Revenue Management and Dynamic Pricing Explained
Decisions about pricing have a very real impact on sales volumes, revenue and profitability. You've likely heard the terms revenue management and dynamic pricing before. But, what do they mean exactly? And how do they drive revenue?
What is revenue management?
Simply put, revenue management is when you predict or anticipate customer behaviour, and then optimize your pricing, product availability and distribution to maximize the revenue you're able to earn. To do so, you need good data and analytics to identify patterns and forecast accurate levels of demand. This means understanding who your customer is, how they think and how much they value your product.
What is dynamic pricing?
Dynamic pricing solutions use data to calculate and adjust prices in real time. They help you set prices as often as you need to respond to the market in order to maximize your revenue. It's important to note that dynamic pricing is often confused with revenue management. They do seem the same at first, but dynamic pricing actually fits under the category of revenue management.
As pricing becomes increasingly more difficult due to competitive pressures, shifting market demands and the emergence of subscription services, more companies are turning to strategies that include dynamic pricing.
5 Ways to Predict Demand to Inform your Revenue Management Strategy
Revenue management relies on historical data to provide insights and patterns into consumer behaviour. During the COVID-19 pandemic, demand forecasts were shattered. Some goods were in demand while others fizzled out. In any case, that uncertainty remains today.
Here are five ways to ensure your demand forecasts are accurate:
Find alternative data sets
Consider using data sets from other 'unstable' times in the market, such as after a hurricane, with real-time data from sales.
Tap local knowledge
Data collected should include local knowledge as unique factors could be at play.
Embrace ensemble modeling
Combine the predictions from different models to suggest a point estimate, or reasonable range.
Test and test again
Validate results by testing quickly and often. For example, simple A/B tests offer both speed and flexibility.
Choose the right pricing partner
A cloud-native pricing solution provides you with a single source for all your pricing data. In addition, it automates endless data mining, allows you to test different pricing strategies and helps you respond to market changes in real time.
Source: Predicting Consumer Demand in an Unpredictable World, Harvard Business Review
Advantages of using Dynamic Pricing as a Revenue Management Strategy to Increase Profits
Trigger sales
Increase demand
Keep pricing accurate
Improve customer insights
How to Implement Dynamic Pricing in your Revenue Management Strategy Successfully
There are six components that organizations must consider and manage well to be successful using dynamic pricing in their revenue management strategy.
Strategy
Set a realistic pricing strategy that is well aligned with your capabilities, products and competitive position. For example, it doesn't make sense for a small player to be a low-cost provider.
Discover how to develop a pricing strategy that truly works for your company.
External factors
Consider external factors such as culture. Different cultures and businesses have a variety of attitudes toward fixed and negotiated pricing.
People
Gaining alignment from all relevant individuals involved will ensure your success. For example, ensure sales incentives properly align with price optimization objectives.
Read on to find out the 4 steps in securing executive support on your project.
Process
To be most effective, consider establishing a cross-functional team to evaluate pricing strategies and processes on an ongoing basis.
Learn about the key roles you’ll need to complete your project.
Information
Easy, rapid access to historical deal data is a must to support the use of pricing data (including pricing, volumes, add-ons, cross-sales and terms and conditions).
Before you make the switch to pricing software, be sure you have three key data sets ready to go.
Software
The right pricing solution can help you position and maintain dynamic pricing to ensure success. A cloud-native solution sets pricing controls, keeps data organized and reduces many of the human tasks of managing pricing.
Find out what pricing software works best for your company.
Achieve Your Revenue Management & Pricing Goals with Pricefx
Pricefx can help you take advantage of dynamic pricing to meet your revenue management goals to deliver profitable growth and efficiency in record time.