Also referred to as yield management, revenue management can be described in extremely simplistic terms (selling the right product, to the right customer, at the right price, through the right channel) or defined in a more complex manner. Brought mainstream by industries like hospitality and airlines, revenue management is a discipline that combines data mining, analytics, and operations research to understand customer behavior. This is why companies large and small are taking stock of revenue trends and reviewing historical data to harness the advantages of revenue management. The results are then used to gain a competitive advantage by predicting future purchasing behaviors.
Broadly speaking, revenue management is about setting prices based on supply and demand, as well as consumers’ willingness to pay. You need an in-depth understanding of your target market’s perception of the products and services you offer. Further, you need to accurately predict consumer behavior and use this knowledge to optimize product/service availability.
What if you have a software as a service (SaaS) subscription-based business? How can you leverage revenue management to differentiate your offerings, reduce operational costs, maximize profitability, and improve the customer experience? When revenue management is utilized correctly, the results are typically customer loyalty and improved profitability.
Dig Deeper into the Advantages of Revenue Management
The success of your revenue management strategy starts with your ability to accurately determine product or service price alignment, availability, and distribution for each of your customer segments. As we peel back the layers and revenue management definition, we find six distinct but interwoven components. Let’s explore these components as well as some revenue management examples in the real world:
1) Know your target markets’ expectations
To better understand your target markets’ expectations, revenue management requires extensive research. Ongoing research not only keeps you apprised of customer expectations but provides the insights needed to modify your products or services and/or develop new offerings to meet changing customer needs.
For example, a hotel that caters to business travelers determines that their clientele expects high-speed internet access, complimentary breakfast, laundry services, and an onsite gym. To meet their needs, increase bookings, and boost profitability, the hotel may offer packages that consist of fast and reliable Wi-Fi, breakfast buffets, complimentary laundry services, and off-hour access to the gym and sauna.
2) Segment the market
The right revenue management strategy enables you to gain insights into your target market, as well as investigate the availability of new market segments you can target. For example, let’s look at Apple. Traditionally they sold electronic equipment to consumers in the way of computers, phones, earbuds, etc. They now offer digital app subscriptions to services like MyFitnessPal to help customers utilize those electronics to improve their overall health.
3) Price competitively
Of course, one of the primary goals of your revenue management strategy is to gain the knowledge needed to price your offerings competitively, while increasing profitability. Even medical device companies are now offering both physical and digital products. Previously, hospitals and clinics would purchase medical imaging equipment outright – something that can be very costly. Now, these companies can provide the equipment for a minimal monthly fee instead.
4) Foster collaboration
The revenue management strategy you create must be shared and implemented across the company. From marketing and sales to customer service, these are the employees who will use the strategy, develop marketing programs and advertisements, sell the products and services, and respond to customer service requests. Without a united front, the revenue management strategy that was so carefully created will, at best, provide mediocre results and at worst fail miserably – leaving revenue on the table.
5) Eliminate manual processes
Automating time-consuming and repetitive tasks not only reduces costly errors but frees resources to focus on revenue-generating tasks. In addition, by integrating demand data into forecasts and pricing recommendations you’re in a better position to manage your revenue management strategy more effectively.
6) Integrate technical solutions
Your ability to successfully accomplish the above five layers is largely dependent on whether your solutions are tightly integrated. With technology that’s integrated across disparate departments, your staff – regardless of their department or tasks – are contributing to the same revenue management goals. From a managerial perspective, they’ll be able to make more effective and accurate decisions.
Above we touched on competitive pricing, however this doesn’t mean developing static pricing that’s below market value. Let’s look at a few revenue management pricing strategies that are used by profitable companies across the globe.
Revenue Management Pricing Strategies
One of the, if not the most, important aspects of your revenue management strategy is to develop effective pricing. To help you determine the pricing strategy that’s right for your business, we’ve listed the ones that have high levels of success.
Usage-based pricing
Going back to our medical device example and offering different market segments different pricing packages, usage-based pricing allows you to scale prices based on exactly what a customer wants and will use. While they can provide the equipment for a minimal monthly fee, they could break down charges based on the overall number of images produced each month.
Dynamic pricing
This pricing model enables you to increase or decrease pricing in response to real-time data. For instance, if you have a supply surplus, decreasing costs will enable you to sell your extra goods. Alternatively, when demand exceeds supply, raising your prices allows you to charge a premium for the products or services. Essentially, dynamic pricing allows you to align rates to coincide with changing demand, maximizing your revenue potential.
Hybrid pricing
Why lock yourself into a single pricing scheme, when you can combine the most appropriate for your industry? Hybrid pricing gives you the ability to gather usage data from any source and automatically assign the rating in real time. This enables you to not only provide customers with the pricing options they want but allows you to mix and match the most lucrative pricing models.
While not every pricing strategy is suitable for every industry, today’s pricing models have been designed for virtually any use case. However, it needs to be noted that developing a pricing strategy isn’t a one-and-done initiative. It takes ongoing analysis to keep your pricing strategies in line with customer requirements, industry demand, product supply, costs, etc.
Understanding Churn and its Impact
Also known as attrition, churn typically refers to customers that discontinue doing business with the organization. Customer churn rate is a key metric (percentage) of lost customers during a specified time frame such as weekly, monthly, quarterly, or annually. From a subscription-business perspective, the churn rate measures the percentage of a SaaS company’s existing customers that cancel their subscriptions during a specified time.
Calculating customer churn is a four-step process that consists of:
- Determining the time metric, e.g. weekly, monthly, quarterly, annually
- Learning the number of customers you had at the beginning of (the) period (BOP)
- Calculating the number of customers that churned by the end of (the) period (EOP)
- Dividing the number of churned customers by the number of customers at the beginning of the period
To illustrate, let’s assume that you began the first quarter with 1,000 subscribers. However, during the same quarter you lost 50 subscribers. The churn rate would be 5%.
50 / 1,000 = 0.05 x 100 = 5%
Once you have this percentage, you’re able to gain a better understanding of the company’s financial health and its long-term viability. Additionally, it provides clarity on the quality of the business, serves as an indicator as to whether customers are satisfied or dissatisfied, and provides a competitive comparison to gauge an acceptable level of churn.
While the above is an easy churn calculation, there are more sophisticated methods of calculating churn. Let’s look at some other churn rate formulas.
Gross revenue churn rate
Since not every customer provides equal revenue, gross revenue churn rate provides additional insight into how customer churn affects profitability. This metric is typically used by SaaS companies, as well as other subscription-based businesses that measure monthly recurring revenue (MRR).
Let’s assume that you want to measure revenue churn for the month of May. We’ll also assume that your business had an MRR of $150,000, and during May you lost $1,500. Your gross revenue churn rate for May would be 1%.
$1,500 / $150,000 = 0.01 x 100 = 1%
Adjusted churn rate
Used by rapidly growing companies, adjusted churn rate considers the number of customers at the start of the time metric, the number at the end of the time metric, and the number that churned during that period.
To illustrate, let’s assume that you had 3,000 customers at the start of the period, at the end of the time period you had 4,500 customers, and during that time 50 customers churned. Your adjusted churn rate for that time period would be 1.33%
(50 / [(3,000 + 4,500 / 2)]) x 100 = 1.33%
Seasonal churn rate
Some industries like retail stores experience purchasing peaks and valleys – think holiday shopping from Thanksgiving through Christmas Eve. The seasonal churn rate calculation helps in determining churn rates for busy and slow periods, as well as annual churn.
For example, let’s say that your total number of customers during your busy season is 2,500 and during that time period your churn rate is 1%. During your slow periods you have 1,000 customers with a churn rate of 5%. Your annual churn rate percentage would be 2.14%
{[(2,500 x 1%) + (1,000 x 5%)] / (2,500 + 1,000)} x 100 = 2.14%
Customer churn can further be segmented into:
Voluntary churn
The most basic, voluntary churn takes place when a customer cancels the contract prior to the contract end date. Reasons for voluntary churn include financial issues, dissatisfaction with products/services, poor customer service/experience, lack of personalization, better offer from the competition, and diminishing value.
Involuntary churn
This type of churn takes place when the company severs the relationship with the customer. Reasons for involuntary churn are fraudulent activity, lack of payment, and the inability to reach the customer for contract renewal.
Revenue churn
This type of churn speaks to gross revenue churn where it is not about the loss of the customer but revenue loss due to product/service downgrades. This type of churn can quickly be calculated using the following formula.
Revenue lost during a period
_______________________ x 100 = % of churn
Total revenue during the period
While churn typically carries negative connotations, negative churn is mainly positive. When the churn calculation result is negative, it usually means that revenue has increased, even though product/service cancellations had occurred.
Why Churn Occurs
As touched upon previously, churn occurs for many reasons – some controllable and some not. Churn rates are impacted by several elements. Here’s some of the most common factors that contribute to high churn rates.
- Lackluster experiences throughout the customer journey
- Inadequate or disappointing product/service experiences
- Misalignment between cost and value
- Economic conditions that affect budgets
- Perception that offerings are too expensive
- Product/service no longer meets customer needs
- Competition offers a more attractive product/service at the same or lower price
- Product/service has features/functionality the customer doesn’t need
- Offerings lack innovation and become stale
How to Lessen the Impact of Churn
To lessen churn rates and resulting revenue loss, there’s an increasing necessity for businesses to be agile. This includes product/service functionality and features, innovation, pricing and value alignment, and importantly to have a good understanding of customer needs.
Other ways to keep churn rates low and reduce its impact on MRR and annual recurring revenue (ARR) include:
- Develop flexible pricing structures like short-term contracts, discounted plans, and scaled pricing tiers
- Ensure that pricing aligns with value
- Personalize offerings beyond standard features and functionality
- Ensure onboarding new customers is a seamless process
- Provide product training and exceptional support
- Offer one-on-one consultancy services to top-tier customers
- Contact customers that have canceled their contracts before the end of the subscription period to understand their reason(s) and offer incentives to entice them to return
- Offer longer contract periods, e.g. 12 months versus monthly
- Incentivize customers with contract upgrades, cross-sells and upsells
- Improve products to enhance the experience
- Identify at-risk customers and proactively offer incentives such as special offers, enhanced support, and down-sell alternatives
- Make customer loyalty a priority across all customer-facing business units
Regardless of the industry, churn is inevitable. However, by keeping your finger on the pulse of churn rates you’ll be able to proactively reduce churn rates.
Take Revenue Management to the Next Level
In the past, revenue management was primarily focused on price. Today, however, product/services, customer experience, offering value, and timing are equally important. If we narrow this further, the customer experience is the most impactful way to lessen customer churn.
However, many companies, especially those using basic billing solutions, struggle with the revenue management process. There are five core pillars a revenue management system needs to provide.
- Configure and Sell: This pillar includes products and pricing (product catalog, pricing/rating, and packages and bundles) and configure, price, quote (CPQ) (rules-based configuration, customer-specific pricing, branded proposals, and approvals).
- Bill and Invoice: This includes order management (subscription management, invoicing, taxation, and usage processing), as well as account management (account hierarchies, contract management, and partner settlements).
- Pay and Collect: This accounts receivable pillar includes payments, cash app, and payment retries.
- Recognize and Report: The revenue recognition pillar spans ASC 606/IFRS 15, revenue allocation, contract modifications, subledger, and general ledger.
- Sustain and Grow: The final pillar encompasses customer portal, extensible data model, integrations, business process management (BPM), security and control, global support, and reporting.
Revenue management is an ongoing process and when done right delivers faster time to market, competitive differentiation, and improved customer satisfaction.
BillingPlatform helps companies realize revenue for any type of product offering, from simple subscriptions to sophisticated usage-based pricing and everything in between. Our industry leading revenue management platform delivers a seamless quote to cash process that enables you to reduce operational costs, differentiate in the market, maximize profits, and improve the customer experience. Reach out to our experts today to learn more about how we can help.
