Are you really doing Revenue Management? 🤔 Podcast Ep. 60
Many companies in 2020 say they practise revenue management but do they really?
We ask are many of them really doing traditional pricing management and strategy?
TIME-STAMPED SHOW NOTES
[01:08] Why we cannot do revenue management in a non-capacity-constrained environment?
[03:13] Most companies do not have the confidence to increase prices to optimise and do a revenue management
[04:47] How does the old fashioned approach of tendering to hinder some companies to do revenue management?
Do companies really practice revenue management?
In today’s episode, we want to ask… do companies sometimes believe they’re doing revenue management?
When in actual fact, they’re not really. They’re just pursuing pricing or contracting or tendering.
There seems to be a movement occurring in the pricing community. Whereby if you say you’re in revenue management as opposed to pricing.
This is somehow a more glamorous more scientific approach to optimising revenue to get more margins. When potentially you’re still doing basic sort of cost-plus pricing under that sort of veneer of revenue management.
Can we do revenue management in a non-capacity-constrained environment?
I think we’ve seen this in many sectors. I’ve seen it in the garbage collection. I’ve seen it in FMCG, foodstuffs and these sort of things. And we’ve even seen it in tendering for government contracts.
To be honest, the revenue management I always think of it as through pricing your optimising capacity-constrained stuff.
In reality, many companies if you’re selling food, if you’re picking up bins you’re not capacity constrained. It’s very rare for you to be at full capacity or to almost be a full capacity.
If you want to produce more of something you can do more of it. And if you’re tendering, you’re not optimising. You’re not using price into segmentation to optimise revenue.
What you’re doing is tendering to say yes we will do all this work if we win. If we don’t and we’ll do it at the price that through tender you ask.
We’ve covered tendering quite negatively to some extent in some previous episodes.
But I personally don’t think that you can be doing revenue management in a classical sense with a lot of data analytics and big data. If you’re doing tendering or if you’re selling to supermarkets all that sort of thing.
If you’re looking at or if your perception of revenue management is one that moves beyond capacity utilisation. And now you’re thinking about optimising revenues based on customer demand.
Equally, I would argue a lot of teams are nowhere near that level of sophistication when they are optimising prices or even setting prices. Customer value drivers, forecasting and understanding of demand either past or in real-time is very immature.
In both aspects of customer demand and supply, both areas are underdone.
I would suspect that is because of the pricing model. As Aidan was saying is largely locked in by that sort of tender based approach.
Especially if you’re doing tenders government contracting or even dealing with big supermarket chains. Where you’re dealing with almost duopoly in your customer base.
To some extent, you don’t have the pricing power to differentiate and optimise revenue without in that instance.
To a large extent, you’re being dictated by the purchaser in some way. It’s almost like the reverse of revenue management. It’s almost you’ve been kept to a minimum level.
We’ve gone through tenders and contracting this sort of work where procurement will try to push you as low as possible.
You can look at an airline, where there is commercial travel. Let’s say a big bank or a big major corporation might get special rates on flights, etc. But that will be one segment of the market.
If your main customers are say the big supermarket chain or something like that. They account for a very large percentage of your revenue clearly your be your ability to differentiated is diminished.
I always think that you have to have that confidence to increase prices. To change prices, to move prices etc., to optimise and practice good revenue management.
Most companies don’t have that ability with their customers. Most companies are locked into longer-term prices whether it’s over a month or a year or even longer.
When you’re in that scenario your ability really to optimise is minimal.
Bottomline: The old fashioned approach of tendering hinders some companies to do revenue management
And as a result, because the whole relationship with a customer and that sort of price relationship are sort of limited by tendering.
That old fashioned approach what happens, as a result, is that you can’t do revenue management as well as you would like.
Then you end up sort of doing that more of tactical pricing and revenue management to optimise revenues.
By that I mean, often you’re given very limited options to play with the pricing playbook as it were. Especially in FMCG and go to everyday low pricing.
Then try different discounts levels to push volume at different price points. To drive revenue and to get those margin targets. Then it just becomes a sort of pretty much the same in bouncing from different promotional prices and discounts to drive revenue to reach your targets.
Unfortunately, that isn’t good revenue management practice it becomes very reactive.
It’s stressful because you’ve only got a certain bandwidth price window to play. It does frustrate good pricing professionals quite a lot. Because they know the full extent of revenue management strategic pricing could yield much better results.
Not just for the business they’re working in but for their customers as well. But because of this old fashioned sort of ecosystem value chain. Which is a very limited value between the customer and the company. Everyone sort of misses out, unfortunately.
To be honest, I don’t think I have much more to add on this one. I think we are going to end with an offer we have.
I supposed these sorts of problems are things that you’re facing as a pricing manager or commercial executive. Feel free to reach out, go to our website and Taylor wells.com.au.
On our homepage, you’ll find the opportunity to start our pricing audit. It’s a free pricing audit just fill in your details. And we’ll get back to you and we can go through all of those things in more detail.
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