Revenue Management… What’s all the Buzz?
The concept & practice of Revenue Management isn’t a new idea. What is new is the shift of CPG companies building their revenue management capabilities in house.
The Birth of Revenue Management… Airlines & Hotels
The concept of revenue management gained popularity within both the Airline and Hotel industries. These industries are defined by cost structures that are heavily “fixed” with variable costs that are relatively low.
The cost to fly an Airplane at half capacity is very similar to the cost to fly the airplane at full capacity.
Similarly, the cost to run a hotel at half capacity is similar to the cost at full capacity. As a result of cost differences being negligible when demand is up or down, it made perfect sense for these industries to focus on Revenue as opposed to cost in delivering their profit targets.
Through leveraging statistical models & price elasticity research to maximize revenue, these industries were able to significantly enhance their bottom lines. Other industries such as Consumer Packaged Goods, are now seeing the benefits building their Revenue Management teams and applying similar Analytic techniques.
Revenue Management vs. Profit Management within CPG
Revenue Management within CPG is more complex than the airline & hotel industry. The variable cost component of
a packaged good is significant enough to care about. There is already an existing fixed infrastructure that is leveraged so the variable cost of the product is usually small, but each unit created has to have a cost assigned to it. This means that a singular focus on revenue is seldom effective within CPG. Instead, CPG companies really need to focus on “Profit Management” which accounts for the cost component.
Within CPG, Revenue Management is still being defined, yet there are some key lessons that are being learned from those pioneering this new focus. Best in class organizations have setup their Revenue Management teams to drive
both their short and longer term strategies. They should be focused on driving the growth of the organization through price & promotion strategies as well as steering the organizations product Mix Management. When deciding on the right growth strategies, Revenue Management teams need to focus on profit enhancing growth more than just driving topline sales.
Where should Revenue Management reside within an organization?
Revenue Management teams need to have strong executive sponsorship of the CFO or CEO. The team must have the
ability to “make the call on pricing-related activity”. Revenue Managers reporting into other executive teams are often challenged.
Revenue Management teams that report into the CFO, tend to have the greatest success at shaping an organization’s profit growth agenda. Regardless of where Revenue Management teams report, there should always be cross functional alignment & collaboration.
What have Successful Revenue Managers focused on?
They invest in the right tools for the job
Track pricing activity & compliance
Utilize Price Elasticity & Scenario Planning capabilities
Establish Key Performance Indicators (KPI’s)
They “Own” Pricing Architecture, Processes & Policies
Develop & Communicate an Annual Operating Plan& multi-year pricing roadmap
Build/Manage governance: Out-of-Bounds, Retail-Based-Costing, UMAP, etc.
Establish & Coordinate an internal “Pricing Council”
They Engage with Others to drive profit-accretive portfolio enhancement
Initiate purposeful innovation with Marketing to capture profitable opportunities
Drive Retail Execution that “Beats-the-Curve” by partnering with Sales/Strategy & Trade Marketing
Work with Retail customers as partners to embrace longer term category vision
Companies who build the right teams to lead an analytic-change agenda, and invest in the right tools will have greater success capturing more than their fair-share of the profit pie than companies who take a status-quo approach.