Episode #0058 - Do you need complex IT systems for revenue management?

In this episode of pricing college - we take a look at revenue management and ask if your business really requires a complex IT system to implement revenue management.

 

Many companies are not at the pricing maturity to fully take advantage of a system of this nature.

 

In today's episode we want to ask, do you need to use complex computer programs and systems in a revenue management department? The question here arises because more and more we're seeing programs. A multimillion-dollar system used to just be used in airlines, hotels, etc, being suggested to many more different types of companies. And we ask, is that really required?

Well, I think people are investing. Companies are investing more in revenue management software to optimise their processes based on a lot of different types of criteria. In the past, 10 or 20 years ago and thinking about airlines now. Because they were the first to adopt more software for pricing and revenue management. But they started pretty basically. They would have certain price points. Three or four different price points per seat or flight. Then once the seats run out at a certain price. They go to the next bucket of the price which tended to be higher. In a way, it sort of gave that sense of dynamic pricing revenue management. But it was just a way of getting more yield in a very basic way at different price points. But I think now as the pricing management team expands the discipline evolves. We're finding now optimised prices for airlines or in industries with very slim margins. You may have to invest more in software to safely optimise prices and revenues. Otherwise, you could be at risk of falling loss.

One thing I’ll say here is often people think they’re gonna go 100% from day one. In many aspects of business and certainly in pricing revenue management, it's taken many steps. It's getting early wins. It's getting scores on the board or getting buy-in from stakeholders and moving forward. Going from a position where you've got no pricing department, no revenue management. Then jumping into a multimillion-dollar system. To be honest probably isn't the right way to do it. It's much better to get a lot of the benefits by spending very small amounts of money. People often think that you have to go 100% into something to get the results and there's no graded or step basis. But I'm a big believer in step by step. It always reminds me of people who say they’re going to start the gym. That they don't want to get too big. They always say not having the awareness as to how difficult it is to build muscle, etc. And they're almost like thinking they'll become Arnold Schwarzenegger overnight. In some way, I don’t think many people have linked pricing to Arnold Schwarzenegger before. But in this context, take little steps you will get a lot of the benefits. A lot of companies with very immature pricing revenue management systems. I don't think it's ready to jump in at the beginning. When you don't know what you're doing when you don't fully understand your pricing approach, let alone your optimisations approaches. I think don’t buy the big-ticket things immediately. Because you could be left with a white elephant sitting there not being used. 

I think that's a good point, a lot of companies do invest in software as a knee-jerk reaction to a changing market or some form of price pressure from the competition. What they end up doing is going, oh, you know, I'll get that silver bullet solution. I'll get some revenue management software to optimise my prices. I won't invest in a pricing team. I don't even know, what a pricing framework is? But there's an assumption that that software has it all. It doesn't and if it does it's bare-bones. It needs to be implemented and integrated into the business. There has to be a pricing framework and algorithm to run it. That again needs to be adjusted according to the business various dynamics and factors. When I mentioned the airline's industry before that was quite a slow process to where it's where it is now. Initially, it started very rudimentary revenue management. Not dynamic pricing but given the illusion of dynamic pricing by moving to different buckets. That's not a sophisticated form of capacity utilisation or even optimising based on customer or consumer demand. Now, however, over the last 20 or 30 years, the airline's industry has learned a lot. They've cultivated their own business rules, factors and variables. That they'd like to study from a pricing perspective to optimise their revenues safely. That could be flights forecasting, network effect, the whole lot. So they're looking at multiple dynamics to optimise prices. Seat pricing, flight connections, the availability within the network and how popular a given type of flight, or system is? Also looking at ancillary optimisations of products as well as as a whole, of their food, the trolley cart and all of that perfumes. And all that sort of stuff that's all integrated within the system. So there are multiple variables to consider. In that regard, sometimes it could be data overload, just thinking through all of that. So a good pricing software system will be very useful.

I think we just go through there, a lot of the complex things that airlines and companies like really look at. In the airline industry, it's accepted revenue management and an accepted function. There are experts in that business and they're using tools of the trade.  I'll be honest, a lot of the companies we look at don't have that level of maturity. So even going through those factors that we could be looking at. Such as competition on the lines, special events, connections, whatever else. A lot of companies in the pricing functions or well some of them don’t even have a pricing function. Let alone have that level of detail as to what driving demand and pricing. In that context, to be honest, I think an expensive revenue management system won't be useful to them until they're much further along than the maturity cycle. I think this back of the envelope stuff. You got to spend your money at the beginning to build your expertise. You probably get someone in there to run pricing for you, maybe a pricing manager, a pricing analyst. Get a good Excel system in place, a good ERP system maybe, or use a system that you do have. Why throw a lot of money into something, if you don't have the capability to use it? I think there's something we'll touch on in future episodes. But one of the big problems with revenue management systems is they don't just come straight out of the box. Especially if you're not in the airline industry. There needs to be tailoring, tinkering and making it applicable to your business. When someone goes for a job interview, you're often asked, do you understand this industry? The same thing applies to computers and systems. Not to be negative about it, they’re very useful tools. But I would say a start easy start in a way you can understand. Don't jump into the deep end.

Work out what your strategic price-setting process is, does it optimise revenues? Then think about your approach, is dynamic pricing essential for your business? or perhaps it's not? So it's thinking about your business, what works for your business now? Then have that five-year plan in mind. And being able to iterate as you go along. Because things do change, markets change, a customer base changes. We all know that going through COVID at the moment how quickly things change. How that impacts pricing and business models. Having that in mind, even though you've got that five-year plan but understanding your business. Your approach to pricing then building that pricing team who can figure that out for you. Then from there, making small steps to getting the system. Building on the framework as suggested. And working across the business to make that happen because pricing doesn't happen just within the pricing team. It’s a real organisational level commitment.