What Is Revenue Management? A Complete Guide

Much of sales is about answering the five Ws — who, what, when, where and why — to identify prime selling opportunities and achieve the best outcome. Revenue management software plays a crucial role in the process by helping you to understand how to sell the right product to the right customer at the right time and price.

In this article, we’ll share strategies and best practices to help you to predict and respond to changes and maximise your revenue.

What you’ll learn:

• Revenue management defined
• Why is revenue management important?
• 8 stages of revenue management
• Important revenue management KPIs
• Revenue management tips and best practices

Revenue management is when you use data and analytics to plan and optimise your pricing. It helps you to predict customer behaviour so you can maximise product availability and pricing. When you understand your customers, you can sell to them at the right time, at the right price and through the right channels.

Market demand changes over time. And analysing data — industry trends, competition, consumer behaviour — helps you more accurately predict swings in demand. You can use this information to make strategic changes to your pricing to maximise your profit.

Leveraging revenue management is common in the travel and hospitality industries. These companies must consider inventory availability, pricing and customer demand. For example, if an annual convention is held near a certain hotel, it may increase its rates during this time because of higher-than-normal demand.

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There are key differences between revenue vs. sales. Revenue is the total amount of money your business brings in or the top line on your income statement. The revenue recognition principle touches every part of your business. Sales, at its simplest, is the exchange of something of value for currency.

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Nowadays, sales leaders are shifting their focus to factors within their control to drive predictable revenue and prioritise low-risk initiatives with modest guaranteed growth (55%), according to the latest State of Sales report. Revenue management is an important piece of this puzzle — with data at its centre.

Data gives you a deeper understanding of your customers and what they want and need, so you can make more informed decisions about your business. For example, a company selling eCommerce software examines its historical data and sees that customer demand rises during the holiday season. The company can take this insight to its sales team and have them upsell customers with special holiday software packages to drive more revenue during a peak time of the year.

The customer also wins when a company practices revenue management techniques. In my experience, satisfaction improves because customers can feel when companies are noticing and meeting their needs.

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The revenue management process involves a series of steps to determine customer behaviours. It then uses this information to set and adjust pricing. This is what the process looks like:

Revenue intelligence relies on correct, real-time data. Spreadsheets are no longer an efficient tool for this process because they can take time to generate and introduce human error. Revenue management software can help you to speed up the process and ensure accuracy. With automation tools for routine and time-consuming tasks, you can unify customer data, generate real-time insights and reduce operational costs, all at the same time. Invest in software that integrates with your existing revenue tools and systems and is easy to learn and implement.

Example: A tax preparation software company chooses a revenue management tool that works with its data structure and can pull data from its customer platforms.

Once you have a revenue management tool or software implemented, it’s time to start collecting customer behaviour data. These are three areas to focus your data collection efforts:

• Historical data: Look at past data to help identify patterns that can inform future demand, such as your customer orders and inventory levels.
• Customer spending habits: Collect data on where, when and how customers are buying your products, such as payment methods and purchase frequency, to understand how price motivates their spending.
• Market trends: Seek out data that points to how customers behave in response to seasonality, competitor pricing or other trends that may affect demand.

Example: Since seasonality is relevant to the tax prep software company, the business zeroes in on its customers’ spending habits during past tax seasons. The company examines how much customers were willing to pay for certain products, including upgraded tax packages.

After you’ve collected all your customer behaviour data, the next step is to organise it into segments to make it more manageable. Segmentation helps you to divide large chunks of data into smaller, similar groups — the same geographic location or customers who made three purchases in three months, for example.

The goal of segmentation is to create customer profiles or buying personas based on each segment. These segments are used to determine the pricing and availability that will attract those buyers.

Example: The tax prep software company identifies a significant number of customers who purchased the software in the past three years, during January. It calls this segment “Early Decision-Makers” and updates these customers’ profiles accordingly. Now the sales team knows who to start nurturing well ahead of tax season.

Forecasting in revenue management involves making accurate, data-backed predictions about future customer demand during a specific period. The demand-forecasting process involves examining past market trends, historical data and economic conditions to develop customer behaviour patterns. This helps establish when demand is likely to rise and fall throughout the year. Depending on your industry, other forecasting factors could be the cost of oil and gas, home sales, regulatory changes and weather.

Example: A predicted economic downturn could affect budgets and influence sales for tax prep software companies.

Use your data, segmentation insights and forecasts to set prices for your product or service. Before diving into pricing strategies, I suggest putting some thought into your risk levels. For example, if you set your prices too low, you risk not bringing in enough revenue and may be perceived by some customers as low value. If you set them too high, customers may decide you are too expensive and choose not to buy at all.

Another consideration is to ensure your plan is flexible. This allows you to pivot your pricing strategy when changes happen that data can’t account for, such as a new competitor entering the market or a natural disaster affecting sales.

Example: The tax prep software company team discusses their risk levels and decides to set their prices on the lower end.

The next step is to select a pricing strategy that aligns with your risk levels and allows for flexibility. These are some pricing strategies to consider implementing:

Prices are continuously adjusted in real time based on customer and market demand. Dynamic pricing is primarily used by rideshare businesses. Example: A ride sharing service adjusts its fares based on time of day and customer demand.

Customer demand and market fluctuations help companies determine product availability and stock volume. Inventory management is suited for retail, manufacturing and travel businesses. Example: An airline adds more flights during busier summer months when more people typically travel.

When a company sets its prices above, below or the same as its competitors. Example: A cloud solution startup sets its prices slightly below its more established competitors to attract market share.

This strategy involves offering a package of products for a set price. This is one strategy used to sell less popular products by bundling them with popular ones. You will see bundle pricing used by restaurants, banks, auto and software companies. Example: An Internet service provider offers a bundle plan price for cable, mobile and home phone.

Used to achieve a desired profit margin, this strategy — also known as mark-up pricing — adds a percentage on top of a base cost to account for the costs of production. Retailers such as grocery or clothing shops often use this strategy. Example: A furniture retailer marks up the price of a couch by 10% more than the production cost.

Also known as the high-low pricing strategy, a company initially sets its price high and then gradually lowers it to attract a wider audience. The approach is frequently used by large tech and apparel brands. Example: An electronic goods brand launches a new gaming console at $500 and then lowers the price to $300 a few months later.

A company launches a new product or service at a price far below the competition to attract customers away from competitors. Example: A software as a service (SaaS) provider announces its new meeting-scheduling software, available at half the price of its competitors’.

Used to predict times throughout the year when customer demand will be high and low for a product or service. Example: A tax prep software company reduces prices during tax season to attract more users.

Next, it’s time to get your sales team up to speed on your revenue management strategy and pricing plan. The plan details should be communicated to your team as early as possible. Typically, you would share the plan at an annual sales meeting as part of your strategies for the coming year. Give reps all the information they need to know how to handle customer questions — and objections — about pricing and availability. Share details about any upcoming promotions and opportunities, so they can up- and cross-sell effectively. Provide sales enablement and coaching for reps who may need additional training.

Example: The tax prep software company announces its new pricing strategy and goals at its annual company meeting. It shares answers to customer FAQs and sales reps’ questions.

The final step of the revenue management process is to review your results, key performance indicators (KPIs) and other metrics to determine what did and did not work. Take those learnings and refine and optimise your process. One approach I like is conducting A/B testing, where you present two pricing options to customers and see which one resonates more.

Example: The tax prep software company correctly forecasts an economic downturn and adjusts its prices for customer demand.

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Sales key performance indicators (KPIs) are the metrics used to measure how closely a sales team’s performance matches predetermined goals and how it affects the business. Using KPIs allows sales leaders to measure the effectiveness of their revenue management strategies and ensure that they’re tracking to maximum profitability.

These are the KPIs to measure in assessing your sales team’s performance and how well it aligns with your company’s goals and growth plan:

What it measures: How closely your forecasted sales match your actual sales.

Why it matters: A company can identify weaknesses in its sales team if a sales forecast is missed and add more sales coaching and training.

How to calculate: (Actual sales)/(forecasted sales) x 100 = Forecast accuracy percentage

What it measures: A customer contract’s average sales over the course of a year.

Why it matters: Sales teams can identify up- and cross-sell opportunities to increase the annual contract value and company revenue.

How to calculate: (Total sales value of contracts in a year)/(number of contracts) = Average ACV

What it measures: On average, how long it takes for a prospect to convert into a customer.

Why it matters: Understanding the factors that affect your sales cycle length — time of year, budget constraints, trust in your product, perceived value and demand — can help you pinpoint adjustments to make for better results.

How to calculate: (Total number of days to close a sale)/(Total number of deals) = Average sales cycle length

What it measures: Retention refers to customers who continue to buy your products or services, while churn rate accounts for those who choose to stop buying from you.

Why it matters: It’s typically more expensive to acquire new customers than to keep existing ones. Revenue managers can analyse retention, recurring revenue, and churn rates to determine whether pricing and availability are affecting sales.

How to calculate: (Overall number of customers at end of year - net new customers gained during the year)/(number of customers at start of year) x 100 = Customer retention rate

(Overall number of customers at beginning of year - net new customers gain at end of year)/(number of customers at start of year) x 100 = Customer churn rate

What it measures: How much a company needs to spend to generate customers.

Why it matters: This helps a company gauge its marketing performance to determine which campaigns and associated price points resonate most with customers.

How to calculate: (Average revenue per customer) x (Average customer lifespan) = Customer acquisition cost

Many external and internal factors affect sales. And these things affect your revenue. But don’t get so focused on the present that you’re not thinking about the future. Consider the long-term impact of how your revenue management decisions today will affect pricing in the next month, year and beyond.

Here are some other revenue management best practices to keep in mind:

Maintain data quality: Accurate data and analytics are the basis for good revenue operations. Without them, your segmentation and forecasting will be off and your process will suffer. Revenue management software helps you to stay on track, ensuring that you collect and base decisions on reliable data.

Manage the head count: Headcount planning involves making sure you have the right number of people with the right skills on your sales team — and other areas of the business — to meet customer expectations and demand. For example, adding a product developer to build a new, highly demanded software feature can help you to meet customer expectations and potentially raise your product price.

Learn about the industry: Revenue management practices can be applied across most industries, but each will typically have nuances when it comes to customer demand and behaviour. For example, a ski lodge will have different demand and popular times of year than a beach resort. Do your research to keep up with the latest industry trends and competition and how they apply to your organisation. Tap into your sales community for their insight.

Operate ethically: Practice fairness and transparency with your pricing strategies or risk a loss of customer trust and loyalty. For example, a cloud provider adds hidden charges or fees to its service but buries this information in the fine print. Train your sales team to clearly communicate your product or service’s pricing and availability to customers so nothing comes as a surprise.