FinanceRevenue ManagementRethinking Strategic Revenue Management

Rethinking Strategic Revenue Management

The main function of revenue management is to maximize income through operational decision making, primarily around price and inventory control. It has played a critical role in travel, hospitality, and transportation industry marketing departments since the mid-1990s. In many cases, a revenue management department serves as the starting point for strategic initiatives, usually with the request for trend analysis and projections. However, the department’s involvement often started—and ended—with the provision of revenue data.

Over time, this involvement has expanded, as companies have realized that revenue management organizations possess not only the data, but also the analytical expertise and knowledge base to perform and support various strategic analyses, including distribution channel strategy, new product or service development, market share, and competitive positioning. While these analyses are providing insight to strategic decisions, the operational revenue management systems and processes continue to operate behind the scenes, maximizing property revenues on a nightly basis without regard to the business decisions that have been made. In some sense, companies have used the data provided by revenue management systems to make changes in their strategic direction, but the related revenue management operational systems (and associated personnel) have never been utilized to fully support these changes.

In the last 10 years, two principal shifts have forced companies to act quickly to ensure all elements of operations, including pricing and inventory control policies, supported this new direction. The severe economic shocks after 9/11, including the economic downturn in 2008, and the proliferation of online travel agencies (OTAs) and other new technologies (including social media and mobile apps) has led to a significantly more informed customer base, especially with regard to rates.

As a result, strategic decisions to improve market share or introduce a new product (really, anything that shifts short-term revenue maximization in favor of long-term business viability) must be reinforced by revenue management systems in order to be effective. Without this integration of strategy and operations, the success of the business strategy itself is in jeopardy.

Revenue management isn’t the only operational function that must be leveraged to implement strategy. Yet, unlike sales or customer service, revenue management is, in most companies, more automated and disconnected from strategic decisions. Reconnecting that link requires two shifts, one in organizational behavior to guarantee buy-in from critical personnel and the other in technology and business process to facilitate expedient changes.

First, formalizing regular discussions with revenue management personnel and decision-makers will help employees who implement pricing and inventory decisions better understand a company’s strategic direction, and will provide senior management with a regular view into the marketplace—one that can’t always be communicated through a report.

Second, construct an additional layer around the revenue management system to facilitate significant changes. This could involve creating a categorical-based workflow for evaluating pricing and inventory decisions so that changes can be made not simply by exception but by design.

The integration of a company’s revenue management organization (people, processes, and technology) with its strategic direction is critical to success. Although the first step in this new business model—analyzing the changing landscape by involving a company’s strongest resources in terms of data and analytic expertise—is already underway, there are multiple remaining steps to complete the journey. These include establishing an understanding of strategy in one of the company’s most important operational functions and creating an analytical and technological layer that supports that strategy within the operational technology that exists today.

Revenue management has made an impact on the success of many companies. Integrating the strategic decision making within that operational framework, from analysis to implementation of pricing and inventory controls, is the next leap forward for companies in the hospitality industry.

Lee Ann Dietz is senior product manager in the SAS Hospitality and Travel Global Practice.