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Focus: Revenue Management

Revenue Management consists in the dynamic management of Prices with the aim of optimising revenues obtained from the sale of a service or product.
 
Dynamic Pricing is required in sectors that have a perishable product (that cannot be stocked). Airline flights are the grounds from which RM originated in the 70’s: a flight departing with many empty seats generates losses, since flight costs are often fixed. Likewise, a flight bouncing off several passengers generates the loss of revenue opportunity that would come from higher prices.
 
British Airways was the first company to use RM systematically through price differentiation according to the flights’ level of flexibility (open flight, closed flight, reimbursed or not, possibility of switching flight) and to actual purchasibility during the booking/sale period for the flight (nearing the departure date, the cheaper fares gradually disappear). Previously, flight prices were single and fixed for the duration of the booking/sale period. 
 
These two different set-ups are respectively called PRICING and INVENTORY, and are the two base activities of RM: every RM Office is structured with a Pricing analyst unit, in charge of preparing pricelists according to the expected segmentation of the market; and of an Inventory unit, managing actual allocation of prices according to the current trend in service sales.
 
In light of its specific ability in extracting value from the market through detailed segmentation of prices and their dynamic trading, RM gradually extended to other industries with similar critical requirements where the product cannot be stocked.
 
Both Hotels and Cruises gradually introduced RM activities in order to manage unsold rooms or cabins (revenue SPOILAGE), or on the contrary to avoid being sold out too long before the service is due (revenue SPILLAGE).
 
More recently, RM activities and systems have been initiated for railways, and likewise for the sale of TV advertising or for the management of tickets for theatres and concerts, all of which having similar perishable service characteristics.
 
Market feedback appears to suggest that the need to set up a RM function will also spread to sectors usually having fixed costs and a traditionally non-perishable product. For example, telecommunication, whose prices – both in landline and mobile – are currently rigid and valid for indefinite duration. The congestion originating from concurrent surfing at given times during the day and/or in specific areas will soon make the price of services variable according to its level of scarcity at the time/in the place determined by traffic congestion.
 
Even motorways, which at peak times accept vehicles that will then remained blocked for hours due to congestions, could in the future make use of RM techniques.
 
The search for managers to include in the RM function is complicated due to two reasons: on the one side, it is necessary that professionals have specific training and specialisation on the topic, on the other, the sectors offering the opportunity of gaining the requested experience are still few, making the “hunting grounds” quite limited.
To date, the theoretical and practical academy of RM still lies in AIRLINES: ALITALIA provided experts to several companies, that in their turn are creating skilled pools in sectors such as hotels, railways, cruises and gambling.
 
The track record in RM suggests that its implementation in a company initially leads to optimisation of the cash flow and P&L. With the progressive effectiveness of the head office (staff, systems and statistics), RM takes on a strategic nature for the growth of the market and for revenue share in the market.
Those having a weaker development in RM will forcibly lose passengers, clients and spectators to competitors who are better organised, losing market share each year.
 
It appears therefore that RM represents one of those examples in which strategic growth passes through the creation of a structure/function that enables the direction of development through optimisation criteria, which is therefore crucial in mature markets.