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 be successful, 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 algorithms 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. Dynamic pricing is often confused with revenue management. They do seem the same at first, but dynamic pricing actually fits under the umbrella terms of revenue management.   

As pricing becomes increasingly more difficult due to competitive pressures, fluctuating market demands and the emergence of subscription-/usage-based services, more companies are turning to strategies that include dynamic pricing.

5 Ways to Predict Demand When the World Is Unpredictable

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. 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 modelling

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, automates tedious data mining, allows you to test different pricing strategies and helps you respond to market fluctuations 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

Spacer

Trigger Sales

Most think of dynamic pricing as a way to increase prices, but there are circumstances where decreasing your prices can trigger more sales. Think of a flash sale that can help meet sales revenue targets.

Spacer

How to Implement Dynamic Pricing Successfully

There are six components that organizations must consider and manage well to be successful using dynamic pricing in their revenue management strategy.

Achieve Your 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.

Learn more about our dynamic pricing and revenue management solutions. Learn More Speak to a Pricefx expert to see how we can get you started quickly. Talk to an expert