Revenue Management is an innovative, devastatingly effective economic discipline, which perfectly responds to the market of this current historic and economic moment.

Revenue Management represents the present (even though it is little more than a babe in swaddling clothes) and, above all, the future. Understanding this may be vital for many entrepreneurs and especially for those who are not yet ones but are preparing for the “big jump”.

Here I would like to try to clarify my viewpoint regarding the importance of this new economic discipline and, in particular, try to best contextualise it.

Three ways to do Economy

Let us start by specifying that there are 3 economies (understood as ways to do economy) underway, all at different stages of maturity, development and social acceptance.

These are:

• Traditional Economy
• Low Cost Economy
• Revenue Management Economy

Traditional Economy

Traditional economy has been developed over the last decades and is at quite an advanced stage of maturity. The characteristic of this economy is the market oriented product, though this does not correspond to an equally market-oriented price, as it is assailed by fixed costs and the budgets you would like to achieve. Both fixed costs and budgets often condition the price above or below the optimal market level.

Furthermore, prices tend to be static and only “moved” by discounts that should always be justified somehow. In this economy – which is then that which surrounds it – the entrepreneur does not so much manage the variations in demand as undergo them and is often at the mercy of demand flows depending on the season or contingent situations that cannot be foreseen or controlled.

Low Cost Economy

Low cost economy, on the other hand, started to spread and assert itself in the ’90s and after a period of great splendour I would say that it is now marking its time rather.

The characteristics of this economy are represented by a product that can both follow the market indications (market oriented) and be in some way imposed on the market due to penetration prices (product oriented). In low cost economy the products are “no frills” and based on essentialness, sometimes (actually, quite often) at the price of quality. In low cost economy, volumes represent an element of the utmost economic importance. The penetration prices of the mother product (for example, an aeroplane ticket), are accompanied by overly high prices in cross-selling and up-selling (a sandwich or rather particular seats) on accessory products.

Low cost prices tend to be dynamic, without though ever going over certain preset parameters, because, as soon as the prices reach the levels of analogous products managed by traditional economy, the difference in quality leads to an inevitable slowing down in sales.

Revenue Management Economy

Revenue Management economy represents the natural evolution of the former two, attempting to take the positive from the two economies preceding it and creating an economy that is more correct, better performing and also more suited to the historic moment.

In this economy the price is highly dynamic (far more than in low cost) and the products have to be sold in full awareness that the quality is very important, both when the price is very low and when it is very high and cannot thus be modified on the basis of the price.

Another unique feature of Revenue Management – with respect to previous economies – is that it removes limits from the sales rating fork, which can drop to even lower than those imagined by the low cost economy and reach very high price levels that are unimaginable for traditional-type economy.

Another trademark of Revenue Management economy is that the price needs no justifications: the rate is dynamic because the market is dynamic and so the justification of the price variation is dictated by the moment of purchase more than by the product. As with low cost economy, here too the sales actions on accessory products acquire notable importance, but here, with respect to the low cost, the prices of accessory services proceed analogously to those in sales of the mother product (so they fluctuate), while in low cost they tend to be rigidly high.

In Revenue Management the business action of word-of-mouth acquires fundamental importance: indeed, as quality is always high, this word-of-mouth represents a virtuous flywheel, which occurs less in low cost as the product quality is often essential and scanty. Furthermore, when Revenue Management clashes with products sold by the traditional-type economy, it always has the upper hand as it can at certain moments perform prices with greater penetration and at others – when demand is high – wisely succeeds in making prices rise far beyond the imagination of traditional economy, as the latter will tend to stop before a price erroneously considered congruent.