Tim Baker Defining Revenue Management and Dynamic Pricing

BAKERRICHARDS 1

Defining Revenue Management and

Dynamic Pricing the difference is

important!

Tim Baker (Director, Baker Richards)

There has been a lot of talk recently about Revenue Management, Yield Management and Dynamic

Pricing. It seems these terms are being used interchangeably by the arts industry, but they actually have

subtly different meanings and understanding the difference between them is important as organisations

think about applying new approaches to pricing strategy.

According to Robert Cross, the pioneer of airline revenue management (RM), Revenue Management

ensures that companies will sell the right product to the right customer at the right time for the right

price

Since its invention in the 1970s, RM has been applied in many other industries, including rail travel, hotels

and TV advertising. Essentially it sets a range of price classes and then controls the availability of each

price class according to demand. One of the key challenges that RM was designed to address is the

perishability of the inventory (the common factor in most industries where it is applied, i.e. once the show

has started, you can never sell the ticket again). While revenue management is essentially tactical, the

strategy should be set in advance (i.e. the price classes and the sales analysis used to judge when and

where to apply them should be pre-determined).

The key principle of revenue management is to adjust price differentials in response to customer demand

in order to maximise both occupancy and income. Revenue Management is about optimising volume of

attendance for a perishable good, as well as maximising yield (i.e. its about filling planes, as well as

maximising income from price insensitive business travellers). It therefore includes reducing prices to

stimulate low demand as well as increasing prices to exploit high demand. The latter is the primary focus

of Yield Management (they are not the same thing). Yield management focuses on maximizing the

income from those buyers who are considered the most price inelastic.

Revenue Management can therefore be used as an umbrella term covering much of what we would

usually think of as pricing strategy (indeed many of the standard pricing tactics used by theatres, e.g. Rush

Tim Baker Defining Revenue Management and Dynamic Pricing

BAKERRICHARDS 2

or Standby, could easily be thought of as revenue management), including dynamic pricing. In particular

it relies on being able to manipulate differences in prices (metrics) and value fences (ways of

differentiating the value offered for each price) in order to manage demand across inventory.

Dynamic Pricing refers to the adjustment of these variables over time. Whereas revenue management need

only mean charging different prices for different seats at different performances, dynamic pricing can also

mean charging different amounts for the same seat at different times in the sales cycle.

In applying RM principles to manage demand across available inventory (fill planes), strategy does not

have to be dynamic to be effective. Static applications of differential pricing can be more useful, such as

differentiating the price of performances on different days of the week. One of the reasons for this is that,

in order for customers to be able to respond to those price differences by changing their behaviour, they

need to be able to see clearly what the price differentials are. Note also that one of the key elements of

effective RM strategy in the airlines is the planning of inventory: how many flights should there be, and at

what times?

There are three key dimensions to revenue management; continuums along which RM strategy can be

applied:

Increasing prices >> decreasing prices: managing demand means that prices can go down as well as up.

Static >> Dynamic: the extent to which pricing can be adjusted over time in response to changing demand

Underlying>> Explicit: the extent to which the differences in pricing are apparent to the customer and can

therefore be effective in managing demand across inventory.