Revenue Management has revolutionized the way modern companies think about pricing. From its start in the airline industry to its popularization in the hotel segment, to its jump into the B2B space — it’s tough to imagine certain businesses ever reverting back to static pricing.
Increasingly, the pricing of other products, in catalogs across any number of B2B sectors, is going the way of the airline seat: Offering variable prices based on a host of inputs and algorithms in order to maximize the top line.
What is Revenue Management?
At its core, the practice of Revenue Management (sometimes also called “Revenue Optimization“) aims to clear the shelves of a perishable product: every empty plane seat or empty hotel room is an expired opportunity. Its goal is to maximize revenue under specific circumstances, informed by data-driven predictions and insights. In the B2C world, it’s what makes your hotel room so expensive on Labor Day Weekend – and what makes off-season rates so low – think: summertime in Manhattan.
Revenue Management is well studied, understood, and practiced; and it often overshadows its less popular but arguably equally impactful cousin, Profit Management. Some might confuse the two as synonyms, and sure, revenue and profit are an undeniably close-knit pair. Moreover, good Revenue Management often leads to strong profit margins — however, Profit Management is a standalone discipline with its own unique considerations and advantages.
What is Profit Management?
While its better-known cousin is primarily concerned with maximizing top-line growth, Profit Management pulls in all the revenue-related decisions and then takes a close look at costs, even seemingly insignificant ones, that can add up to wreak havoc on your profit margins. Profit Management recognizes that for most B2B companies, intelligent profitability requires a simultaneous understanding of the specifics of pricing decisions and the related cost impact.
When done correctly, Profit Management helps to strategically maximize your profit on each individual sale by diving deeper into the tools and strategies that increase the intelligence of pricing and customer insights: identifying what the customer values. At the same time, you understand the operational costs of your offer, and can better direct customers to offers that improve your profitability.
Bringing it into the animal kingdom, you might think of a squirrel employing Revenue Management when it gathers as many acorns as it can for the winter, working in the most efficient way possible by recalling which trees produced the most acorns in past seasons.
Profit Management, then, is the squirrel figuring out the safest place to stash the acorns for future collection, so they don’t decompose in the elements and lose their value, all the while memorizing the specific locations of the biggest, most appetizing acorns. Revenue Management ensures there’s plenty of nuts around the territory, and Profit Management ensures that each one, and especially the really good ones, are primed for a successful, organized, and efficient collection.
Revenue and Profit Management Examples
Let’s look at some simple business models to understand revenue management. If you are a butcher, or baker, your products have a shelf life – they are perishable. You might get some people to buy ahead of time, to confirm they will be supplied on a specific day.
But if you have extra loaves of bread that aren’t sold soon after they are baked, you really don’t care too much about costs (that was realized when you baked). You are looking for revenue – because anything is better than nothing at this point. The price is marked down for “day old” bread (for only a day, the market hopes) and then the loaves are worthless.
Profit management, then, is useful for the candlestick maker. The product is not perishable; if a candlestick is not sold today, it’s still available to be sold tomorrow. And importantly. So the price of today’s sales has a large influence on the price of sales tomorrow. If you offer a low price today, your market will expect that tomorrow.
So, to really understand the impact on your business, you need to know the profit margin for your candlesticks: price to sell minus cost to make. Costs don’t dictate prices, but your profit is the space between. And since you have options as to when to sell (since the candlestick is not perishable) you can keep your price at a profitable level, and look for another selling opportunity tomorrow.
Can’t I Just Pump More Resources Into Revenue Management to Ensure My Profits Increase?
Well, yes and no. There’s more to a modern B2B firms’ bottom line than a maxed-out revenue figure minus COGS. In a technology landscape, what goes into the generation of a quote, and ultimately what goes into winning a deal, depends on a plethora of factors that both include and extend beyond what Revenue Management looks at.
Remember, net profit is determined by deducting several things from revenue: Management costs, technology costs, costs of sales, and other operating expenses. If you’re concerned with maximizing revenue, but aren’t considering the smaller costs that waterfall downward into your net profit line, you’re leaving money on the table.
Take for example the idea of using a basic spreadsheet to manage and track quotes and approvals. Not only are you spending operational costs on the account execs laboring over that spreadsheet when their time could be better spent elsewhere, but you’re also suffering from its inherently slow pace — causing friction with the customer and possibly even losing the deal to a more agile competitor.
Incidentally, that competitor (let’s call them “Firm B”) is a devout practitioner of both revenue management AND profit management.
Firm B is using tools that:
- Provide AI-driven customer insights and segmentation.
- Automatically measure and optimize pricing impact.
- Leverage AI for smarter, better-informed pricing.
The team at Firm B is not only making their own lives easier through automated processes, more accurate insights, and lowering their OPEX; they’re also delivering value to the customer through faster quote times and a better understanding of the customers’ needs.
Of course, Profit Management isn’t going to supplant Revenue Management any time soon for butchers and bakers – loaves of bread don’t last forever. Keep in mind, though, if you sell something with shelf-life, and you don’t take watch your profit margin with the same care a candlestick maker does? Like an old cruller, it may just deteriorate in front of your very eyes.
Even if your product doesn’t go bad over time, without proper management, your profits will.