In this episode of Pricing College, Aidan and Joanna discuss the difference (if any) between pricing and revenue management. Is one a subsector of the other, or are they distinctly different?
TIME-STAMPED SHOW NOTES:
[00:40] Joanna says revenue management is distinctly different.
[01:00] Aidan says there’s a trend for job advertisements under “revenue management.”
[01:35] Joanna says people can make the mistake of confusing the two.
[02:00] Is revenue management a capacity-constrained area of pricing?
[02:30] Is revenue management moving more into forecasting?
[03:50] Joanna discusses how revenue management can play a more strategic role in business decision-making.
[05:00] Revenue management really takes advantage of willingness to buy.
[05:30] Computer programs can be used to crunch numbers and, consequently, examine micro-segments in greater detail.
In today’s episode, we want to talk about the difference between pricing and revenue management.
See whether your pricing is under controlPricing and Revenue Management: What’s the Difference?
Pricing and revenue management are closely related, but they serve different purposes:
- Pricing focuses on setting and managing prices to support profitability while delivering value to customers.
- Revenue management focuses on optimising demand, capacity, inventory, and pricing to maximise revenue.
- Revenue management is particularly relevant to capacity-constrained businesses such as airlines, hotels, rental cars, and cruise ships.
- Pricing and revenue management can be confused because businesses sometimes use the terms interchangeably, particularly when pricing is treated as a tactical lever to drive volume.
- Revenue management also uses forecasting, customer segmentation, and willingness-to-pay analysis to determine how available capacity can generate the most revenue.
In an airline, for example, there may be a fixed number of seats on a flight. Revenue management considers how to allocate those seats and what customers may be willing to pay, while pricing more broadly concerns how prices are set and managed to support profitability.
The distinction becomes clearer when looking at how revenue management works in capacity-constrained markets.
In broad terms, I would say pricing concerns setting and managing prices to drive profitability for the business while delivering value to customers, whereas revenue management concerns optimising demand, capacity, inventory, and pricing to maximise revenue.
You probably notice, if you’re applying for a job in the pricing sector, that revenue management roles are common, particularly in capacity-constrained industries such as airlines, hotels, rental cars, and cruise ships.
This is because pricing is often confused with revenue management. Pricing is sometimes treated as a tactical lever rather than a strategic one, particularly when businesses use it primarily to drive volume or respond to market conditions. As a result, people sometimes use pricing and revenue management interchangeably when they want to drive volume or tactically discount in the market.
To my mind, in layman’s terms, I think of revenue management as a sub-sector of pricing. If the entire field is called pricing and revenue management, to me, revenue management applies particularly to capacity-constrained sectors. Also, industries such as hotels and airlines have a certain number of seats, rooms, or cars that you can rent out.
If demand goes through the roof overnight, you can’t increase supply significantly.
You’re trying to maximise revenue while assuming that your supply is constrained by physical capacity. For example, if an airline has a fixed number of seats on a particular flight, it cannot simply create additional seats when demand increases.
Forecasting demand is an important part of revenue management, helping businesses make decisions about capacity, availability, and pricing. They can use that information to anticipate demand and plan capacity ahead of time. In the case of airlines, this could mean adding more flights.
Fundamentally, on a very busy route, you could put on a different flight. The way I look at the famous example is this: a flight is about to leave in one minute, and there’s one seat left. What would it be profitable to sell that seat at? In theory, selling a remaining seat at a low price could generate additional revenue if the flight is operating anyway and the sale does not create significant additional costs. And the additional revenue can contribute to profitability when the incremental costs are low.
Yeah, because you wouldn’t have sold it anyway. That’s right. Another example would be the fuels and energy sector. These businesses are traditionally known to use revenue management and dynamic pricing. In the past, this was more focused on the supply side, including how much they should produce and how they should allocate supply to distributors. But now they’re using it to think closely about forecasting, consumer demand, and what drives people to buy, so they can utilise revenue management as more of a strategic lever.
Revenue management can be understood as maximising revenue from available capacity and inventory.
Let’s take an airline as an example. People generally accept that prices change based on certain criteria. Criteria such as time of day and whether flights are red-eye flights affect the price. They will accept that flying between two non-main airports might be cheaper. Flying over a weekend may be discounted if you do a longer stay. They use different pricing approaches to reflect differences in customer demand and willingness to pay. This helps them capture more of the available revenue from different customer segments.
If there’s one seat for sale, you could sell it to tourists who may or may not want to go to a certain city, or to a business person who has to get to that meeting on Monday at 9 am, the “willingness-to-pay” difference could be significant.
This comes down to customer value drivers and understanding why people are buying:
How are they buying?
Who are they buying from?
Are they coming through your website?
Are they coming through your call centre?
What’s the urgency with which they need to buy?
Revenue management makes extensive use of technology, analytical data, and computer programs.
If you think, as Joanna mentioned, the number of potential value drivers for customers is too much for any person to keep in their head, computer programs can help. PROS is an example of software used to analyse pricing, demand, forecasting, and other variables in revenue management.
Yeah, they do that. But they first look at segmentation to break this down. They break these down into what they call micro-segments, which are essentially different groups. You can identify different groups of customers and competitors. It’s breaking down the market so you can make it more manageable. Also, you can review the value drivers in a more systematic way. Then, you’ll find that some groups overlap while others do not.
LINKS MENTIONED IN TODAY’S EPISODE:
What is revenue management
PROS
Listen to a previous discussion about where pricing is set.
For a comprehensive view on building a great pricing team to prevent loss in revenue,
Download a complimentary whitepaper on How to Build Hiring Capability To Get The Best Pricing Team
〉〉〉 Get Your FREE Pricing Audit 〉〉〉
Read This CEO Pricing Strategy To Improve Margin & EBIT
Are you a business in need of help aligning your pricing strategy, people, and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
