Perfect match

Entrepreneur, June, 1997 by Mark Henricks

RM doesn't work well in industries with little or no inventory, Kretsch says. For example, a tour operator who arranges travel on demand for customers, without buying anything in advance, will benefit little from RM. "The perishability of inventory is very important," he says.

RM is also of limited use to businesses that are government-regulated or controlled by some other outside agency, Kretsch adds. That's the case with Bob Bennett, founder and owner of the 20-employee Edgewater Inn in Biloxi, Mississippi.

As a condition of receiving a higher rating in the American Automobile Association's travel guides, Bennett says, he has to stick to his published prices. That forces him to plan pricing a year in advance and takes away the flexibility to raise prices to meet short-term surges in demand.

Revenue management is risky. One risk is that you'll raise prices too high or for the wrong customers. Bennett believes some of his competitors do this. "On weekends, they may get $115, when during the week they may [charge] $29," he says. "This person has an unhappy guest."

Another risk is that you'll price below cost or turn away more customers than you should. When you're playing with revenues, you've got to be extra careful, both in setting prices and in developing systems to carry out the RM strategy. As an example of the risks, Cross says a glitch in the computer system running a new American Airlines RM program in 1988 mistakenly told ticket agents that all discounted seats on certain flights had been sold. Customers calling about advertised low fares were told the low-fare seats were sold out and were then referred to American's competitors. Meanwhile, American planes were taking off with plenty of empty discounted seats. The RM error cost the airline $50 million in lost revenues in a single quarter.

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RM experts often describe the technique as more a change in philosophy than an implementation of technology or complex marketing systems. But entrepreneurs who do it insist that effective RM requires a great deal of attention to detail.

Peter Chwalisz uses off-the-shelf professional practice management software to make sure he knows both his costs and his customers intimately. He carefully discriminates in pricing based on seasons and markets. And he ruthlessly disciplines himself to micromarket to those he has found are his most profitable customers, such as truckers and doctors, and turn away those who don't yield adequate return.

Trying to manage revenues with any less commitment is unlikely to produce any significant competitive edge. "You already have higher prices before Christmas and lower prices after Christmas," he says. "A lot of [business owners] already do this without knowing it's a revenue management principle."

Mark Henricks is an Austin, Texas, writer specializing in business topics.