Just about all any business is looking for is a way to maintain precisely the right amount of product inventory or resources to supply a service and to know the highest possible price the market for its products or services will bear. That would mean no overstocks, no disappointed customers and no write-offs to explain to investors. And the price would always be right to maximize profits.
Until someone comes up with a working crystal ball, revenue optimization software may offer the best hope to companies looking to achieve those goals.
This business intelligence software factors variables such as demand, the cost of a good or service, and the amount of revenue the company needs to be profitable. It then calculates the best sales price for a good or service. When key parameters change, the software revises prices almost instantly.
For example, if a travel company selling space on a cruise ship knows from historical trends that February is a bad month for a particular trip, it can drop the price to a level most likely to close the deal with a given customer.
At the same time, the company’s price planners, using a revenue optimization system, can draw data from applications that handle sales and marketing operations, as well as from data repositories containing customer-related information, in order to make their calculations.
The planners can also factor in other variables, such as the cost of the trip at this particular time of the year based on fuel prices or the weather. They can even launch marketing campaigns targeted at the audience most likely to respond to an offer.
“Revenue optimization takes a finite good, factors in demand and comes out with a price,” explains Donald Davidoff, vice president of pricing and revenue management at Archstone-Smith, an Englewood, Colo.-based national apartment owner-operator.
Archstone-Smith uses an application from Manugistics Group Inc. in Rockville, Md., that forecasts the demand and supply for its space to create the best pricing across a variety of leasing scenarios.
The software, called Lease Revenue Optimizer, comes up with a number by factoring in what the competition is doing and Archstone’s own corporate goals for profitability. The software also has rules that dictate how to respond to changes in competitors’ pricing, Davidoff says.
The analytical capabilities in revenue management software can automatically identify and segment a company’s most profitable customers, explains Steven Pinchuck, corporate director of revenue management at Harrah’s Entertainment Inc. in Memphis. The company, which operates hotels and gaming establishments, also uses revenue management software from Manugistics.
Built-in Business Rules
There can be considerable complexity built into the business rules embedded in the software. For instance, a company in a retail environment may tweak the price differently for a special promotion, using variables such as budget constraints and sales goals, says Ben Vinod, vice president of solution development at i2 Technologies Inc. in Dallas.
On the other hand, if for instance the product isn’t selling, there may be an end-of-life price optimization, which factors in how much of a markdown will be available and how much stock is still in place.
Once the software is up and running, configurations can be altered on the fly, depending on whatever priorities make the most sense, says Vinod. The applications can factor in key performance indicators for a particular industry.
The software can also be programmed to recognize a particular sales region or a certain line of products that are underperforming and calculate the best pricing scheme to effect a turnaround.
Profit may not even be the key factor — a company may be more interested in increasing its market presence and may be willing to mark down a product accordingly, he says.
The software’s capabilities are still in their infancy outside of the supply chain planning applications field, says Gartner Inc. analyst Karen Peterson.
The retail industry has shown the biggest demand for the applications thus far, because companies have to figure out the best way to price products and move them off shelves. The software has yet to be deployed with much success in other industries where there is some interest in revenue optimization, such as high tech.
Revenue optimization software requires clean legacy data, says Davidoff. The legacy data often isn’t formatted to be recognizable by the software, so users must build a data integration layer that can find and correct errors.
And users can’t typically just install and use revenue optimization software out of the box, says Peterson. Rather, they can get a competitive advantage with it only by understanding the specifics of their industry and their corporate strategy and then modeling the software accordingly.
