 Formulation
of a Definition |
Revenue Management originated with the deregulation of the
US airline industry, when airlines like American, Delta and
United embarked on a strategy to manage capacity to counter
balance the success of Peoples Express. Peoples Express was
a new airline, which offered customers low-priced and a no
frills service from Newark Airport (Cross 1997a). American
competed by offering a few seats at even lower prices that
Peoples Express but maintaining higher fares for higher paying
passengers. In this way, American attracted the low spend
passenger who would book flights well in advance from Peoples
Express, but maintaining higher spend passengers who booked
flights one or two days before departure. This led Peoples
Express to eventually be declared bankrupt (1994)
Revenue Management (RM) is a management technique being
utilised by an increasing number of service industries in
order to maximise the effective use of their available capacity
and ensure financial success. The application of RM can be
seen in the hotel (Huyton & Peters 1997), package holidays
(Hoseason & Johns 1998), car rental (Anon 1998), air
transport (Ingold & Huyton 1997), rail transport (Hood
1997), cruising (Anon 1998) and TV advertising industries
(Anon 1998). These industries all have the characteristics
of service, or particularly, they are selling an inventory
unit of a piece of time. This may be a journey from Delhi
to London, a one night stay in a hotel or a 30 second advertising
slot before the World Cup final. All of these industries
have commonality. This commonality is expressed as firms
which are constrained by capacity, since unsold capacity
cannot be inventoried, it is lost forever. For example, a
30 second TV advertising slot for a specific time period
on a specific day cannot be sold again, if it is not used.
This lost opportunity, represents lost revenue. The perishability
of the capacity-constrained service organisation (Kimes 1997),
adds to the complexity of finding the optimal profit.
In general terms, RM is the process of allocating the right
type of capacity or inventory unit to the right type of customer
at the right price so as to maximise revenue or 'yield' (Kimes
1989). In the airline sector RM can be considered to be the
revenue or yield per passenger mile, with yield being a function
of both the price the airline charges for differentiated
service options (pricing) and the number of seats sold at
each price (seat inventory control) (Donaughy et al 1998).
In hotels, RM is concerned with the market sensitive pricing
of fixed room capacity relative to a hotel's specific market
segments. The goal of RM is the formulation and profitable
alignment of price, product and buyer. As such, RM can be
defined in the service industries as a 'revenue maximisation
technique which aims to increase net yield through the predicted
allocation of available inventory capacity to predetermined
market segments at optimum price'.
Where service organisations are constrained by capacity,
financial success is often the premier function of management
in utilising the available capacity. RM is used in industries
which are capital intensive services which equate yield as
maximisation because of the nature of high fixed costs. The
marginal contribution of selling another rail journey, is
so small to the marginal revenue as to render the costs inconsequential.
Because of this, Revenue Management is often associated with
revenue maximization because of the inconsequential level
of variable costs.
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