The Past, Present and Future of Revenue Management

The practice of Revenue Management began over three decades ago. Since then, rapid advancement in technology has allowed RM applications to provide extraordinary benefits to companies. In addition to realizing great success, data scientists who study Revenue Management have learned a great deal from challenges faced over time.

There have been several notable milestones in the pioneering of analytical pricing and Revenue Management which have paved the way for other industries to adapt and enhance these strategies.

In 1977, American Airlines unveiled its ‘Super Saver’ discount fares, expanding the role of Revenue Management to include allocating reservations to different fare classes and different passenger segments.

In 1985, when American Airlines introduced the ‘Ultimate Super Saver’ discount fares, it allowed the company to more effectively compete with PEOPLExpress, a low-cost airline. As American Airlines and others discovered a way to match the low fares of PEOPLExpress – but only for those seats that they predicted would otherwise be unsold – it foreshadowed the downfall of the low-cost carrier. Instead of relying on a roomful of people to allocate those discount seats, the airline installed innovative and dynamic inventory management systems that could accurately forecast passenger demand for different fare classes. The system also had the ability to deftly save seats for late-booking, higher-paying passengers, and to allocate leftover seats to a variety of fares with advanced purchase restrictions.

This ability to offer discounts with laser-precision enabled American to offer an Ultimate Super Saver Fare which was below PEOPLExpress’ lowest price. Using these sophisticated inventory management systems, American, Delta and others could offer a broad range of fares (for example from $69 to $699) which gave them tremendous flexibility in matching consumer willingness-to-pay with the airline’s available capacity. PEOPLExpress, unable to respond, saw its load factors drop from 85 percent to 30 percent and its losses hit a staggering $50 million per month, ultimately forcing them to merge with Continental Airlines in 1987.

Another milestone in Revenue Management occurred in the mid-1990s when UPS implemented a customized bid-response model to predict the probability of winning long-term contracts, resulting in increased profits of over $100 million per year.  UPS recognized that their problem was different from airlines and hotels. Rather than optimizing the revenue for a discrete event such as the purchase of an airline seat or a hotel room, UPS was negotiating annual rates for large-volume customers using a multitude of services over the course of a year. They formulated the problem as a customized bid-response model that used historical data to predict the probability of winning at different price points. They called the system ‘Target Pricing’.

With Target Pricing, they were able to forecast the outcomes of any contractual bid at various net prices. They were able to identify where they could command a price premium over competitors and where deeper discounts were required to land deals. Incorporating cost data and strategic marketing objectives enabled them to give accurate pricing guidance to the sales force in any competitive situation. The result was more consistent and rational pricing for customers and long-term profit maximization for UPS.

A modern, real-world success story

Recently, a leading national automotive retailer with more than $9 billion in revenue was facing challenges from their customers, particularly hyper-informed millennials. To overcome this challenge, they combined their cumulative internal knowledge and subject matter expertise with analytics and data modeling techniques to develop a customized solution.

With the implementation of this innovative solution, inventory decisions at the automotive retailer are now based on rigorous demand forecasts and optimization. Additionally, pricing decisions have been transformed with a market-based pricing approach.

Through these innovative capabilities, a competitive advantage was created, delivering a projected $100+ million in benefits.

There are many opportunities available to companies that take advantage of Revenue Management capabilities. Implementing analytically-driven pricing and Revenue Management solutions can provide companies with the competitive advantage and transparency they need to be top of mind with consumers providing the right product, at the right time, and for the right price.