From Data to Profit: What Is Revenue Management and Why It Matters?

Revenue management is not accounting or just pricing management. Discover how revenue management transforms data into profit, its evolution across industries, and why more organisations are adopting this critical commercial capability. Explore key frameworks by BCG and Coca-Cola within the CPG/FMCG industries.

Frequently, people either don't know what revenue management is or have misconceptions about it. When they hear the term "revenue management," they often assume it refers to accounting, likely because of the word "revenue" in the title. However, at least 50% of revenue management involves data analysis (not just financial data) and business intelligence, with the remainder focused on strategy development and building and supporting governance infrastructure, including KPIs, processes, tools, and capabilities.

It is also notable that some companies today still do not fully recognise the importance of revenue management function within their organisations, especially in the current turbulent environment. Furthermore, it is interesting that some large international companies have only recently begun establishing revenue management functions.

Additionally, current literature on revenue management primarily focuses on the hospitality industry, with knowledge relevant to other sectors remaining quite fragmented.

That’s why, in this article, I would like to focus on the following points:

• What exactly is revenue management
  • Terms and definitions
  • Revenue management vs. yield management
• How revenue management became popular and spread across different industries
• Why more and more organisations are establishing revenue management functions
• Where revenue management fits best within an organisational structure
• The most widespread revenue management approaches in CPG and FMCG
  • BCG’s Revenue Growth Management framework
  • Coca-Cola’s OBPPC framework

What Is Revenue Management

Terms

There are several terms that denote ‘revenue management’, including:

• Revenue management (RM)
• Revenue growth management (RGM)
• Net revenue management (NRM)
• Yield management

Essentially, they are very close to each other. Regardless of its title, the main principles remain steadfast and applicable across industries. However, some companies, such as Kantar XTEL, see a significant difference between NRM and RGM, considering RGM a ‘better’ term that reflects the right and mature mindset compared to NRM. On the other hand, Boston Consulting Group (BCG) does not distinguish between these terms.

I personally prefer to use the most common term, ‘revenue management’, or the abbreviation ‘RGM’ as a short version. ‘RM’ is not as explicit and widespread as ‘RGM’; it is often used to denote other terms such as ‘Relationship Manager’, ‘Resource Manager’, ‘Regional Manager’, or ‘Rapid Manufacturing’.

Definitions

Once the terms are clarified, navigating through the various definitions becomes easier. However, if you rely solely on Wikipedia, you might be misled. Wikipedia provides a very narrow explanation of revenue management, specifically for the hotel industry as a “discipline to maximize profit by optimizing rate (ADR) and occupancy (Occ)”.

This is not surprising, as if you ‘google’ this term, the top results on the first two pages are often connected with the hospitality industry. The reason for this will become clear from the history of revenue management, which will be discussed further in the article.

Therefore, let’s turn to more authoritative sources and explore how the Big 3 consulting companies define revenue management.

▪️ BCG’s definition is quite general:

Revenue growth management — also known as net revenue management — isn’t just another pricing program. Rather, it’s a savvy way to handle net revenue, which is essential for funding operations and production. … NRM is an approach for maximizing the revenues and profits from a company’s brand and product portfolio over time.

▪️ According to McKinsey & Company:

Revenue growth management (RGM) — the discipline of driving sustainable, profitable growth through a range of strategies around assortment, promotions, trade management, and pricing.

▪️ Bain & Company defines RGM as a comprehensive strategy that balances key elements such as pricing, assortment, price-pack architecture, promotions, and trade terms to maximise value for all stakeholders — consumers, retailers, and manufacturers.

All these definitions emphasise driving profitable growth through leveraging pricing, assortment, promotions, and trade spend. However, they lack an important component — the key marketing concept of 4Ps or marketing mix: product, price, place, promotion.

As opposed to the Big 3 companies, Simon-Kucher, another global strategy consulting firm, is more precise and includes this in their definition of revenue management:

…, it's [RGM] about driving profitability by strategically managing your prices, products, placements, and promotions. The right product with the right price in the right location with the right activation to tackle the right consumer.

Thus, from my point of view, it’s better to define revenue management in the following way:

Revenue management is a strategic discipline aimed at driving profitable growth by analysing and predicting consumer behaviour to sell the right product to the right customer at the right time for the right price through the right channel.

This definition captures the essence of revenue management, highlighting its focus on combining data mining, consumer insights, and operations research with strategy to optimise sales and profitability.

Revenue Management vs. Yield Management

It's important to mention that while revenue management and yield management have similarities, they are distinct terms. The main difference is that yield management involves the strategic control of inventory to sell the right product to the right customer at the right time for the right price. By ‘inventory’ it is meant a fixed, time-limited resource such as airline seats, hotel room reservations or advertising inventory.

Secondly, yield management is more tactical than strategic, focusing primarily on price optimisation. In contrast, revenue management considers the bigger picture, covering forecasting, in-depth analytics, and broader strategic elements. Revenue management integrates various components such as demand forecasting, market segmentation, and overall business strategy to maximise profitability.

Therefore, it’s better to consider yield management is a specific inventory-focused branch of revenue management.

How Revenue Management Spread Across Different Industries

The history of revenue management, originally known as yield management, begins in early 1970s in the airline industry.

1970s - Early 1980s: Early Beginnings in the Airline Industry

• In 1972, Kenneth Littlewood, an employee of British Overseas Airways Corporation (now British Airways), laid the foundation for what has become today's revenue management discipline. He proposed a decision rule, now known as Littlewood's Rule, for selling discounted airline tickets. Littlewood’s concept was simple: more people would buy cheaper tickets than full-fare ones. So, airlines should sell discount tickets only until the money made from them equals what could be made from selling a smaller number of full-fare tickets. The main challenge was figuring out how many full-fare tickets would likely be sold.
• The deregulation of the airline industry in the United States in 1978 created a highly competitive environment, prompting airlines to seek new ways to optimise their revenues.
• In the early 1980s, under the leadership of Robert Crandall, American Airlines developed a computerised system called DINAMO (Dynamic Inventory Optimisation and Maintenance Optimiser). This system allowed the airline to adjust ticket prices based on real-time demand and inventory, targeting discounts only to situations where there was a surplus of empty seats. This innovative approach helped American Airlines maximise their revenue and established them as one of the pioneers in revenue management.

1980s: Expansion to the Hospitality Industry. Hotels, like airlines, deal with perishable inventory (rooms) and fluctuating demand. Robert Crandall discussed his success with yield management with J. W. "Bill" Marriott, Jr., CEO of Marriott International, and Marriott International ****became the first hotel chain to embrace revenue management. Following its success in the airline industry, yield management techniques were subsequently adopted by the hotel industry.

Early 1990s: Application in B2B. Up to this point, revenue management had focused primarily on driving revenue from B2C relationships. But, in the early 1990s UPS, an American global shipping and logistics company, enhanced revenue management by revitalising their B2B pricing strategy with a customised bid-response model called Target Pricing. This model used historical data to predict winning probabilities at different price points, allowing UPS to forecast bid outcomes and strategically apply price premiums or discounts. This approach resulted in over $100 million in increased profits in the first year.

1990s - 2000s: Expansion in Other Industries. In the 1990s and 2000s, revenue management principles naturally expanded beyond airlines and hotels to other sectors with similar inventory and demand characteristics, including car rentals, cruise lines, and television advertising.

• Early 2000s: Ford Motor Company's Adoption. In the early 2000s, the Ford Motor Company began adopting revenue management to maximise the profitability of its vehicles. Ford segmented customers into micro-markets and created a differentiated and targeted price structure. By understanding the range of customer preferences across different product lines and geographical markets, Ford's leadership established a revenue management organisation. This organisation measured the price-responsiveness of different customer segments for each incentive type and developed an approach to target the optimal incentive by product and region.
• The public success of Pricing and Revenue Management at Ford solidified the ability of the discipline to address the revenue generation issues of virtually any company.
• The Adoption in CPG, FMCG, and Retail. During the early 2000s, CPG and FMCG companies began experimenting with revenue management practices, focusing on pricing strategies and trade promotions to enhance profitability. Retailers used data analytics to forecast demand, manage inventory, and optimise pricing strategies, particularly during sales events and holiday seasons.

2010s: Integration of Advanced Analytics. By the 2010s, advancements in data analytics and technology allowed companies to refine their revenue management practices further. Companies started to harness big data and advanced analytics to gain deeper insights into consumer behaviour, optimise pricing, and manage inventory and trade spend more effectively.

Late 2010s - Present: ‘Precision RGM’ Driven by ML and AI. In recent years, the advent of big data, machine learning, and artificial intelligence has further transformed revenue management. Modern revenue management systems integrate vast amounts of data to provide real-time insights and predictive analytics, enabling businesses to make more informed pricing and inventory decisions. Firms like IBM and SAS offer advanced revenue management solutions that incorporate AI and machine learning to optimise pricing and demand forecasting across various industries.

Why More Organisations Are Establishing Revenue Management Functions

Organisations are turning to revenue management primarily with the aim to boost their top and bottom lines. Additionally, various external factors also push companies to adopt these practices, including:

• Commodities inflation
• Political and economic turmoil
• Tough market competition
• Pressure form partners and customers
• Shifts in consumer behaviour
• Regulatory changes

Implementing revenue management practices helps companies:

• Stay agile, competitive, and profitable in today's dynamic market environment
• Maximise revenue and profitability
• Enhance customer satisfaction through personalised offers
• Optimise inventory utilisation
• Improve forecasting
• Make better strategic decisions

The chart below by Bain & Company demonstrates the impact of revenue management. According to Bain’s implemented RGM programs, companies have seen an average gross profit uplift of 13%, with an average increase in the category profit pool for both manufacturers and retailers reaching 21%.

Where Revenue Management Fits Best Within an Organisational Structure

While revenue management utilises financial data, it is definitely not a finance & accounting sub-discipline, regardless of where it is situated within the organisational structure. Revenue management is a key capability in an organisation that answers critical business questions of what to sell, when to sell, to whom to sell, and for how much, using data-driven tactics and strategic approach. The integration of revenue management within an organisational structure varies depending on the industry and the specific company:

• Some companies place revenue management teams within Marketing department because marketing initiatives typically focus on attracting and selling to customers.
• Others dedicate a section of Finance department to handle revenue management responsibilities due to the significant bottom line implications.
• Alternatively, some companies place the Revenue Management department directly under the CEO or have elevated the position of Chief Revenue Officer (CRO) to the senior management level. This role typically oversees key functions such as sales, pricing, new product development, advertising, and promotions.

Revenue Management Approaches in CPG and FMCG

Revenue management approaches vary across industries due to the unique characteristics and challenges each sector faces, such as nature of inventory, demand characteristics, pricing flexibility, sales channels. Distinct practices have emerged in hospitality, airlines, CPG/FMCG and tech, each tailored to the specific needs of its industry.

My perspective is primarily connected with CPG/FMCG due to my experience in these industries. Therefore, I’ll focus on RGM approaches as they apply within these sectors.

Two popular frameworks provide a structured approach to revenue management in CPG/FMCG, enabling companies to navigate market complexities and drive sustainable growth:

• BCG’s RGM framework,
• Coca-Cola’s OBPPC framework.

BCG’s Revenue Growth Management Framework

The Boston Consulting Group developed the RGM framework to help companies navigate complex market dynamics and improve their profitability by leveraging data analytics and market insights.

This framework emphasises five revenue management levers:

1. Pricing by Brand and Channel (Strategic Pricing): Analysing market conditions, consumer willingness to pay, and competitive pricing to determine the optimal pricing strategy (brand price architecture (BPA) + channel pricing strategy). This ensures that products are priced to maximise revenue without losing market share.
2. Price-Pack Architecture (PPA): Designing product packages and sizes that meet consumer needs while optimising profitability. It includes determining the best packaging options, sizes, and price points to attract different consumer segments. This strategy ensures that the product offerings are aligned with consumer preferences and market demand.
3. Active Mix Management (Product Assortment Management): By analysing sales data and consumer trends, companies can identify which products to offer, discontinue, or highlight. This ensures that the product assortment aligns with consumer demand, maximising sales and profitability.
4. Promotion Management: Designing and executing targeted and impactful promotional activities to drive short-term sales and introduce new products. It includes analysing past promotion effectiveness, consumer response, and ROI to optimise future promotional strategies.
5. Trade Terms Management: Negotiating terms with retailers and other trade partners to ensure mutual benefits. This includes setting terms for discounts, allowances, and payment conditions. By optimising trade terms, companies can improve their relationships with partners and enhance their overall profitability.

The framework’s enablers are critical components that support the effective implementation and sustainability of RGM strategies. By focusing on these enablers, companies can comprehensively and effectively leverage their revenue growth initiatives:

1. KPIs and Dashboards: Establishing clear performance metrics and KPIs is essential for tracking the success of RGM initiatives. This involves setting benchmarks, monitoring progress, and analysing outcomes to ensure that revenue management strategies are delivering the desired results.
2. Processes: Ensuring that all relevant departments and teams are aligned with the RGM objectives is crucial. This involves establishing clear roles, responsibilities, and processes for cross-functional collaboration. Revenue governance should be in place to oversee the implementation of RGM initiatives, ensuring consistency and accountability across the organisation.
3. People and Organisation: Implementing RGM requires significant organisational change, and effective change management practices are crucial. This includes communicating the benefits of RGM to all stakeholders, managing resistance, and fostering a culture that embraces data-driven decision-making. Change management ensures that the transition to new processes and systems is smooth and sustainable.
4. Tools: A robust technology infrastructure is essential for supporting data collection, storage, and analysis. This includes implementing systems and platforms that facilitate real-time data processing, integration across various functions, and scalability.
5. Capability Building: Having skilled professionals who understand the intricacies of revenue management is vital. This requires investing in training programs and continuous learning opportunities to develop expertise in RGM practices. Companies need to build capabilities in areas such as data analytics, strategic pricing, and trade terms management.

Coca-Cola’s OBPPC Framework

Another approach to revenue management is the OBPPC framework, which stands for Occasion, Brand, Package, Price, and Channel. It was initially introduced by The Coca-Cola Company to enhance their on-channel execution, and has since been adopted by other companies.

The OBPPC framework helps businesses align their products and marketing strategies with specific consumer occasions, ensuring that the right product is offered in the right package, at the right price, through the right channel, and under the appropriate brand.

1. Occasion: Identifying different consumer occasions and tailoring products to fit these specific moments.
2. Brand: Ensuring that the brand resonates with the target audience and meets their expectations.
3. Package: Offering packaging options that appeal to consumers and suit the occasion.
4. Price: Setting prices that reflect consumer willingness to pay and competitive positioning.
5. Channel: Distributing products through the most effective channels to reach the target audience.

In a nutshell, this model ensures that companies cater to varying shopper needs by offering the appropriate brands, packages, and price points within target channels.

Final Thoughts

More than five decades of revenue management history have demonstrated that it is vital and effective solution and critical commercial capability for any business to survive and grow sustainably in challenging environments with significant pressures from various sources.

Revenue management approaches vary across different industries due to the unique characteristics and challenges each sector faces. But essentially, the core principle remains consistent across industries: selling the right product to the right customer at the right time for the right price through the right channel, aimed at maximising revenue and profit.

Based on the most popular and widespread RGM frameworks within CPG/FMCG industry, developed by BCG and The Coca-Cola Company, and various definitions by global consultancies, revenue management is clearly not an accounting or finance sub-function. It is a commercial discipline that combines data analysis and business intelligence with strategy to understand customer, consumer, and shopper behaviour. This integration helps answer key business questions and drives sustainable growth for the company.

REFERENCES

1. "Delivering Profitable Revenue Growth Strategies Through a Holistic RGM Approach." Xtel Group, link. Accessed 25 July 2024.
2. "Revenue Growth Management." Boston Consulting Group, link. Accessed 25 July 2024.
3. "How Net Revenue Management Boosts Top and Bottom Line." Boston Consulting Group, 2017, link. Accessed 25 July 2024.
4. "Revenue Growth Management in the COVID-19 Crisis." McKinsey & Company, link. Accessed 25 July 2024.
5. "Why Consumer Product Companies Need to Solve Revenue Growth Management." Bain & Company, link. Accessed 25 July 2024.
6. "Revenue Management." Wikipedia, link. Accessed 25 July 2024.
7. "Inside the mysteries of airline fares." NBC News, link. Accessed 25 July 2024.
8. "Two Ways to Operationalize Your Portfolio Strategy for Market Growth." Prophet, April 2024, link. Accessed 25 July 2024.
9. "The Coca-Cola Company's Growth Strategy." The Coca-Cola Company, link. Accessed 25 July 2024.
10. "Sales and Marketing." Coca-Cola Hellenic Bottling Company, link. Accessed 25 July 2024.
11. "Implementing World-Class Revenue Growth Management (RGM) with the OBPPC Framework." PriceBeam Blog, link. Accessed 25 July 2024.