Dynamic revenue management: a major building block of wealth creation in the new economy

News categories: value based management, e-commerce and sales force automation, customer asset management, business performance management, Information Technology

An extensive study conducted by the Boston Consulting Group (BCG) revealed a common pattern of worldwide corporate top performers. BCG examined 5,316 large quoted companies worldwide which represent nearly 80% of the total worldwide capitalization of all stock markets. The consulting firm measured companies’ performance according to the average annual TSR (Total Shareholder Return) – the rate at which these companies added value for their shareholders – over a five-year period, from the end of 1993 to the end of 1998. The study’s aim was to ascertain how the best companies achieved superior performance. The key finding of the study was: successful value creators first built profitability, then grow. The value creation strategy has to take into account the current situation. Only when companies get their levels of profitability up to above the cost of capital they can create profitable and sustainable growth. The top performers acting according to this approach outperformed the rest of the pack by far. The gap between the top company and the 50^th company’s average annual TSR was 115 percentage points; the gap between the 50^thand the 100^th company was just over eight percentage points. At the end it comes down to the conclusion, that you can outperform the market, regardless of industry sector, market or profitability level if you stick to that rule.

In the study BCG also found out that American companies were more successful than their European counterparts. The reason was, that American companies tended to create value by growth whereas Europeans tended to create it by restructuring. The conclusion was, that corporate America started much earlier than Europe to restructure and “reengineer” and have been earlier ready for a profitable growth strategy (the original BCG study …).

What does this mean to the world of e-business ?

The first task for e-businesses is to become profitable – then grow. Restructuring of traditional companies under an e-business strategy is often focused only on cost efficiency – that is: cutting out cost of the value chain by eliminating manual inefficiencies. Most approaches today fail to address the revenue side of the business. And the Internet’s dynamic pricing models and highly competitive environment is challenging especially it. At what level should a reserve price be set in an auction or a reverse auction? Prices are under pressure and the revenue side of the business tends to slip away from the control of the company. As a result, revenue optimisation is becoming the most crucial value creation factor before adapting any growth strategy. For example, not all customers are alike. When is a customer a good source of revenues? How much more should one charge for a rush shipment versus a standard shipment ? What is the most effective way to segment a market for higher profitability ?

The leaders in revenue management models are industries like the airline industry. A structured revenue management approach proved extremely beneficial to airlines. It streamlines an industry plagued by inefficiencies on the revenue side by reducing the amount of profit lost to “perishable goods”, i.e., empty seats. And this is the challenge to any business which has to optimise demand, capacity and time. This kind of revenue optimisation also includes more adapted compensation models for the sales force. Still most companies compensate their salespeople based on the revenue generated, not on profitability. Numerous revenue management software companies have emerged to address this and similar issues.

On average revenue management software can boast a 2%-8% revenue gain – a totally new market in software applications. Players in this market are for example Maxager Technology, PROS revenue management Inc., and Talus Solutions – at the website of the last you will find a game where you can learn to optimize revenue in ticket sales for a cruise ship.

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