Revenue drives business. An initial response
is to say—more is better. But on reflection,
you know that isn’t true. Revenue must be
profitable to be desirable. And profitability means
more than gross margin. Understanding profitability
takes a coordinated organizational effort
involving marketing, sales, finance, operations, and
logistics. Coordination requires revenue and cost
information that is causal, reflects operations and
economic reality, and is agreed upon across the
organization. It also requires an understanding of
the basic principles of revenue management which
is a topic that surprisingly is missing from both
accounting and marketing educational curriculum.
A recent Statement on Management Accounting
(SMA) by the Institute of Management Accountants
titled Revenue Management Fundamentals
outlines the core principles.
A few key concepts include: understanding your
customer segments, knowing what characteristics
customer groups value about your products, and
designing your products to efficiently and profitably
respond to those demands. Consider the
accompanying graphic to this article—it illustrates
the benefits of responding to customer segments
with variations in products or associated services.
4 Levers of Revenue
Management
Revenue management has four levers that help
you understand and manage the operational
response to customer variability.
Lever 1—Pricing Basis: This lever is obvious. You
need to determine how much customers will pay
for the differentiation desired so that you can
decide if it is profitable for you to produce or offer
it. Alternatively, can you remove some capabilities
or services, reduce price, and gain more less demanding
customers profitably? It is important
to remember pricing is set by the market and customer
value; your cost determines if you should be
in the that line of business.
Lever 2—Inventory Allocation: This refers to
both physical inventory available and the inventory
of productive capability. Are you collecting
the demand information about your customers
and customer segments to adapt your inventory
of products, associated services, and productive
capability to the most advantageous and profitable
components of demand? Rush orders, late orders,
the size of orders, the seasonality of orders, and
many other characteristics are attributes of the
product or the associated services that can be
managed with a price response and/or a customer
desirability determination. Do you have enough
information about customer profitability and control
over your selling and production to ensure
your inventory and productive capacity is going
to your most profitable customers? Can you use
slow periods to bring in less profitable customers?
Lever 3—Product Configuration: This lever
involves both physical product configuration and
non-physical elements such as terms and conditions
or customer education/consulting. Have
you identified the key physical and non-physical
attributes that your customer segments value?
What is your ability to profitably adapt a product,
its features, and its associated services to customer
demands? Are you meeting the demands of
the customers that have the potential to improve
profitability because they are willing to pay for
more profitable features and service?
Lever 4—Duration Control: This lever involves
collecting the information and using operating
and process changes to predict or shape customer
behavior to enable improvements in profitability.
Normally, the goal is to make customers more
predictable and optimize your time and effort to
meet their demands. Duration control can involve
internal process changes or changes that involve
customer communication or interaction. Examples
may include incentives to order more regularly,
when to focus sales force efforts, improvements
in order picking/packing/shipping, improvements
in customer order acceptance procedures, etc.
Too often organizations focus on increasing
sales revenue or reducing product cost. This concentration
of effort leaves a great deal of the
customer experience unexplored. Revenue management
focuses on the profitability of existing
and new sales by understanding what segments
customers value, are willing to pay for, and how
the organization can adapt itself and customer
behavior to meet those needs profitably.
