REVENUE MANAGEMENT IN RETAILING
Subash Talatam

Retailing, one of the largest sectors in this globalised economy, is going through a transition phase not only in India but also throughout the world over. Traditionally, the corner grocery store was the only choice available to the consumer, especially in the urban market. This is slowly giving way to international formats of retailing. The traditional food and grocery segment has seen the emergence of supermarkets / grocery chains (Food World, Nilgiris, Apna Bazaar, etc.), convenience stores (ConveniO, HP Speedmart, etc.) and fast-food chains (McDonalds, Dominos, PizzaHut, etc.).

Market trends show that it is the non-food segment in which foray has been made into a variety of new sectors. These include lifestyle / fashion segments (Shoppers' Stop, Globus, LifeStyle, Westside, etc.), apparel / accessories (Pantaloon, Levis, Reebok, etc.), books / music / gifts (Archies, MusicWorld, Crosswords, Landmark, etc.), appliances and consumer durables (Viveks, Jainsons, Vasant & Co., etc.), drugs and pharmacy (Health and Glow, Apollo, etc.).

The traditional grocers, by introducing self-service formats as well as value-added services such as credit and home delivery, have tried to redefine themselves. However, the boom in retailing has been confined primarily to the urban markets in the country. Even there, large chunks are yet to feel the impact of organized retailing. There are two primary reasons for this. Firstly, the modern retailer is yet to feel the saturation' effect in the urban market and has, therefore, probably not looked at the other markets as seriously. Secondly, the modern retailing trend, despite its cost-effectiveness, has come to be identified with lifestyles.

In order to appeal to all classes of the society, retail stores would have to identify with different lifestyles. In a sense, this trend is already visible with the emergence of stores with an essentially `value for money' image. The attractiveness of the other stores actually appeals to the existing affluent class as well as those who aspire for to be part of this class. Hence, one can assume that the retailing revolution is emerging along the lines of the economic evolution of society.

Why do we need Revenue Management?

“What you don’t know about Revenue Management could kill you!”
                                          - Donald Burr, Chairman and CEO, PEOPLExpress Airlines.

“The firms with the best revenue management will prosper and grow; the remainder will struggle to survive by restricting themselves to local or niche markets.”
                                          - Prof. Peter Bell, President-International Federation Operational Research Societies.

The primary objective of any organization is to increase its ‘shareholder value’. This value is derived from maximized profitability. However, it is very difficult to achieve the profitability goals of an organisation because it depends on the tactical methods employed to increase profits. A retailer can increase his profits either by reducing the costs or by increasing the revenues.

Today, consumers have an option to purchase products from an ever-widening range of retail outlets. Companies which previously had a small handful of competitors in the marketplace, are today gearing up to face the ever growing number of competitors who have complex offerings that include loyalty pricing, promotions, rebates, first-time shopper discounts and even auctions.

Pricing has become a complex activity for retailers, with large volumes of information about changing market conditions being available to consumers. Retailers are required to continually differentiate their offerings, making a number of strategic product-level decisions. The complexity of product-level decisions is growing exponentially as companies increase their product lines and move from mass-market strategies to customer-centric strategies.

Today, it is even more critical for retailers to strategically respond to changes in cost and competition, as well as changes in product availability and demand.  The traditional approach of retailers to maintain a limited number of highly visible items has changed and customers are looking for the entire range of product offerings. Hence there is greater opportunity for competitive advantage. The means to the opportunity lies in revenue management.

Revenue Management (RM) with respect to retailing can be defined as a process designed to manage a retailer’s revenues and profits which is an integral part of his core strategy. In support of the primary organizational strategy, RM considers customers and competitors along with internal goals and objectives. To make RM more effective, it should be embedded into the business processes that exist throughout the organization.

Retailers are today adapting to pricing strategies like - customer-driven pricing, competitive-driven pricing, and value-based pricing. Though, pricing has been viewed in the past as one of the components of merchandising, in the recent times it is considered the most important component of the merchandising mix because it has the greatest single impact on profitability. Industry studies show that a 1 percent increase in price can drive in excess of a 10 percent improvement in operating profitability. Changes in fixed costs or variable costs on the other hand do not have the same magnitude of impact on the operating profitability.

Retailers need to consider the differences between what are often referred to as blind and sensitive items. Items that consumers are familiar with – to the extent that they react to a change in price – are referred to as “price-sensitive.” All other items, which consumers are less familiar with, and for which price is not readily understood or known, can be categorized as “blind items”.  The importance of this distinction is that sensitive items are typically managed tightly from a pricing perspective in reaction to competition – producing slender margins. Conversely, blind items receive less pricing attention and yet represent a greater opportunity for maximizing margins.

By giving visibility to the trade-off between profit and price image, RM enables retailers to develop and implement attainable pricing strategies so that they can answer strategic questions such as –

• What is my overall price image relative to the competition?

• What is my revenue and profit potential given current demand and market dynamics?

• What are my optimal pricing strategies given current enterprise objectives for profit, revenue and price image? etc.

Therefore, Revenue Management is an answer to the complex problem of optimizing prices to maximize revenue and profits. To be effective, it requires three basic steps, namely, analyzing competition; understanding consumer demand; and aligning pricing with the enterprise objectives. Revenue management is going to be one of the most important facilitators to managing an institution with vigor.

In India though retailing is in the nascent stage, the role of retail networks in the days to come is likely to improve. Retailers have to concentrate on their revenue management, among other decisions, as it can unlock millions in hidden retail revenue. With so much at stake, and so much potential benefit, retailers should give serious consideration to implementing a revenue management system.

Existing and future entrants into retailing should keep in mind the six fundamental pillars that make up the foundation of Retail Revenue Management. Each pillar makes an important contribution to unlocking hidden revenue and profit opportunities for retailers. They include - Implementing multiple price strategies enterprise-wide; achieving a consistent competitive price image; understanding demand at the lowest level; optimizing the product prices; optimizing uniquely for different products; and winning on the Internet. Combined, they create a comprehensive solution to optimizing the full financial potential of the enterprise.

Proper implementation of RM would help key decision-makers – the CEO, VP-Merchandising, et al - in formulating effective strategies to achieve the corporate goal of shareholder wealth maximization. In evaluating revenue management systems, certain components like - Long-Term Competitive Price Image, Multiple Products, SKU-Level Demand, etc. - should be present to provide a complete and effective solution. It also synchronizes departmental objectives, simplifies channel management, improves promotions management and supports CRM, et al.

The existing and upcoming retailing chains have to adopt revenue management as a part of their business strategy as it helps them to synchronize departmental objectives, simplifying channel management, improving promotions management, and supporting CRM and loyalty initiatives.

Revenue management in retailing helps a retailer understand the revenue, profit and price image implications of implementing different strategies. Based on a retailer’s objectives, it recommends price points that will differentiate a retailer’s product offering. This simplification enables a retailer to extend pricing decisions to all products, not only price-sensitive products, and ultimately unlock hidden revenue and profit opportunities. The result elevates pricing to a strategic level that permits the achievement of long-term category and enterprise objectives while still allowing pricing implementation to occur at the SKU level.

Retailers today require a dynamic pricing capability that respects customer and product differences and the corresponding competitive and strategic implications of different pricing implementations. Revenue management in retailing will prove to be a significant weapon for defending and increasing market share and profitability.

Subash Talatam, BBM, PGDM (AIM-C), PGDCA, Financial Accounting (US GAAP)
Research Associate
Aurora’s P. G. College, Chikadapally,
HYDERABAD – 500020.
subashtalatam@rediffmail.com

Back