Revenue management is the practice of controlling the price you pay for goods and services so that you can manage your financial resources effectively.
Essentially, it means using pricing to maximize your business’ profit while maintaining a good relationship with your customers. Knowing what elements go into a successful revenue management strategy can help your business grow and prosper.
Key Elements To Consider
The pricing practices your company follows will greatly influence your revenue management strategy. If you want to be effective, you need to consider what are the key elements that can increase your conversion rates and sell more products. Below we introduce you to some of the most important factors that can affect your pricing strategy and success in implementing a revenue management system.
The First Step Towards Effective Revenue Management
The first step to effective revenue management is to properly set your prices. Setting a high price for a product or service and expecting an order to come in simply because you priced it that way is not a valid business strategy. Proper pricing, on the other hand, is based on proper cost analysis, a good market research, and a good understanding of your target audience’s purchasing power.
When setting your prices, consider what are your competitors charging for the same product, and what would your customers consider to be a good value. Proper pricing can eliminate costly price fluctuations and give you a steady income stream that you know is based on a sound business strategy.
Proper pricing also gives you the ability to negotiate better with your suppliers, as you now have a clear picture of what your products are worth. You can ask for a price reduction if you meet the right criteria, and sometimes even get a substantial discount if you meet certain conditions.
Cost Of Goods Sold (COGS)
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COGS is the total you will have to pay for the goods or services you purchase, including the cost of materials, labor, and shipping. Knowing how much you are losing on each sale is essential to properly manage your income and expenses. The concept of COGS is simple: you purchase goods from a supplier, you pay for them, and you sell them to your customers.
COGS is directly related to pricing, meaning that if you want to reduce your COGS, you will need to lower your prices. This is especially important for businesses operating in a free market, as they will constantly be forced to lower their prices to keep up with the competition.
If you want to avoid bankruptcy, lowering your COGS is the key to sustainable profitability. Reducing COGS also increases your bottom line and gives you the ability to invest in new equipment and expand your business with more staff, both of which increase your chances for success.
Operating Expenses
Operating expenses are the expenses you incur in maintaining your business, including salaries, rent, utilities, advertising, and business travel. These expenses can vary greatly from industry to industry, but as a rule of thumb, smaller businesses with fewer revenue streams will have higher operating expenses.
Knowing how much money you are spending on each sale can help you properly prioritize your expenses and adjust your budgeting accordingly. If you have a bad relationship with your bank, you might want to consider looking for alternative sources of financing to keep your business afloat.
Depending on your cash-flow situation, you might also want to reduce your spending on non-essential items to concentrate on growing your business.
Profit Margin
Profit margin is the amount of money you make over and above your operating expenses. Just like COGS, profit margin is also directly related to pricing, as you will have a higher profit margin if you sell your products at a higher price.
This is where the rubber meets the road when it comes to effective pricing, as profit margin represents how effective your pricing practices are. Your profit margin will increase as you lower your prices, and if you want to see your business grow, you will need to increase your profit margin.
As long as your prices are correct and you are not losing money on each sale, you will have no trouble raising your profit margin.
Raising your profit margin does not necessarily mean you will get a higher sales volume, as you may need to cut corners to achieve it. Think of raising your profit margin as an investment, as this will make your customers feel that you value their business and that you are committed to keeping their business.
In turn, they are more likely to buy from you in the future as you establish yourself as an expert in your industry.
Product Life Cycle
Product life cycle refers to the period from the time your product is designed to be produced, to the time when it is discarded. Knowing when your product will become outdated can help you plan ahead and decide what to do with your old stuff. Old products simply become obsolete and can be replaced by new products that are either more advanced or just updated versions of the previous model.
Your product life cycle will determine how long you will need to keep your inventory levels stable and whether or not you should try and push your products further than they can go.
Old products will depreciate in value faster than newer products, meaning you can often make a considerable amount of money by selling your old products at a lower cost.
If your business model is based on selling one-of-a-kind collector’s pieces, antique stores and flea markets might be a good place to start looking. You may also want to consider selling your excess inventory through a wholesale company to maximize your profits.
Customer Relationship Management (CRM)
Customer relationship management is the field of marketing and sales that focuses on enhancing customer satisfaction and building lasting customer relationships. Properly managing your relationships with existing and potential customers is essential to running a successful business.
In today’s world, customers have a wide array of options when it comes to shopping, and if you want to retain them as customers, you will need to provide them with a good experience. One of the best ways to do this is by creating and maintaining an excellent customer relationship, which we discussed above.
Inbound Marketing and Sales (or Marketing and Sales for short) is a methodology developed by Josh Elton, which aims to put the customer at the center of everything your business does.
Pricing As A Signal
Pricing as a signal is a marketing and management strategy which encourages businesses to communicate their prices openly. According to the theory behind this strategy, customers will interpret your prices in two different ways: as a signal of your value and as an indication of how much you want from them.
In other words, if customers perceive your prices as high, this may mean you provide a good value for your goods and/or services or you want as much business as possible. If your prices are perceived as low, this may mean you are offering poor value or you want to keep your customers but don’t need as much business as possible.
Open and honest communication about your prices can help you gain a better understanding of how customers perceive your offerings and allow you to create more effective strategies.
This strategy can also help you get more value out of your existing customers, as you can use their past purchases to your advantage and provide them with special deals and discounts. This can make a huge difference in your customer retention efforts and in your bottom line. It’s always better to have more customers, right?
Product Variety
Product variety is the amount of different products or services you offer. If you want to be able to effectively price your products and services, you will need to offer a variety of options to your customers.
Offering a variety of products or services will give you the ability to create a tiered pricing structure, where you can offer low, middle, and high price ranges for your products or services.
This will make it simpler for your customers to understand and take advantage of your pricing structure. We recommend creating a plan before you begin implementing this strategy, as it will take some time for customers to become familiar with all your products and prices – and you will inevitably run into situations where you do not have the exact product they want.
In these situations, you will either need to ask them to wait for a while or offer them a completely different product at a different price point.
This is why we say it takes time to establish proper pricing: you will not be able to gauge how effective your pricing strategies are without having all the right numbers to back you up.
With product variety, you can ensure you have something for everyone and create a more welcoming environment for customers who might otherwise hesitate to come into your store. This will, in turn, increase your overall sales and help you grow your business.
