If your revenue management team is falling short of expectations, they are likely guilty of one or more of the six deadly sins of revenue management (RM). Knowing these six sins is essential so you can quickly identify them and implement practical solutions to combat these common business problems and pricing mistakes.
Below we'll tell the fictionalized stories of Make Money Inc.'s RM team, illustrating just how deadly these six sins of revenue management can be.
Learn now ye sinful followers, or forever burn in the fires of ineffective revenue management.
I. Thou Shalt Understand the Role of Revenue Management
Robin, a new hire on the Make Money Inc RM team, understands revenue management as a fancy term for price-setting and expects this to somehow lead to incremental demand creation. This is what was expected of the RM team at her previous company; she does not know any different. Robin entered the role with numerous misconceptions that prohibit her from achieving her full potential. For instance, she limits herself to price-setting activities and struggles to understand how to calculate price elasticity of demand or prove any movement in demand. Unfortunately, it’s a busy season, and no one at Make Money Inc. has discussed expectations with her or changed her perspective. These misconceptions and errors hinder the revenue management team, and further, the organization. Since Robin does not understand her role, she cannot fulfill it.
Revenue managers are responsible for so much more than setting prices. Consider the number of different possible price levels, discount offerings, new product pricing strategies, assortment decisions and channels to play in. The potential projects and related impacts are vast. The specifics of the role may differ slightly from company to company, but the key activities should be similar. These activities revolve around breaking down historical data into valuable insights that help forecast demand and other elements of customer behaviour in the future. Members of the revenue management team must understand their role and associated expectations to perform effectively.
II. Thou Shalt Embrace Change
Annie, Revenue Manager at Make Money Inc., has been using the same business case template format to assess the value of new business contracts for many years. This business case template does not incorporate the latest key performance indicators for prospective customers. The key performance indicators for average items carried and point of sales dollars are excluded. However, Annie continues to use the format because this is what she and her team have always done. She does not wish to stray from the approach which she views as tried and true.
Although Annie believes she is just upholding the status quo, her decision not to innovate and improve the existing business case is a disservice to the organization. The business case supports an outdated view of the organization and its priorities. This discourages a culture of dynamic pricing strategies. Revenue management practices and tools need regular updating to remain relevant in an ever-changing business landscape. An outdated business case template cannot produce useful or accurate insights. Annie should re-invent the template in a format that welcomes iterative changes that reflect market and business changes. Additionally, the new template should allow the proposal to be viewed from the customer’s perspective. It is important to understand how customer view their business and perceive the relationship with Make Money Inc. Adding the key performance metrics which customers use allows the RM team to experience this perspective shift. The best strategies for today and tomorrow tend to be re-invented versions of past proven operations.
III. Thou Shalt Always Be Proactive
Robin, Annie's team member, read a news story a few weeks ago about Dollars and Cents Co., a competitor experiencing financial concerns. Rumours of a potential bankruptcy for the competitor swirled around the office but fizzled over time. Today, Robin became aware of the official bankruptcy and a list of clients which the competitor will no longer be able to serve. Robin's team is now scrambling to prepare contract drafts as they try to lock down these prospective clients.
There is a tiny window in which to research company profiles, contact potential clients, understand product requirements, and grasp pricing expectations. Make Money Inc., is at a considerable disadvantage to others who began preparing for this opportunity weeks ago when the first inklings of the financial trouble faced by Dollars and Cents Co., was made public.
A revenue management team who acts reactively cannot be successful. Robin's failure to begin proactively responding to the grave news concerning a competitor when she first got wind of it is an excellent example of this. A proactive revenue management team can identify, communicate, and prepare for upcoming opportunities and challenges; a reactive team will scramble to respond, putting together a sub-par solution due to time constraints. Why not solve future problems today with proactive business solutions? At a minimum, we can try to identify them and start thinking about what they may mean for our organization. Anything less is self-sabotage.
IV. Thou Shalt Make Decisions
Annie is not a confident decision-maker. She leaves all decisions up to Daniel, an executive at Make Money Inc. As a result, her role has, over time, become more administrative, as she's chosen to forego opportunities for leadership to Daniel. Annie is more comfortable with this dynamic, as it means she can avoid accountability for the outcomes of decisions. If Annie could not pass decisions onto Daniel, she would procrastinate and wait for the market to make the decision for her.
This is a cultural obstacle many organizations face as they establish the role of revenue management in the decision-making process. Often teams end up in this precarious position as they have maneuvered to avoid making others upset or achieve other superficial objectives. Revenue management shouldn't be an administrative or supporting function. Instead, it should be regarded as a valuable operation with the authority to make decisions and responsibility to be held accountable for those decisions.
The current arrangement at Make Money Inc. is not sustainable. Someone in Annie's role should be extremely comfortable making decisions independently and be empowered to do so by leadership. They should be prepared to own their role, advocate for and justify the decisions they put forth at all points of the execution process.
V. Thou Shalt Not Navel Gaze
Jamie was responsible for putting together a sales incentive program for a select group of Make Money Inc. customers. He needed to determine what amount of cash back to reward customers with for hitting specific sales targets. His analysis was entirely internally focused. Once he determined the break-even amounts for each customer, he considered the job done.
After the program was published, Jamie discovered that competitors with similar programs offered far lower financial incentives. These other programs went beyond to require a minimum number of new customer accounts, a certain level of product stocking by region, and a particular set of products with suggested price points. This additional detail in program requirements resulted in higher incremental sales and the ability to track the metrics leading to these sales. The competitor programs link the payouts to the value gained from the customer. Unfortunately, Jamie set the rewards significantly higher than necessary; the payouts exceeded the value to Make Money Inc., putting the company on the hook.
Jamie's actions are a typical case of navel-gazing. He is failing to recognize the valuable insights that can be gained by extending his view externally. Jamie could have conducted some competitive research to understand how other players are executing similar programs. Additionally, he should have considered current and future expected market conditions that customers may be facing. Revenue management needs to continually be looking outside the organization, outside the market, as broad as possible for signals. Adjustments should be made and communicated for both positive and adverse impacts on a business.
VI. Thou Shalt Not Operate in Silos
Annie, Robin, and Jamie have minimal interaction with the other departments at Make Money Inc. Even if they have a question for the sales team, they will attempt to figure it out on their own rather than reach out to a sales representative. As a result, the team's output is disconnected from the outputs of other key teams like sales, marketing, manufacturing, and finance—typical silo mentality. Bringing us to our final sin of revenue management, thou shalt not operate in silos. Siloed operations occur when departments or management groups do not share information, goals, tools, priorities and processes with other departments and can be highly detrimental to overall operations.
Recently at Make Money Inc., marketing agreed upon an advertising calendar with a big customer for the upcoming year. Due to the lack of interdepartmental communication, the RM team was unaware of these marketing plans. RM presented a promotional calendar to the customer which did not leverage any of the marketing activities. Failing to align the marketing and promotional calendars is a big opportunity loss. For instance, running ads and reduced-price points together leads to higher demand, and bigger jumps in velocity, driving significant unit sales increases.
All parts of an organization must come together cohesively to achieve objectives. Of course, this includes the revenue management team. The team cannot be viewed as an external element, operating in their silo away from the rest of the organization; this is counterproductive. The practices of revenue management are closely related to aspects of finance, marketing, sales, manufacturing, and more. As such, the team should be an integral part of the organization. Clear lines of communication between all departments are crucial to ensuring cohesive operations.
ABOUT THE AUTHOR Dominique Borden is an Associate at Revenue Management Labs. Revenue Management Labs help companies develop and execute practical solutions to maximize long-term revenue and profitability. Connect with Dominique at [email protected]