Revenue Management

Revenue Management is the application of disciplined analytics that predict consumer behaviour at the micro-market level and optimize product availability and price to maximize revenue growth. The primary aim of Revenue Management is selling the right product to the right customer at the right time for the right price and with the right pack. The essence of this discipline is in understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment.

Businesses face important decisions regarding what to sell, when to sell, to whom to sell, and for how much. Revenue Management uses data-driven tactics and strategy to answer these questions in order to increase revenue. The discipline of revenue management combines data mining and operations research with strategy, understanding of customer behavior, and partnering with the sales force. Today, the revenue management practitioner must be analytical and detail oriented, yet capable of thinking strategically and managing the relationship with sales.

Before the emergence of Revenue Management, BOAC (now British Airways) experimented with differentiated fare products by offering capacity controlled "Earlybird" discounts to stimulate demand for seats that would otherwise fly empty. Taking it a step further, Robert Crandall, former Chairman and CEO of American Airlines, pioneered a practice he called Yield Management, which focused primarily on maximizing revenue through analytics-based inventory control. Under Crandall's leadership, American continued to invest in Yield Management's forecasting, inventory control and overbooking capabilities. By the early 1980s, the combination of a mild recession and new competition spawned by airline deregulation act (1978) posed an additional threat. Low-cost, low-fare airlines like People Express were growing rapidly because of their ability to charge even less than American's Super Saver fares. After investing millions in the next generation capability which they would call DINAMO (Dynamic Inventory Optimization and Maintenance Optimizer), American announced Ultimate Super Saver Fares in 1985 that were priced lower than the PeoplExpress. These fares were non-refundable in addition to being advance-purchase restricted and capacity controlled. This Yield Management system targeted those discounts to only those situations where they had a surplus of empty seats. The system and analysts engaged in continual re-evaluation of the placement of the discounts to maximize their use. Over the next year, American's revenue increased 14.5% and its profits were up 47.8%.

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