21 Oct How Revenue Management system can increase your profit
Revenue management system, in short RMS, termed as a maker and breaker of the industry, either it’s in manufacturing, healthcare, e-commerce or hospitality industry.
It won’t be wrong to say, any industry will not grow until it works on revenue management.
Implementing revenue management will boost your profession in a very strategic way but it can break when you do not examine your business history and analyse properly.
Well, it’s not easy to generate good revenue. There are lots of sleepless night and hard work that pays off to get ideal revenue.
But before moving further into more technical terms, Let’s take a break.
I mean to say analyse your experience in your industry by answering some of the questions.
First, come to the Hospitality Industry.
It comes first because the Revenue Management System was first introduced in the airline in the 1980s.
Let’s get started.
Have you ever experienced the price variation while booking your airline seat?
And, also experienced the hotel or resort booking?
These enterprises not only oscillate their pricing according to the duration of booking and boarding but also strictly follow seasonal vacations and festivals.
In technical term pricing variation called as Dynamic pricing. *
Now, I’ll show you another case of price variation in the E-commerce and commercial industry.
Have you ever analysed the mentioned scenario?
How shoppers mark the same product at different prices at a different time?
How you get an offer while doing shopping of above XXXX number or in festivals?
How shoppers sell a combination of products, either it is the same products or different products?
This all comes under revenue management.
Wait, not only the hospitality and commercial industry using the revenue management system, but also the Manufacturing, Healthcare and real estate industry are in a row. Any business in the world work on the revenue management system to out-perform their competitors and grow exponentially.
Revenue Management system
Revenue management is the application of disciplined analytics that predicts consumer behaviour at the micro-market levels and optimize product availability and price to maximize revenue growth. Source: Wikipedia
In simple term, we can say
The revenue Management system is defined as strategies of selling the right product to the right customer at the right time for the right price via the right channel.
Let’s break this definition into simple questions according to your profession
1. What service should you sell?
2. Who is your target customer?
3. In what group your customer belongs?
4. What is the ideal time to sell your products?
These questions you should ask yourself before getting into any business. Once you analyze you get a clear answer and then your next step is to strategize your business to get good revenue.
Or, If you already into a business, you must have analysed the mentioned question. Besides, you must understand your experience and history, like how you work till now.
Presently, you must have a clear idea of the Importance of the revenue management system and how different industry, strategies to generate revenue in their ways.
How to calculate revenue:
Simply Revenue can be calculated as
Revenue = No. of unit sold * Average price
Or, Revenue = No. of customer * Average Price of service.
Let’s understand in a better way through an example of the HOTEL Industry.
To maximize the revenue of the hotel, need to increase
1. Occupancy = No. of room sold/No. of room Available
2. ADR- Average Daily Room = Room revenue/ Room sold
Occupancy and ADR help to calculate RevPAR.
RevPAR is the key factor of revenue in the hotel industry and terms as Revenue Per Available Room.
The formula of RevPAR is
That means we get revenue from each room is dependent on how many rooms are occupied and what is the average price of the room.
Okay, it becomes more technical.
Let’s play with numbers to make it simple.
Suppose, a hotel has 51 rooms.
Out of 51 rooms, 1 is under renovation.
So, now we have 50 rooms for booking.
And for a day, 25 rooms are booked with dynamic prices.
3 room sold for $95
9 rooms sold for $90
10 rooms sold for $85
3 rooms sold for $70
So, the Total price will be $2,155 for 25 rooms.
Occupancy % = Room sold/total room = 25/50
Let’s calculate ADR
ADR = Room revenue/ room sold = $2,155/25
RevPAR= Occupancy* ADR
= 0.5*86.2 =43.1
RevPAR will be 43.1
Using this matrix and analysing the competition. The hotel owner adjusts the next 25 rooms rates. This is how the hotel owner calculates their revenue.
Well, as it is mentioned earlier that getting ideal revenue is a tough nut to crack. You have to calculate and see competition, demands, and other factors manually, which is a time taking the task as well as there is also a chance of misconception. Small misconception will help your competitors to out-perform you.
Imagine how it is if you have software which manages your revenue automatically. Only you have to input a few data and your headache of manually doing revenue management gets solved.
This application called a Revenue management system, which allows you to input base price and rests works done by RMS, as, RMS uses AI and machine learning to set-up the best price depends on demands. That will help you to check, control and reactivate dynamic price setting.
We are closing this article with the conclusion and hope that it makes some sense to you.
The initial step to out-perform your contender and reach the height of success, you need to run a business in a very strategies’ way
Revenue Management software is designed to work with updated market share as well as allow you to see the pre-assumed graph of results based on history.
By the end of the day, you would have a complete analysis of your revenue and this will aid you to take the fundamental move to expand your business.