I have recently been exposed to revenue management. At the beginning of the month, I attended a Revenue Management and Pricing International (RMAPI) event. Watching the presentations and listening to the speakers, I was astonished at how mathematical RM is. Some of the more theoretical presentations had slides that were completely covered with complex equations that, I must admit, I found hard to follow.
Then last week, I was in Amsterdam co-chairing Eyefortravel’s Online Marketing Strategies for Europe conference in Amsterdam where, as part of my duties, I chaired the Revenue Management & Analytics track. Not quite so mathematical this time but still very impressive.
What impressed me is that RM appears to conjure profit from thin air. In travel, we are saddled with a limited and perishable stock. Limited because we cannot manufacture more. A hotel only has so many rooms. A cruise ship has a limited number of cabins and, unless we adopt the 2010 Ryanair idea of inflight standing, a flight cannot carry more passengers than it has seats. Perishable because once the ship has sailed, the flight has flown or the sun has risen over the hotel announcing another day, we can no longer sell our product, it has disappeared. RM delivers more profit from a given inventory.
So the job of the Revenue Manager is easy to describe: maximise the revenue from our limited stock: Firstly, if we are selling out, can we push the price higher? Secondly, if we are not selling out how do we need to move the price to sell more units without setting the price so low that we no longer maximise revenue?
RM is a hellishly complex world. As RMAPI’s website describes it, “The techniques involved are a combination of market segmentation, inventory control, data analysis and advanced forecasting, pricing, sales, cost control, performance monitoring and other disciplines.” In my mind, I am thinking of Revenue Managers as close to being Rocket Scientists as makes no difference.
There is just one thing, though. If I am running a business, I am not interested in maximising revenue. I don’t want revenue management. I want profit maximisation and my customers surely have to come into the equation other than being no more than a demand curve. Every new customer is expensive to win and that expense is going up, not down; so my pool of customers is nearly as limited as my hotel rooms or flight seats.
What I need to do is to maximise my profit from my limited customers. Specifically, I need to maximise customer lifetime profit by prolonging customers’ relationships with us and then squeeze the most profit out of them.
With that scenario in mind, my concern is that customer profit maximisation or customer relationship management (CRM) as we can call it, does not sit well with RM.
We are in the age of price transparency with websites providing our customers with price trend information, price alerts and so on. Our customers are learning when our prices will be at their lowest and know when to pounce. Revenue managers are using trend information to set prices and our customers are lapping this up by buying at lowest price which creates the trend for next year’s RM analysis, potentially taking us around a vicious downward spiral. So while RM is maximising revenue, it could well be fighting against CRM, personalisation, actionable analytics and all the techniques that are seeking to maximise customer lifetime profits.
So here’s the question: Is there a conflict between RM and CRM or can they co-exist in harmony? What do you think?