Revenue Management Defined: Ultimate Guide for 2022 (2024)

Many businesses face huge swings in demand over the course of a week, a month or a year. Thiscan be especially difficult for businesses with inelastic supply and high fixed costs, likeairlines, hotels and golf courses. Revenue management is the art and science of predictingthose swings in demand and responding in a way that maximizes the business’s revenue.This article outlines the basic principles of revenue management along with strategies andtips for becoming a good revenue manager.

What Is Revenue Management?

Revenue management is the practice of applying data and analytics to predict demand andadjust pricing — and, in some cases, other terms of sale — to maximize revenuefrom the business’s underlying inventory/supply. Revenue management has been calledthe art and science of “selling the right product to the right customer at the rightprice”. Some definitions include additional qualifiers — such as “at theright time” or “through the right channels” — but the core premiseis the same: varying how you sell a product or service to meet the constantly changing needsof the market’s buyers.

Revenue management is more than just figuring out what price to charge. With revenuemanagement, the right price is often more a function of the needs of potential customersthan the economics of the product. So, for example, businesses where cost-plus pricing(adding a consistent margin to the cost of producing the product) works well might not needa process as sophisticated as revenue management. Industries with high fixed costs and lowmarginal costs are the most common users of revenue management. These industries tend to bein the travel and hospitality sectors: Hotels, airlines, golf courses and car rentalagencies are some examples of businesses that make heavy use of revenue management to setprices and other sales terms.

Revenue Management vs. Yield Management

These are related concepts; in fact, some consider yield management to be a type of revenuemanagement that focuses on clearing inventory. Clearing inventory through yield managementrequires the following two points to be true, the presence of which is also useful whenapplying any kind of revenue management techniques:

There’s a fixed amount of what you’re selling — in other words, a“depletable” inventory, such as the rounds of golf a country club cansell in one day on a single course.
What you’re selling expires. This isn’t necessarily literal; inventorymay expire in the way a round of golf tomorrow can’t be sold the day after.The point is, when the unsold inventory expires, it’s worthless.

Some people add a third condition, which, while not strictly necessary for yield management,is required for any analysis more complicated than “find the right prices”:

Differences in customers’ willingness to pay for what you’re selling mustbe correlated with something the business can use to segment its offerings. On ourhypothetical golf course, for example, perhaps weekday customers are willing to paymore than weekend golfers because they’re mostly paying from business expenseaccounts, or maybe weekday customers want to pay less because they’re retireeson fixed incomes who happen to have more time for midweek rounds. Whichever way itgoes, the point is to establish different selling terms based on the segmentation.

Revenue and Yield Management Key Differences

Revenue management is broader than yield management — it allows for longer-termapproaches to maximizing revenue and delivering value to customers, whereas yield managementis about optimizing what you can get out of a fixed inventory. A business can apply revenuemanagement practices where yield management assumptions don’t hold true by focusing onmore revenue-generating variables than simply sales of inventory. The inventory-centricyield management approach also ignores opportunities to improve ancillary revenue thatvaries by customer type, such as which golfers tend to buy items in the pro shop or whichhotel guests are most likely to eat in the restaurant.

That said, yield management practices are at the core of many revenue management strategies.You may want to think of revenue management as a broader strategic approach, with yieldmanagement containing a particularly useful set of tactics you can employ toward your goals.

Key Takeaways

Revenue management lets businesses treat individual days like separate micro-markets,with their own supply-and-demand curves.
Good information — about the business, customers, competitors and the calendar— is essential to revenue management.
While revenue management can be a highly quantitative practice, a numbers-only approachisn’t always the right long-term strategy.
For some businesses, revenue management is the difference between success and failure.

Revenue Management Explained

In practice, success in revenue management is all about collecting and analyzing high-qualityinformation. A good revenue manager must possess detailed information about their offerings,customers, calendar and competitive market.

Knowing your offerings means not only your inventory but also what you cando with it. A hotel room night, for example, might be sold by itself, as part of a longerstay or as part of a room block for a conference or wedding.

Knowing your customers is essential to predicting demand, including severaldifferent aspects of demand. Business travelers are different from leisure travelers andwill respond differently to promotions, events, seasons and even the day of the week.Conventional wisdom suggests that leisure travelers book further in advance than businesstravelers, though there are certainly spontaneous leisure travelers who look for last-minutedeals.

Why Is Revenue Management Important?

Revenue management helps businesses get the most out of what they have to sell, offerspecific deals to customers who value them the most and capitalize on opportunities in a wayfixed pricing never could. But even more than that, some businesses wouldn’t evenexist without revenue management — it can be the deciding factor that lets a businessoffer products to customers at all.

Take, for example, a hotel in a popular weekend spot. During the week, it can only charge$100 per night if it wants to fill a room. On weekends, it can charge $300 per night.Without revenue management, a $100 room night price would bring in $700 per week assumingthe room is filled each night. A $300 room night price would bring in $600 per week, leavingthe room vacant most nights. Now, if the hotel needs a room to bring in $800 per week tooperate, it can’t stay in business. But with revenue management, the hotel can make$1,100 per week on that room by charging $100 on the five weekday nights and $300 on Fridayand Saturday nights.

That logic applies to any business with high fixed costs and low variable costs. For suchbusinesses, operating at all is costly, but serving an extra customer when capacity isavailable becomes very inexpensive.

5 Revenue Management Steps

When approaching revenue management, it helps to have a systemized process. In practice, thefive steps described below can be ongoing and concurrent, but having a clear progressionthat takes you from gathering information to making decisions is what makes revenuemanagement, well, manageable.

Gathering information (data collection): In this step, you’llwant to collect as much relevant information as you can. It helps to focus on thefollowing four key areas, though that’s not to say relevant informationwon’t exist outside of this framework.
- Know your offerings: What are you selling? What ways can you sell them?
- Know your customers: This includes regular customers and potentialcustomers. Who are you trying to reach? What do you know about them?
- Know your calendar: Every season, every week, every weekend and evenevery day can be thought of as its own micro-market.
- Know your market: Collect enough information about competitors andcomparables (substitutes) to know your potential customers’ entire choiceset — not just what your offerings look like to them.
- Know your history: What do you know about the history of everythingabove? How do things usually go for a particular day/month/event? What can youlearn from past experiences? What are your customers used to? What paststrategies worked and didn’t, and do you know why?
Slicing and dicing (segmentation): After step 1, you have a lot ofdata that can be broken down in 1,000 different ways. The question isn’t aboutwhich is the “right” way to do it, but what are the useful ways topartition the data? If you know that customers who buy at the last minutedon’t care as much about price, on any given day you can divide your offeringsin time, with prices higher for closer dates. If weekend customers are differentfrom weekday customers, or Monday morning customers are almost all businesstravelers (true enough for many airline routes), you can segment by day of the week(and for the airline example, even time of day). If a recurring promotion has loyalfans who wait for it, make room for those customers who are a great source ofreliable repeat business. Use what you know to divide customers and calendar intouseful segments, which in turn helps manage your offerings.
Seeing the future (forecasting): Using newly collected data, theprecision gained through useful segmentation and historical data, you can startforecasting demand over time and by customer type. Sometimes this is asimple process involving a baseline (e.g., how things have been going recently orwhat happened at the same time last year) plus adjustments based on new learnings.But forecasting can also be as complicated as you want to make it — sometimesit’s an automated computational process using regression techniques on timeseries data with influencing effects from your data collection. The trick is to makesure the added benefit of a more detailed and sophisticated model is worth theeffort it takes to generate.
One useful source of input data for your forecasts is output from other forecasts.Forecasts about the weather, consumer behavior and general economic trends can beuseful in determining how your industry as a whole will fare and, from there, howthat will impact your particular competitive position.
As with all forecasting, remember: garbage in, garbage out. No matter howsophisticated and excellent the forecastingmodel is, if the information put into it is low-quality and unreliable, theresulting forecasts won’t be reliable either. It’s tempting to spend alot of effort investing in excellent forecasting capabilities, but that must bematched by good data collection or else the forecasting is all for show.
Planning and executing (decision-making and optimization):Forecasting can shine a light on what customers, competitors and industries will do.In this step, it’s time to decide what your business should do. With detailedforecasts about how many customers of which type are going to consider yourbusiness’s offerings on a given day, you can mathematically calculate therevenue-maximizing response. Optimization can be complicated, but many revenuemanagement systems offer proven, built-in optimization formulas. With thesecapabilities in hand, the question becomes: Should you simply execute therevenue-maximizing strategy that the math dictates? The answer: Sometimes, butprobably not always.
It’s important to remember that while the math is proven, the real-world databeing fed into the formulas is never perfect. Your forecasts and understanding ofthe demand curves are guesses, subject to error. So instead of just trying tomaximize expected value, you also want to manage deviations from that expected value— in other words, minimize downside risk while pursuing some opportunitieswith high potential upside, even if they cannot be forecasted with high accuracy.
There are a few important questions to ask when deciding how closely to follow theforecasted optimized prices. First, is setting prices too high substantially more orless risky than setting them too low? If the risk is asymmetric — one way isfar riskier than the other — you may want to adjust prices to err on the sideof caution.
Second, is there important information the forecasts couldn’t account for?Hotels underneath a rare solar eclipse, for example, tend to sell out that night.When this last happened in the U.S. in August 2017, hotels that didn’t accountfor the event either lost out on revenue or wound up canceling confirmedreservations in order to resell the rooms at higher prices later (which resulted insome very bad press).
Third, are there long-term considerations that outweigh short-term revenueoptimization? A luxury product may have a brand to protect, and managers could worrythat pricing too low may undercut their ability to command a premium going forward.With enough time and specificity, some of these extra considerations can beincorporated into data and forecasts, but human judgment still has an important roleto play alongside mathematical optimization in the planning and execution of revenuemanagement strategies.
If there’s one thing to take away from these steps, it’s, again, thateverything depends on the quality of the data. Business activities that bring invaluable information about customers and potential customers (e.g., an experimentalpromotion you can’t forecast) may not immediately translate to revenueincreases, but they have the potential to steer the future of your business.
Iterating (dynamic reevaluation): In reality, a revenue managementdepartment will be cycling through all of these steps every day. At the same time,they’ll be seeing results from past cycles coming in. It’s important tolearn what worked, what didn’t and — most importantly — why.Sometimes when a strategy doesn’t pay off, it will be because of poor processexecution. Or maybe one week a competitor simply outplayed you. But sometimesit’s because customers have changed and your old understanding is no longertrue. This may be an early sign that important changes are needed elsewhere in thebusiness. A good revenue management process will make room for learning andadaptation. How many articles have been published about millennials“killing” some company, product or industry? That’s an unhelpfulframing for an important truth: Competitive businesses that don’t listen towhat their customers want and note how they’re changing don’t succeed.

History of Revenue Management

One could quibble over its exact origins, but many scholars and business writers havecoalesced around one 1970s story as the beginning of modern revenue management: when BOAC, apredecessor to British Airways, first offered “early-bird bookings”. BOACnoticed that leisure travelers were more price-sensitive and tended to book earlier thanbusiness travelers. So it offered a discount for booking more than three weeks ahead oftime, with prices attractive to more leisure travelers. Meanwhile, most business travelerscontinued paying the higher price.

While successful, this strategy raised some potential issues. How many seats would beavailable for the discounted price? If prices were altered without controlling inventory,BOAC risked filling a plane with leisure travelers and missing out on higher revenue frombusiness travelers, who were its most frequent fliers. But if it didn’t offer enoughseats at a discount and a plane flew with empty seats, that ticket would expire with novalue to anyone. The question of how many seats to make available at the discounted pricealso had no straightforward answer — the season, the day of the week and the time ofday all made a difference. Leisure travelers tend not to fly out Monday morning, whilebusiness travelers were more likely to fly between big cities than to communities with manyresorts and spas. With airlines, there’s the added complication that not everyoccupied seat flying between City A and City B gets occupied by a passenger whose origin isCity A and whose destination is City B. Flights can be legs in an itinerary, so if a route(say, to London) is full of passengers making connections, you could have dozens ofdifferent itineraries on one aircraft at one moment.

What started as a simple promotion, one successful enough to be emulated by others, grew intowhat we now know as revenue management. It jumped from airlines to hotels to many otherindustries, each of which adapted the practices to its own idiosyncrasies. Most industriesdon’t have “legs” of an itinerary (though railways do), but hotels addedtheir own considerations like length of stay — the logic and mechanics of which arealso used by car rental agencies. The introduction of computers dramatically increased whatrevenue management could do. Today, the advent of artificial intelligence may once againrevolutionize how businesses tailor offerings to different customers.

Revenue Management KPIs and Metrics

Revenue management has some common financial key performanceindicators (KPIs) and metrics, but of utmost importance is to find the KPIs thatwork best for your business and situation. These are examples, not a comprehensive menu fromwhich to assemble a dashboard.

Average daily rate: This is common in hotel and rental businesses.It’s the average revenue per unit per day. It ignores other sources of income andunrented periods, and can be an indicator of the pricing power of a core offering. Forrentals that aren’t rented by the day, substitute the appropriate time period(hour, week, etc.).
Occupancy: This measures how full a hotel is, though the concept cangeneralize to other rental businesses as, simply, the percentage of units rented at anygiven time. Related, average occupancy is the occupancy measure over time instead of ata point in time.
RevPAR (revenue per available room): This is perhaps the most importantgo-to metric in the hotel industry, and it combines the previous two concepts. It tellshow much revenue each room is generating and includes nights a room sits empty. Again,you can generalize this metric for any rental business, thinking of it as “revenueper available unit”.
ARPA (average revenue per account): The ARPA KPI takes a differentperspective than the previous metrics: It looks at revenue per customer account ratherthan per asset. It’s usually calculated as monthly recurring revenue divided bythe number of accounts generating that revenue.
Profit per unit: This comes in many forms (profit per room, perairplane, per vehicle) and many different measures of profit. In the hotel industry,GOPPAR (gross operating profit per available room) is most common, butit’s easily adapted to other industries. Many businesses using revenue managementtechniques have high revenues and high costs, so focusing only on the revenue side canlead to an overly optimistic view.
PRASM (passenger revenue per available seat mile): This is the revenuemanagement KPI for the passenger airline industry. It takes passenger revenue (ignoringrevenue from things like cargo and credit card loyalty programs) and divides it by thetotal number of miles traveled by each seat in an airline’s fleet. Seat miles arecorrelated with fuel burn and time in the air (and therefore wages paid for work in theair), two of an airline’s biggest cost drivers, and they’re a goodmeasurement of an airline’s capacity for delivering travel to customers. Thismetric goes down when seats fly empty, accounting for the lost opportunity.
Other accounting and financial metrics: Revenue management KPIs canalso include a variety of standard accounting metrics, like total revenue and EBITDA(earnings before interest, taxes, depreciation and amortization). Not every metric hasto be special or customized like PRASM or RevPAR.
Your metric here: Knowing your business and what matters to it, whatmetric really captures what you’re going for? What summary statistic goes up whenthe business does well and goes down when things go south? Think carefully about whatyou really want to measure, manage and have business teams care about. That’s themetric you want.

Revenue Management Strategies

When most people talk about revenue management strategies, they start with price. But toomuch focus on price can leave extremely valuable tools underused or unused. So beforefocusing on price — in the next section — here are a few revenue managementstrategies that don’t involve changing prices:

Inventory controls: Don’t make every room night, tee time orflight available for purchase all at once. You can hold some back as you learn moreabout the micro-market for that day as it draws closer. You can also block offenough inventory for large bookings by continuously coordinating with therelevant sales teams to figure out when there will be a big event (like a wedding,conference, corporate golf outing or even a church retreat).
Distribution channel controls: Ideally, every customer would buydirectly from your website. But in travel and hospitality, aggregators and marketplaceshave taken a chunk of the customer base and, with it, a percentage of the revenue.Whether selling through Kayak, Trivago, GolfNow, AutoSlash or something else, thinkingthrough how much to offer and under what terms is a decision you can’t makelightly. You don’t want to sell out through a service that takes a commission andbe left without inventory for customers on your website, but you also might not want toignore the large boost in visibility you can get by participating on these platforms.Hotels in particular are known for offering non-price incentives for their most loyalcustomers to book on their websites or through their apps, typically through loyaltyprogram incentives (e.g., you can’t earn points or use your elite status benefitsif you don’t book with them).
Duration controls: Remember the earlier example about a beach resortselling room nights over a popular three-day weekend? Selling the middle night for aone-night stay could make it harder to fill that room on the other two nights. Onepossible way around this problem is by requiring a minimum length of stay, either arounda special event or even all the time.
Married segments: This is a term from the airline industry, but itapplies to any transportation service offering multileg itineraries. Two segments of anitinerary can be “married” if they are sold together, and they might not beavailable separately. Airlines that have crowded flights coming into major hubs andflights departing soon after that are empty may not want to sell the scarce inboundseats to customers traveling only to the hub city. Instead, they might prefer to waitfor a customer who will use that seat to build a longer itinerary — or, at thevery least, charge the customer taking a shorter trip enough to account for the lostopportunity of selling a connecting itinerary.

Revenue Management Pricing Strategies

Pricing, of course, has spawned a variety of strategies for optimizing revenue management.Here’s a sampling of five:

Open pricing: Open pricing is a policy that allows revenue managers todynamically set prices with maximum flexibility. They can change prices dynamically inreal time without having to worry about syncing pricing across, for example, room types,dates, distribution channels or lengths of stay. A word of caution when implementingthis: Sometimes contracts with distribution channels prohibit truly open pricing. So togive revenue managers open pricing freedom requires systems in place to ensurecompliance with those constraints.
Forecast pricing: Forecast pricing is used to set custom prices far inadvance, as opposed to regular or standard seasonal rates. A forecast pricing approachrequires not only predicting what demand will be on a given day far in the future, butalso what competitors might do and what events might impact demand. It must also accountfor customer type — when you set prices far into the future, you’respecifically making offerings to the customer types who book far in advance.
Guest-segment pricing: In this strategy, the business charges differentprices to different types of guests for essentially the same thing. It’s the mostdirect form of price discrimination in revenue management, and therefore it’simportant to make sure that any guest-segment pricing strategy complies with local lawsas well as general ethical principles. For example, you can offer a senior or early-birddiscount in most of the U.S., but you can’t offer different pricing based on race.With that disclaimer understood, segmenting promotions by guest type can be a good wayto reach out to customer types who might not typically consider you. For example, ahotel that prices suites at several multiples of the regular room rate might consideroffering those same accommodations with all their extra space at a family discount toencourage leisure travelers who wouldn’t otherwise consider the hotel.
Length of stay: Similar to duration controls, length-of-stay pricingsets prices in ways that encourage longer stays. You can think of this as a volumediscount, except instead of renting more rooms the customer is buying more room-nights.This way the same night in the same room (or the same day in the same rental car) mighthave a different price depending on when the customer arrives and leaves.
Competition-driven pricing: An important strategic decision to make isthe extent to which a revenue manager wants to set prices based on competitors’prices. Price matching is the most extreme form of this strategy, though usingcompetitor prices to set guideposts can be useful. For example, a midtier hotel may wantto make sure it’s never more expensive than a nearby luxury property, thoughperhaps that rule gets broken when hosting a conference for attendees who valueconvenience more than product quality. Another competition-driven pricing strategy wouldbe to explicitly undercut nearby competitors by a little bit, hoping to attractcustomers who are searching for options using price as their most important factor.

Revenue Management Tips

There are entire college courses in revenue management, so one article (even this very longone) can’t teach you everything there is to know. But here are some general tips tohelp you succeed at revenue management in any industry.

Always be learning. Revenue management is about making the most ofavailable information. No one has perfect information, and no one has perfect methodsfor processing that information. If information and know-how are competitive advantages,the fastest learners will be the best revenue managers.
Don’t be afraid to experiment. Information has value, andsometimes the only way to learn important things about a market is to try them out. Afew thousand dollars of missed opportunity or promotional giveaways might be a bargainif the trade-off is learning valuable information about what customers want and how theymake decisions.
Collaborate. Don’t work alone. Businesses that use revenuemanagement have a lot of departments handling things like sales, promotions, retention,customer service, loyalty, technology, operations and more. All work toward the samegoal: to make money by providing value to customers. Don’t keep valuable lessonsabout customers to yourself, and try your best to learn from others.
Think long term. The practices of revenue management tend to promoteshort-term thinking. You’re rarely selling something more than a year ahead oftime, and hard metrics are coming in every day to which you have to respond.That’s important. But it isn’t everything. Don’t forget to think longterm — you’re not just setting prices, you’re collaboratively buildinga business and a brand. The urge to squeeze out every last dollar is strong (andexplicit in some organizations), but take a moment to think about how your strategyworks long term. Unless the business has some kind of market failure-style protection,like a natural monopoly, leaving customers happy is almost always more important thanthe marginal dollar. Keep one eye on the horizon.

Revenue Management System Features

A revenue management system (RMS) is a software product that assists with, tracks andsometimes even automates many of the practices discussed in this article. Here are somefeatures a good RMS should offer.

KPI tracking: A good RMS will help track key performance indicators andmetrics for revenue managers. It should provide updated metrics on where you are now,where you’ve been and allow you to calculate metrics over various periods of time.
Competitor pricing: In the data collection phase, part of“knowing your market” is knowing what competitors are charging. Ifcompetitors are in a well-known industry that puts pricing data online, a top-rate RMSwill gather some of that information for you. It might not sign up for yourcompetitor’s emails and let you know about special promotions, but it can do thebasic job of scanning what they’re charging and when.
Restriction management: There’s no standard term for this, but agood RMS will account for rules and restrictions, either rules custom-made by you toprevent errors from occurring, restrictions imposed by things like contracts withdistribution channels or requirements from a larger corporate owner.
Revenue estimates: With perfect data on what you’re charging,when and approximate forecasts for what you think demand will be — which an RMScan help you develop as well — the software will often be able to estimate whatyour revenue will be going forward. You can use this for “what if” analysis,but remember that the predictions are only as good as the data, assumptions andforecasts upon which they’re based.
Pricing recommendations: This is one of the most important things anRMS can do, especially for smaller teams and those without a lot of quantitativefirepower. You can reinvent the wheel of running complex models and algorithms, or youcan use models that have been vetted and come with your RMS. At the very least it givesyou a starting place with suggested prices, and you can apply your own analysis andknowledge to make adjustments from there.

Keep in mind that software can only use information you give it or tell it where to find. Itcan’t scan calendars or read news stories and predict how humans will respond (yet).An RMS will be better at processing large numerical datasets than you ever could, but arevenue manager’s job is to also incorporate information that isn’t easily fedinto the software.

Choosing A Revenue Management System

The most important thing to consider when choosing a revenue management system is how closelyyour business resembles the businesses the RMS was designed to help. Revenue managementlooks different in different industries, and while the principles and core logic are largelythe same, the industry-specific elements are still substantial in practice. Don’t tryto force a square peg into a round hole; get something that’s as close as possiblebuilt for your industry.

Many sources will speak with authority about what you need in a revenue management system,but bells and whistles are meaningless without a plan behind them. Sophisticated analyticsare great, but only if you can use them. Many users love cloud technology for data securityand easy software updates, while other businesses already have solutions for storing andsecuring data in place and prefer not to have to deal with software that changes frequently.Most users want help running optimization algorithms and suggesting prices from their RMS,but if your business works best with a simpler approach — and many do —it’s not worth paying for premium capabilities you won’t use. When choosing arevenue management system, the goal is to find the best fit.

Conclusion

Many businesses face huge swings in demand over the course of a week, month or year, and theworld is only getting more variable. It’s hard for many businesses to prepare for andrespond to these shifts in their customer needs — and sometimes shifts in who theircustomers are. Revenue managementsoftware can be an essential tool for meeting customers’ needs and providingthem with the right product or service, at the right price and the right time.

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Revenue Management FAQs

What are revenue management strategies?

Revenue management strategies are strategies that help a business set prices and tailorofferings to their potential customers. Such strategies can range from very general, such asmarket research methods for understanding customers or time series analysis techniques fordemand forecasting, to very specific and tactical, such as enforcing minimum lengths of stayon holiday weekends at hotels.

What is revenue management in a hotel?

Hotels are one of the most common users of revenue management techniques, and many hotelsdepend on revenue management just to stay in business. Hotel revenue managers forecastdemand and set competitive prices to attract customers, sometimes treating each day as itsown micro-market with a unique supply-and-demand curve.

What is the role of a revenue manager?

A revenue manager uses data analytics to forecast demand and then steer a business’sselling strategy. The selling strategy includes pricing — often the biggest and mostimportant part of the job — managing third-party distribution channels, inventorycontrol and any applicable rules, like minimum lengths of stay at a hotel or “marriedsegments” in airline and other transportation businesses’ itineraries.