Revenue Management (With examples)

Revenue Management is the "art" of maximizing Profits by maximizing the Revenue. Normally disregarding the Costs, since you can assume they are fixed or not so important.

Revenue Management is applicable in many business, such as a Coffee Shop, Pub, Hotel, Parking ...

Since examples are the best way to show how Rev. Man. can be used, I will write a few.

Tax Revenues are studied and analyzed, not only by government departments but also by Economics Professors and Researchers.

The most known graphic about the Revenue Management of State Tax is the Laffer Curve. In it we can see that there is an optimal point to achieve the maximum revenue possible, and as we can see, it is not by increasing taxes, sometimes the government has to decrease the taxation.

If taxation is 0, it is expected 0 revenues.

As the Gov. increases taxation, it also increases "Tax evasion" and can reach levels when the worker prefers to find another ways of earning some money.

At the middle, the Gov. finds the "perfect" level of taxation, when it achieves the maximum revenue

Many Hotels have different prices for different seasons, day of week, and other factors.

The reason is simple, trying to achieve an optimal point between "Number of Guests" and "Amount of Money Willing to Spend". Sometimes the benefit of one more client, by decreasing the price is not the best option.

You can verify that by going to a Hotel Website and check the differences between spending a night in a business area during week, or during weekend.

Parking Lots can also be an example where Revenue Management can be applied.

That way the owner of the Parking Lot can maximize the Revenue creating a dynamic pricing strategy.

For example a Parking Lot in a Business area can have a pricing strategy with focus on the weekdays, having low prices during weekends. Adding to the strategy "Price/Hour" the owner can add a price for the entire month, granting more certainty on the amount of money received per month.

Coffee Shops can also use Revenue Management to increase their Profits. Instead of just selling coffee at a standard price, the owners can achieve larger profits by creating different prices.

Since we should assume that the costs are fixed, or we do not want to increase them, I will not consider creating new products, just coffee.

Assuming that the usual consumer will buy a coffee in the beginning of the Morning and After Lunch, you have a standard price at these hours. At these hours the amount of clients is also a non-volatile number.

So the focus will be on the non-busy hours, that can also be called the "Happy Hour" for the clients, when the price is lower. Another option is to have less chairs during the "Happy Hour" than in the "Busy Hour", so there is more space between chairs and the client is happier.

The Problem

Sometimes in order to maximize revenue the manager has to deal with a lot of information. The data can be used to do statistics and predict some of the consumer behaviour, but in order to maximize revenue easier there are specialized companies developing software to achieve that goal.

Examples of Problems & Solutions:

• The Hotel manager can use an excel file to know how many bookings and the historical data. However, if they use an Rev. Man. Software, the software can use the historical data and using formulas, predict the future demand and even manage on-line reservations.
• The Government can benefit of optimization software if it is possibly to include several variables, like what happens to GDP and inflation when taxes are changed. A simple software could not be enough to calculate with precision the effects and the collateral effects would not be considered.