When discussing revenue management, the airline industry serves as the best example of industry-wide usage. First tested by BOAC (now British Airways), all airlines now use some type of pricing and revenue management service to sell tickets. Things like dynamic pricing and overbooking have become common to all airline consumers and both are a result of implementing revenue management optimization software. While airline revenue management is used the most comprehensively, there are takeaways from it that apply to all industries.
Airlines use a sliding scale involving price, inventory, marketing and various sales channels to determine profitable plane ticket prices based on a flurry of factors like willingness to buy, competition and destination. Doing this allows airlines to always price according to what the market determines is appropriate as opposed to having fixed prices throughout. This has a lot to do with why planes are usually full or close to it.
A good example of difference in pricing strategy between two similar industries comes when looking at aviation versus hospitality. Both industries struggle with pricing around similar issues:
- The number of seats or rooms available
- The amount of time remaining to sell the seat or room
- What competitors are charging for the same seat or room.
Hotels often have a fixed price for a room when their occupancy is below 50% and then they increase prices after that. What happens, though, is that bookings slow down and sometimes even stop. This makes it very difficult to get from 50% occupancy to 100%.
Airlines, on the other hand, use complex algorithms to constantly analyze the market and determine what prices customers are willing to pay. This not only keeps airlines competitive but also ensures that the flow of customers isn’t effected solely by occupancy.
Consumers of airlines and hotels alike have become accustomed to fluctuating prices so taking advantage of this is one example of how the hospitality industry could benefit from using revenue management services. One of the more innovative considerations of revenue management services is pricing sensitivity, or the likelihood that a customer will not purchase something because of price. Understanding how price sensitivity changes between different segments of customers can help guide the pricing strategy to optimize profits at a granular level.
A father of five kids is likely to be more conscious and aware of the price of a plane ticket because he has to buy so many of them. On the contrary, the executive assistant booking a last minute flight across country is more likely to pay more and also choose a more expensive seat in business or first class. By targeting audiences differently based on their perceived price sensitivity, airlines are able to make exclusive offers that certain customers are more likely to take advantage of than others.
Many airlines have also implemented corporate safeguards to increase, even sometimes guarantee, their chances of keeping flights full. Airlines with flights to and from certain cities work out agreements with companies with frequent business in both cities promising a given number of seats at a discounted price. Corporations even sometimes are responsible for buying certain seats even if they aren’t being used.
Revenue Management in Other Industries
So outside of airlines and hotels, how can other industries use revenue management? Good question. Here are a few examples of verticals that are either using some concepts from revenue management or none at all:
Rideshare Services Surcharges Based on Demand
When it’s 1:00 AM and you order that Uber only to find a 3x surcharge. Uber’s pricing algorithm includes many of the typical factors that go into revenue management but also unique ones like distance and demand for a ride at a given time. For a traditional factor like price sensitivity, these rideshare companies have an advantage because there isn’t much competition to contend with. The price sensitive can either choose to stay where they are longer in hopes that the rates go down, find some other way to get to their destination which could take longer or be less safe or just pay the price, enjoy the convenience and get home.
These companies also offer premium options for transporting multiple passengers or riding in a nicer car; both of which cost the customer more. While the dollar amounts are often lower in this scenario than in aviation, revenue management is the idea of optimizing every transaction for maximum profitability. Combining the volume of rideshare transactions and a fairly sophisticated revenue management model, these companies capitalize on each customer and continue to grow.
Electronics Capitalize on Willingness-to-buy
The electronics industry could stand to implement more revenue management tactics but there are certain periods when it’s obvious that they are using some. The goal of these pricing strategies is often to increase demand for their products, as opposed to increasing margins and profitability.
Consider the price of televisions around Black Friday, Christmas or the Super bowl and how many retail storefronts run out of them before sunrise. Retailers lower the prices in order to get more people into the store with the hopes that if customers don’t make it in time for the one product they really want, maybe they’ll buy a similar product of lesser quality but at the same price point of the desired sale item. Essentially, they hinge most of their pricing on one factor: willingness to buy.
A comprehensive revenue management strategy would lower the price of televisions the other 362 days of the year which would likely increase sales volume pleasing both consumers, who enjoy lower prices, and retailers, who enjoy increased sales and greater margins.
Entertainment Ticket Prices Missing an Opportunity
Often times, concert venues and movie theatres struggle with the same issues as airlines and hotels: a limited number of tickets to sell, a timeline of when the tickets have to be sold by and the need to sell a minimum number of tickets to return a profit. However, other than charging more for certain seats or VIP packages, pricing remains stagnant.
Other than matinee specials at some movie theatres, prices typically don’t change. This has to do with why so many movie showings are empty or only have a handful of viewers. In terms of concerts, other than tickets bought and then resold on third party sites like StubHub, concert seats remain the same price for the whole sales cycle; albeit seats closer to the stage are often more, they stay the same.
Entertainment pricing could drastically benefit from implementing revenue and yield management strategies. Not so much for the rockstar tours or long-awaited movie releases where price sensitivity is low but for the jazz clubs, theatres showing independent films or garage band performances at the local bar; places where price and demand fluctuate and venues and artists have to get creative to all return a profit.
In the end, every industry is both looking to drive revenue and is also affected by factors like demand, willingness-to-pay, price sensitivity and a slew of other factors that make returning a profit difficult sometimes. The airline industry has made it commonplace to scientifically analyze all of these factors together in order to determine pricing strategy and how to stay in the black. While it has taken years of data collection and analysis to reach this point, there’s no reason other industries can’t set themselves along the same path so that, one day, all companies can enjoy the advantages of pricing based on a revenue management strategy.