Revenue Management

Products and Services should be priced by what the market is willing to pay, not what they cost to make or provide.  However, there are many different price points available in the market.  There are some customers that will pay a premium for your product or service because it brings them enough value or they just aren’t very sensitive to price.  Other customers want a much lower price in order to buy from you.  If you set your price point at the lower end, then you’ll gain more customers, but will be leaving money on the table.  A higher price may bring in more revenue per customer, but decimate your potential user base.

It isn’t always clear what the best price is for a product or service, but what is clear is that the closer you can get to charging each customer their max spend, the more money you’ll make.  To do this you need to study your market and customers and make educated guesses at the number of customers you can bring in at various price points.  Then, you need to figure out how to charge the price sensitive customers less while still charging the customers who don’t care as much about price a premium.  Doing this is called Revenue Management.

Companies accomplish the above in a variety of ways.  Electronics manufacturers sell refurbished goods, which allows the price sensitive customers to buy in at a lower price point while still getting a higher amount from the customers who buy new.  Golf ball makers will use a sharpie to put an X on perfectly good golf balls and then sell them at a discount as balls with cosmetic imperfections.  Yeah, they have an X on them, that is the imperfection.  This allows the manufacturers to still charge top dollar for the regular balls, keeping their place as a premium brand, and also get customers who can’t afford the premium price to buy the X-out balls.

Another application of Revenue Management is the attempt to shift customers from busy times when the service sells out to the slow times when business is idle.  Golf courses charge less during the week than they do on weekends because they are booked on weekends even with the higher prices.  By discounting weekdays, they bring in some customers they wouldn’t otherwise.  Movie theaters do the same thing with Matinee pricing and many restaurants have lunch specials and happy hour. The danger here is if you discount slow times and your busy time customers shift to the discounted times leaving you with open availability during the premium time slots, causing a loss in revenue. The time and amount of discount need to be properly planned as the intent is to bring the overflow traffic of the busy times to the slower times, where they will provide revenue for you as opposed to going to the competition because you are booked.

One Response to “Revenue Management”

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