Revenue management is an extremely important concept in the B2B world – though by no means simple to execute effectively.
To define revenue management – it is a data-driven approach to predicting customer behaviours and using these predictions to optimise pricing strategies and revenue growth.
Crucially, revenue management is not simply about selling the most products to maximise revenue at all costs. Any aggressive, foolhardy discount scheme could achieve that – though it would likely reduce margins to the point of unprofitability. It is a highly disciplined practice that utilises data analytics to sell the right product to the right customer through the right distribution channels at the right time, and right price.
Below, we discuss the fundamentals of revenue management and consider the importance of utilising robust revenue management systems.
What Is Revenue Management?
Traditionally, pricing strategies are based around the cost-plus pricing model – you calculate the costs of producing goods, determine your mark-up and set the price.
Revenue management, however, flips this model on its head. Firstly, it tries to predict what a customer is willing to pay for a product at a given time, then considers the desired margin and finally uses that information to determine what the product costs to produce.
Making accurate predictions about a customer’s willingness to pay is one of the most important factors in revenue management. In fact, using sophisticated revenue management techniques and tools, different prices can be offered to different customers for the same product – based on their willingness to pay. In other words, revenue management is about using data to forecast demand and pricing sensitivity – and then determining your price for a given product to a given customer by matching those factors.
Revenue management is commonly used in the hospitality industry, which serves as a good example to illustrate the concept in practice.
Let’s say a hotel has four rooms available on a Friday night in August. Today is Wednesday, so there’s not much time left to drum up some bookings. The hotel knows that if it doesn’t sell those rooms on that Friday night, once Saturday morning arrives, the opportunity has gone – and the revenue lost forever.
The hotel must now decide what to do. Does it reduce its prices by 25% to try and fill all four rooms? Does it keep its prices the same and settle for filling two of the four? Or does it raise its prices by 50% and aim to fill just one of the four rooms available?
Revenue management tries to find the perfect balance in between them all to maximise the profitable revenue for the business – based on analysis of target customers, historical trends and current market conditions.
Revenue Management Relies on Data
The hotel industry is particularly suited to benefit from revenue management, due to the fact that hotel rooms are “perishable” (in the sense that they must be sold at a certain time) and customers are used to paying different prices for the same commodity (a hotel room) based on time of year or linked to an event taking place.
However, many other industries stand to benefit from revenue management – including those in the B2B space. Indeed, in any market where there is fluctuating demand and a diverse customer base made up of different buyers willing to pay different prices for the same product, revenue management techniques can be applied to optimise pricing strategies that maximise profitable revenue.
For this reason, the market for revenue management solutions is growing. According to recent figures from Markets and Markets, the revenue management market is expected to grow from USD 14.1 billion in 2019 to USD 22.4 billion by 2024, at a CAGR of 9.6% during the forecast period.
Driving the growth, according to the report, is the rising need for competitive pricing strategies and solutions that facilitate data-driven personalised pricing and quoting, deal management, order management, channel management, financial accounting and rebate management.
A well-managed rebate process is one of the most effective ways to improve revenue management for B2B companies. By their very nature, rebate programmes are designed so that different buyers pay different prices for the same product. The aim of rebates is to create different types of incentive that drive specific types of buyer behaviour that maximise revenue growth.
For example, volume incentive rebates reward customers when they purchase large volumes of a certain product. Product mix rebates, meanwhile, can be used to cross-sell, while retention rebates promote continued sales and prevent buyers escaping to competitors.
There are many more ways in which rebates can be used to drive sales and revenues. The key to success lies in having a robust revenue management system that centralises all rebate data in one place. Then, insights can be mined to create dynamic pricing strategies that maximise revenue based on customers’ willingness and ability to pay.
The most sophisticated rebate solutions on the market today provide instant visibility into every transaction your buyers make. With robust analytics, forecasting and deal-modelling features, organisations can unearth additional revenue opportunities to upsell, cross-sell and target the right customers with the right incentives and promotions at the right price and the right time.
This is essential, as effective revenue management relies on having real-time access to up-to-the-minute and good quality customer data. Only when you can continuously track and analyse all sales data can you devise optimal pricing strategies that maximise revenues across your entire customer base. It isn’t easy, which is why it is crucial for your organisation to adopt the right tools and technologies to make revenue management work.
Want to learn more about how revenue management could positively impact your business? Talk to our experts at e-bate today for more information or to request a demo of our intelligent rebate management solution.- Image source