Revenue Management: An Overview on Past
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.
The airlines are credited for developing the foundational science behind revenue management. Almost since the beginning of commercial flight, airlines had attempted to maximize their revenues by focusing on filling as many seats as possible on every flight. This meant predicting how many booked passengers would show up for a flight and how many wouldn’t. Overbooking by that predicted amount was the technique that was deployed to meet their objective.
In the early 1970’s, airlines began experimenting with “fenced” pricing such as offering a discount to passengers who booked more than 21 days in advance. This meant that airlines now had the opportunity to sell additional seats that may otherwise have gone empty. It also meant that the need for tracking and quantitative analysis grew exponentially since customer response to these fare alternatives varied based on season, day of week, time of day, city pair (origin and destination), reason for travel (business or pleasure) and many other variables. In 1972, Ken Littlewood of British Overseas Airways Company (BOAC) now known as British Airways proposed a rule that discounted fares be accepted if their revenue value exceeded the expected revenue of future full fare bookings. Littlewood’s Rule marked the start of what became yield management and later, revenue management.
In October 1978, President Jimmy Carter signed the airline deregulation act which marked the shift from US airlines being a regulated public utility to being part of a free market system. It was then that the practice of yield management was truly put to the test. It passed. Robert Crandall, former Chairman and CEO of American Airlines, gave yield management its name and has called it "the single most important technical development in transportation management since we entered deregulation."
A decade later fledgling yield management practices began within the hospitality industry. In fact, it wasn’t until 1988 that the first yield management-related article appeared in Cornell Quarterly and some of the larger hospitality brands began to experiment by utilizing yield management principles. Unlike the airlines with scores of specialists skilled at quantitative analysis, yield management responsibilities in the hospitality sector fell into the lap of those in other roles – mainly reservation sales managers.
Today the term yield management is outdated and has been replaced with the term revenue management which reflects a broader perspective. Yield management generally refers to an inventory-centric approach to selling the right product to the right customer at the right time at the right price. The term revenue management refers to a business practice designed to optimize the revenue potential of an asset through all market conditions. It is important to note that yield management principles remain as a fundamental component of revenue management and several conditions must exist for it to apply. Those conditions are as follows:
- A fixed amount of resources are available for sale at any given time
- Resources are perishable (after a given point in time, resources are not sellable)
- Different customers are willing to pay a different price for the same resources
- There is some ability to predict future demand for resources
In the early days of hospitality revenue management, the discipline was predominantly reactive in nature. The two tactical levers of pricing and inventory controls were used either independently or in conjunction with each other in response to existing demand. The focus was on raising or lowering rates and placing or removing minimum night stay requirements to maximize the room revenue potential for any given property.
Today, revenue management practitioners in hospitality are far more proactive in that they contribute to driving revenue streams vs. simply reacting to them. Most progressive hospitality organizations fully recognize the critical function this discipline serves and have a structure that supports specialists who sole focus is on revenue management. Other operations with limited human capital may not have a dedicated resource, but do apply revenue management principles – weather they realize it or not.