Tax

Tax Revenues are studied and analyzed, not only by government departments but also by Economics Professors and Researchers.

The most known graphic about the Revenue Management of State Tax is the Laffer Curve. In it we can see that there is an optimal point to achieve the maximum revenue possible, and as we can see, it is not by increasing taxes, sometimes the government has to decrease the taxation.

Laffer Curve

Simple Laffer Curve - example of the Laffer curve for Government Revenue
Simple Laffer Curve - example of the Laffer curve for Government Revenue

If taxation is 0, it is expected 0 revenues.

As the Gov. increases taxation, it also increases "Tax evasion" and can reach levels when the worker prefers to find another ways of earning some money.

At the middle, the Gov. finds the "perfect" level of taxation, when it achieves the maximum revenue


Revenue Management in Hotel

Many Hotels have different prices for different seasons, day of week, and other factors.

The reason is simple, trying to achieve an optimal point between "Number of Guests" and "Amount of Money Willing to Spend". Sometimes the benefit of one more client, by decreasing the price is not the best option.

You can verify that by going to a Hotel Website and check the differences between spending a night in a business area during week, or during weekend.

Airline Seats are very valuable. An empty seat is throwing money away.
Airline Seats are very valuable. An empty seat is throwing money away.

Is a 100% occupation a good thing?

According to some revenue managers, the goal is maximizing revenue and normally the goal of 100% occupation is also a way of maximize revenue, but these two goals are not always related.

For example during the low seasons there are not demand enough to fulfill 100% occupation, sometimes you can vary between a 20% occupation or 60%, but with great changes in the daily rate, these changes can result in a maximized revenue with 20% occupation at a greater rate.

The 100% occupation can also mean that the place is full before the high paying demand paid, an ideal occupation can be 99% or 98%, always with a space left for someone that is willing to pay a lot.

Revenue Management in Parking Lots

Parking Lots can also be an example where Revenue Management can be applied.

That way the owner of the Parking Lot can maximize the Revenue creating a dynamic pricing strategy.

For example a Parking Lot in a Business area can have a pricing strategy with focus on the weekdays, having low prices during weekends. Adding to the strategy "Price/Hour" the owner can add a price for the entire month, granting more certainty on the amount of money received per month.

These Two Probably Have Revenue Management

McDonalds and Marriot are two big companies used to use Revenue Management. The way to increase revenue by adjusting the supply.
McDonalds and Marriot are two big companies used to use Revenue Management. The way to increase revenue by adjusting the supply.

Revenue Management in Coffee Shops

Coffee Shops can also use Revenue Management to increase their Profits. Instead of just selling coffee at a standard price, the owners can achieve larger profits by creating different prices.

Since we should assume that the costs are fixed, or we do not want to increase them, I will not consider creating new products, just coffee.

Assuming that the usual consumer will buy a coffee in the beginning of the Morning and After Lunch, you have a standard price at these hours. At these hours the amount of clients is also a non-volatile number.

So the focus will be on the non-busy hours, that can also be called the "Happy Hour" for the clients, when the price is lower. Another option is to have less chairs during the "Happy Hour" than in the "Busy Hour", so there is more space between chairs and the client is happier.

Revenue Management Systems

The Problem

Sometimes in order to maximize revenue the manager has to deal with a lot of information. The data can be used to do statistics and predict some of the consumer behaviour, but in order to maximize revenue easier there are specialized companies developing software to achieve that goal.

Examples of Problems & Solutions:

  • The Hotel manager can use an excel file to know how many bookings and the historical data. However, if they use a Rev. Man. Software, the software can use the historical data and using formulas, predict the future demand and even manage on-line reservations.
  • The Government can benefit of optimization software if it is possibly to include several variables, like what happens to GDP and inflation when taxes are changed. A simple software could not be enough to calculate with precision the effects and the collateral effects would not be considered.

Hotel Revenue Management Examples

Comments

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    • s007vps profile image

      Sunil Singh 

      13 months ago from Pune

      In Hotel its a game and revenue management is playing a very critical role into in learn we TIHCC is helping hoteliers to best of their capacity to know more https://tihcc.com

    • saitam profile imageAUTHOR

      saitam 

      6 years ago from Lisbon

      Thank you Mary for your comment and for that recommendation for anyone interested in Rev. Management.

    • profile image

      mary 

      6 years ago

      Hello,

      Very good article, the truth is that every day is what ocurrre. As a hotel owner, I always left wondering whether we adapt to the times to come or not .... I recommend you form yourselves on the issue of revenue management. I after much hesitation, I took a course at the end Revenue Management, which is both professional hotel and tourism sector but focused on positions, as people who want to gain knowledge of the latest trends in Hotel Management. I made it through http://www.cesae.es/index.php/24-revenue-managemen... and I can say I am delighted. Good agenda, very práctco I could apply to my day to day in my hotel management.

      I hope you serve.

      greetings,

      Mary

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