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Sa|es kevenue

"#$%&'()* +()#),& - "#./$ 0#$#)12&


Sa|es kevenue ls Lhe amounL of money LhaL a company acLually recelves durlng a speclflc perlod from lLs
normal buslness acLlvlLles, usually from Lhe sales of goods and servlces Lo cusLomers. lL lncludes dlscounLs
and deducLlons for reLurned merchandlse. Also called Lop llne" and gross lncome".

8evenue ls calculaLed by mulLlplylng Lhe prlce aL whlch goods or servlces are sold by Lhe number of unlLs
or amounL sold.

I|nanc|a| kat|os

Gross Marg|n ls a calculaLlon of revenue less cosL of goods sold, and ls used Lo deLermlne how well sales
cover dlrecL varlable cosLs relaLlng Lo Lhe producLlon of good

1hls number represenLs Lhe proporLlon of each dollar of revenue LhaL Lhe company reLalns as gross proflL.
lor example, lf a company's gross margln for Lhe mosL recenL quarLer was 33, lL would reLaln $0.33 from
each dollar of revenue generaLed, Lo be puL Lowards paylng off selllng, general and admlnlsLraLlve
expenses, lnLeresL expenses and dlsLrlbuLlons Lo shareholders.

1he levels of gross margln can vary drasLlcally from one lndusLry Lo anoLher dependlng on Lhe buslness.
lor example, sofLware companles wlll generally have a much hlgher gross margln Lhan a manufacLurlng
flrm.

Net marg|n
neL lncome/sales, or proflL margln, ls calculaLed by lnvesLors Lo deLermlne how efflclenLly a company
Lurns revenues lnLo proflLs

1he raLlo of neL proflLs Lo revenues for a company or buslness segmenL - Lyplcally expressed as a
percenLage - LhaL shows how much of each dollar earned by Lhe company ls LranslaLed lnLo proflLs. neL
marglns can generally be calculaLed as:

neL marglns wlll vary from company Lo company, and cerLaln ranges can be expecLed from lndusLry Lo
lndusLry, as slmllar buslness consLralnLs exlsL ln each dlsLlncL lndusLry. A company llke Wal-MarL has made
forLunes for lLs shareholders whlle operaLlng on neL marglns less Lhan 3 annually, whlle aL Lhe oLher end
of Lhe specLrum some Lechnology companles can run on neL marglns of 13-20 or greaLer.

MosL publlcly Lraded companles wlll reporL Lhelr neL marglns boLh quarLerly (durlng earnlngs releases)
and ln Lhelr annual reporLs. Companles LhaL are able Lo expand Lhelr neL marglns over Llme wlll generally
be rewarded wlLh share prlce growLh, as lL leads dlrecLly Lo hlgher levels of proflLablllLy.

3
8uslness Models



A bus|ness mode| descrlbes Lhe raLlonale of how an organlzaLlon creaLes, dellvers, and capLures value
(economlc, soclal, culLural, or oLher forms of value).

1he process of buslness model consLrucLlon ls parL of buslness sLraLegy

ln Lheory and pracLlce Lhe Lerm buslness model ls used for a broad range of lnformal and formal
descrlpLlons Lo represenL core aspecLs of a buslness, lncludlng purpose, offerlngs, sLraLegles,
lnfrasLrucLure, organlzaLlonal sLrucLures, Lradlng pracLlces, and operaLlonal processes and pollcles.




Sa|es kevenue

"#$%&'()* +()#),& - "#./$ 0#$#)12&
kevenue Mode|
A revenue model descrlbes how a buslness generaLes revenues from lLs producLs and servlces. A key
componenL of Lhe buslness model. ls Lhe sLraLegy a company employs Lo generaLe cash from every
cusLomer segmenL

LxlsLlng buslnesses lnLeresLed ln expandlng Lo new areas or ad[usLlng Lo a new generaLlon of compeLlLors
should carefully conslder Lhelr revenue models. A sLrong revenue model ls also mosL lmporLanL for early
sLage sLarLups, Lhelr lnvesLors are usually very consclous of moneLlzaLlon.

1here are many models for revenue generaLlon, and Lhe acceleraLed developmenL of Lhe lnLerneL, soclal
neLworks and smarLphones ls expandlng Lhe posslblllLles. LlsLed below are 26 common revenue model
Lypes and examples of Lhelr effecLlve use. lL does noL conLaln all posslble models (or offer a slngle revenue
model LemplaLe) and Lhere may be some overlaps, derlvaLlves, and comblnaLlons, however, lL's a good
place Lo sLarL.
llnally, we musL dlsLlngulsh beLween declslons abouL revenue models (e.g., monLhly subscrlpLlon vs. pay
per LransacLlon) and prlclng declslons (prlce of $10 vs. $30). rlclng ls lmporLanL, Powever, prlclng ls noL
Lhe Loplc of Lhls lecLure.


8evenue models - nlne ma[or caLegorles:

A. Commerce and reLall

8. SubscrlpLlons and usage fees

C. Llcenslng

u. AucLlons and blds

L. AdverLlslng

l. uaLa

C. 1ransacLlons/lnLermedlaLlon

P. lreemlum

l. 8evenue model Lypes common ln flnanclal servlces lndusLry


4
Commerce & keta||
hyslcal goods have been sold as long as markeLs have exlsLed, laLer, servlces were offered, Loo. ln recenL
decades, dlglLal producLs have also been developed.
1he baslcs of selllng Lo prlvaLe cllenLs (82C) and buslness cllenLs (828) are slmllar. usually, ma[or
challenges may lnclude:
1urnlng a one-Llme sale lnLo a repeaL sale or lnLo a pre-sale of fuLure producLs (e.g. addlng Lhe cusLomer
Lo Lhe flrm's loyalLy club)
Addlng exLra componenLs Lo a baslc producL (e.g. lnsurance, flnanclng, exLended warranLy, and premlum
accessorles offered Lo car buyers)
Selllng a producL LhaL bonds Lhe cusLomers (classlc examples: razors and blades, prlnLers and
lnk carLrldges)
llndlng a way Lo prlce wlLh premlum Lo markeL segmenLs LhaL are wllllng Lo pay for Lhe addlLlonal value
(e.g. flrsL class on alrllnes)

1) Se|||ng phys|ca| goods
1he LradlLlonal reLall world (hlgh-sLreeL sLores and malls) changed ln Lhe 90's when companles llke
Amazon emerged and, due Lo savlngs on expenslve real esLaLe cosLs, offered Lhrough e-commerce lower
prlces Lhan sLores dld.

2) Se|||ng d|g|ta| products
ulglLal goods can be downloaded and consumed lnsLanLly and usually have nelLher addlLlonal producLlon,
shlpplng or lnvenLory cosLs nor ma[or quanLlLy llmlLaLlons. ulglLal producLs lnclude, for example, songs,
e8ooks, games and apps for smarLphones and LableLs.

3) A serv|ce so|d per un|t
1he work-hour ls common among lawyers, accounLanLs, consulLanLs, l1 lnLegraLors, eLc. 1hls model also
exlsLs on plaLforms such as CeL A lreelancer and Llance.
CLher wldespread unlLs lnclude dlsLance (Laxl rldes), welghL (parcel shlpmenL), and bandwldLh (lnLerneL
servlce provlders).

4) A serv|ce w|th f|xed pr|ce
Movle LlckeLs cosL Lhe same amounL regardless of Lhe movle's lengLh and quallLy or Lhe seaL's locaLlon.
Women's halr salons sell dlfferenL servlces for seL prlces: sLyllng, colorlng eLc.
A currenL example: llverr, a markeLplace where a wlde range of small servlces (called 'glgs') - from
LranslaLlons and edlLlng Lo graphlc deslgn and markeLlng - are offered for $3 each! #$ %&$' ()*+ ,#-'..
'/01$2'2 34' 566'.#$78 35 1985 #$:9&2' 7#78 1;5-' <=>?

S) Sa|e of serv|ces for future use
1hese lnclude pre-pald phone cards or credlLs for usage of phoLos from royalLy-free slLes llke lSLockphoLo,
where prlce per unlL decreases as Lhe quanLlLy purchased grows (Lhe seller en[oys recelvlng Lhe deal's
proceeds before usage).

6) Da||y dea|s ] f|ash sa|es
ually deals (wlLh players llke @.5&05$) were Lrendy noL long ago. Consumers galn an opporLunlLy Lo
purchase lLems aL a sLeep dlscounL, suppllers sell large quanLlLles vla Lhe coupon company, allowlng Lhem
Lo reduce markeLlng, sales and lnvenLory cosLs.

7) Subscr|pt|ons
1hls model has exlsLed for long Llme (e.g. newspapers, magazlnes, gym). lL galned popularlLy ln oLher
domalns, Loo: sofLware (once domlnaLed by Lhe llcenslng model), movles (offered by neLfllx), moblle
carrlers, and oLhers.
Some subscrlpLlon schemes offer unllmlLed usage, oLhers have a speclfled cap above whlch Lhey charge a
hlgher raLe.
Sa|es kevenue

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8) Usage fees
ln Lhls model, Lhe greaLer Lhe usage, Lhe hlgher Lhe paymenL. LlecLrlclLy, waLer, and gas bllls fall lnLo Lhls
caLegory. unLll recenLly, moblle phone carrlers ofLen used Lhls model Lo charge for mlnuLes of ouLbound
calls and quanLlLles of SMS LexL messages.

9) kenta|
8enLal enables mulLlple cusLomers Lo en[oy Lhe same asseL aL varlous Llmes. usually, renL ls prlced per
unlL of Llme (e.g., Lhe LradlLlonal A-#8 and B'.3C model of dally and weekly renLals). new-generaLlon
players llke D#0:1. renL by Lhe hour.

C. L|cens|ng
1hls used Lo be a common revenue model for sofLware players. Powever, wlLh Lhe emerglng Lrend of
SAAS, llcenslng became less aLLracLlve (compared wlLh Lhe subscrlpLlons model).

10) L|cense of usage
1hls ls a common model ln lnLellecLual roperLy (paLenLs, copyrlghLs, Lrademarks). 1he llcense ls usually
llmlLed by Llme, LerrlLory, Lypes of producLs, volume, eLc.

11) Cert|f|cat|ons
A sllghLly dlfferenL varlaLlon ls Lhe usage of cerLlflcaLes. lor example, Lhe McAfee SLCu8L LrusL mark for
lnLerneL webslLes.

12) Auct|ons
1he LradlLlonal aucLlon lndusLry, led by brands such as E534';FG8 and H4.#83#'G8, changed ln Lhe '90s wlLh
Lhe launch of e8ay. lL offered an onllne plaLform Lo connecL buyers and sellers. rlce ls deLermlned ln a
publlc aucLlon, and e8ay generaLes revenues from a varleLy of fees.
LaLely, Lhere ls a Lrend of lmmedlaLe flxed-prlce sales (compared Lo aucLlons) on e8ay, lmplylng posslble
change ln users' preferences.

13) Dynam|c pr|c|ng
Sponsored search resulLs on Coogle's search englne, based on search keywords, are purchased Lhrough
Lhe A2I5.28 sysLem, whlch ls based on dynamlc prlclng. 1he larger Lhe demand for keywords, Lhe hlgher
Lhe cosL per cllck.

L. Advert|s|ng
1he adverLlslng revenue model ls noL new. Powever, Lhe once-sLralghLforward adverLlsemenLs have
become more complex and creaLlve, and Lhe lndusLry evolves consLanLly.
AddlLlonally, due Lo consLanL growLh ln lnformaLlon and lLs avallablllLy, large-scale revenue generaLlon
requlres elLher greaL Lrafflc or nlche domlnaLlon.
1he lnLerneL world has many adverLlslng models: pay-per-vlews (CM) as well as pay for behavlor (cllcks)
llke CC and CA. We wlll noL dwell on Lhem ln Lhls posL.

14) Advert|sements (e.g., text, banners, v|deo)
ln Lhe pasL, adverLlsemenLs appeared only ln LradlLlonal medla such as newspapers, magazlnes, blllboards,
Lelevlslon and radlo. 1oday, by deflnlLlon, adverLlslng also lncludes Lhe lnLerneL and expands onLo apps
and moblle plaLforms.

1S) romoted content
unllke ads, promoLed conLenL (also known as 'sponsored' or 'suggesLed' conLenL) looks slmllar Lo regular
user conLenL. users may glve lL more aLLenLlon or percelve lL as more credlble Lhan oLher adverLlsemenLs,
some users may even be obllvlous Lo Lhe facL LhaL someone pald Lo promoLe Lhe conLenL.
1hls model ls common on soclal neLworks such as ,1:';55J and KI#33'. as well as webslLes llke L'90.
5

16) Sponsorsh|ps
Companles may sponsor, for example, sporLs evenLs, convenLlons, webslLes, and 1Lu Lalks.

17) Databases
Plgh-quallLy daLa (e.g. an lndex of quallfled servlce provlders ln a speclflc domaln) ls valuable.
1he more excluslve Lhe lnformaLlon, Lhe greaLer Lhe value.
1he usage wlll be more valuable (and expenslve) when Lhe daLa ls enrlched wlLh profound analysls.
Some enLlLles speclallze ln lead generaLlon: creaLlng and malnLalnlng names and conLacL lnformaLlon of
poLenLlal cusLomers and selllng Lhem Lo 3
rd
parLles.
lL should be menLloned LhaL for venLures such as Coogle, 1wlLLer and lacebook, whlch aggregaLe hlgh
quanLlLles of daLa abouL users, Lhe revenue englne ls noL sales of daLabases Lo 3
rd
parLles. 8aLher, Lhese
slLes focus on adverLlsemenLs based on cusLomer daLa. 1he ldea of aggregaLlng and uslng daLa abouL
users who do noL pay for Lhe servlces ls Lhe orlgln of Lhe phrase, 'lf you are noL paylng for Lhe producL,
you are noL Lhe cusLomer, you are Lhe producL belng sold.'

18) 8rokerage
1he lnLerneL and oLher Lechnologlcal and soclal developmenLs hurL many lnLermedlarles, and Lhe fuLure
of mlddlemen ls quesLlonable. Powever, mlddlemen sLlll have some lmporLanL roles ln connecLlng parLles
(fees are usually calculaLed by percenLage of Lhe LransacLlon, buL Lhere ls someLlmes also a mlnlmum
paymenL.). 8eal esLaLe brokers and M&A lnvesLmenL bankers fall lnLo Lhls caLegory of lnLermedlarles.

19) 1ransact|on enab|ers
Some enLlLles enable LransacLlons beLween oLher parLles. Pere, Loo, Lhe fee ls usually a speclflc percenL of
Lhe deal. lor example, M1FM19 enables paymenLs LhaL mlnlmlze credlL rlsk (for sellers) and lncrease
lnformaLlon and purchase securlLy (for buyers).

20) Aff|||ate rograms
1yplcal afflllaLe programs, common ln lnLerneL markeLlng (from huge players llke Amazon Lo small-scale
blogs), lnclude sellers of producLs/servlces and parLles LhaL drlve Lrafflc Lo Lhe sellers. Some afflllaLes
expllclLly sLaLe LhaL llnks Lo 3
rd
parLles may enLlLle Lhem Lo compensaLlon.
AfflllaLe programs ofLen use revenue-sharlng mechanlsms (30/30, or anoLher agreed upon revenue
allocaLlon). CLhers may use dlfferenL compensaLlon mechanlsms such as CM, CC and CA (menLloned
earller).

21) Creat|ng a p|atform ] marketp|ace
1he lnLerneL creaLes a unlque and excellenL opporLunlLy Lo easlly connecL sellers wlLh consumers:
A#.;$; enables homeowners Lo offer accommodaLlon Lo LourlsLs who are noL lnLeresLed ln hoLels
N38F llnks arLlsLs and arL seekers
HO;1;F does Lhe same wlLh muslc
1he plaLform manager usually malnLalns and upgrades Lhe plaLform and Lakes care of cusLomer servlce,
paymenL collecLlon, medlaLlon, eLc. Alrbnb also offers lnsurance. laLform managers usually are noL
lnvolved ln creaLlng Lhe producL shlpmenL and do noL hold lnvenLorles.
1he revenue model ls usually a speclflc percenL of Lhe deal (Apple's l1unes and App sLore Lake a 30 cuL
of each sale).
Some markeLplace coordlnaLors collecL from boLh parLles Lo Lhe LransacLlon, oLhers collecL from only one
parLy (whlch subsldlzes Lhe oLher parLy).
Some plaLform managers (llke P#:J831.3'.) are enLlLled Lo revenues only lf Lhe deslred deal ls fulfllled.


Sa|es kevenue

"#$%&'()* +()#),& - "#./$ 0#$#)12&
n. Ireem|um
1he lreemlum model has en[oyed much success ln Lhe lasL decade, alLhough recenLly Lhere ls a debaLe
wheLher Lhe lreemlum days are over.
1he lreemlum ldea ls based on provldlng a baslc verslon of Lhe producL for free and charglng a premlum
for Lhe full verslon. usually, few cusLomers buy Lhe premlum verslon.
8uslness models lnvolvlng lreemlum are very common, especlally for provlders of moblle appllcaLlons,
whlch generaLe huge revenues Lhrough ln-app purchases and upgrades.
1here are several varlaLlons on Lhe lreemlum Lheme (Lo be deLalled below), and Lhere are some mlxLures
and derlvaLlves of Lhese archeLypes.

22) a|d vers|on w|thout advert|sements
Many games and appllcaLlons' free verslons lnclude (ofLen annoylng) adverLlsemenLs. 1he pald verslon
enables usage wlLhouL ads, Lhus lmprovlng Lhe user experlence. usually, Lhe revenues from upgrades
exceed Lhose generaLed by Lhe ads.

23) a|d vers|on w|thout restr|ct|ons
CfLen Lhe free verslon has usage llmlLaLlons: levels ln a game, sLorage volume, number of users, and
more. aylng for Lhe premlum verslon enables unresLrlcLed use. lL ls convenlenL, for example, for
wlreframe appllcaLlons ln whlch mock-ups should be shared beLween varlous members of a deslgn Leam.

24) a|d vers|on w|th add|t|ona| features
Cne of Lhe mosL effecLlve ways Lo generaLe revenue ls Lo sell speclflc feaLures and funcLlons LhaL are noL
lncluded ln Lhe baslc free verslon, such as addlLlonal llves" or excluslve weapons ln games.
1hls model ofLen maxlmlzes revenues per cusLomer, as loyal cusLomers may spend a loL for addlLlonal
feaLures.

I|nance products
1he flnanclal world, offerlng a unlque producL (l.e., money), has speclal Lypes of revenues.

2S. Interest revenues
8anks charge hlgher lnLeresL for loans Lhan Lhey glve for deposlLs. 1he gap beLween Lhese flgures, also
known as Lhe 'lnLeresL spread', should compensaLe for credlL rlsks and operaLlonal rlsks, and has
LradlLlonally been banks' maln source of revenues.
1oday, a new wave of onllne venLures, such as Zopa and lundlng Clrcle ln Lhe uk, presenLs a small-scale
alLernaLlve Lo banks. Slnce Lhey have a smaller workforce and no physlcal and cosLly branches, Lhese
enLerprlses may offer borrowers and deposlLors beLLer lnLeresL raLes Lhan full fledge banks do.

26. Asset management fees
AsseL managers, lnsLlLuLlonal lnvesLors and slmllar enLlLles LhaL manage lnvesLmenLs for Lhelr cllenLs make
Lhelr llvlng from fees. lor example:
ercenLage of Lhe overall cusLomer's asseLs belng managed
ercenLage of new money Lransfers by Lhe cusLomer Lo Lhe money manager
ercenLage of Lhe reLurns (also known as carrled lnLeresL) LhaL some lnvesLmenL professlonal generaLe ln
excess of an agreed upon hurdle raLe.
8ecenLly we wlLness also new players (for example, nuLmeg) offerlng onllne lnvesLmenL servlces ln reLurn
for a speclflc percenL of Lhe managed asseLs.


6
kCI

A performance measure used Lo evaluaLe Lhe efflclency of an lnvesLmenL or Lo compare Lhe efflclency of a
number of dlfferenL lnvesLmenLs. 1o calculaLe 8Cl, Lhe beneflL (reLurn) of an lnvesLmenL ls dlvlded by Lhe
cosL of Lhe lnvesLmenL, Lhe resulL ls expressed as a percenLage or a raLlo.

1he reLurn on lnvesLmenL formula:
ln Lhe above formula "galns from lnvesLmenL", refers Lo Lhe proceeds obLalned from selllng Lhe
lnvesLmenL of lnLeresL. 8eLurn on lnvesLmenL ls a very popular meLrlc because of lLs versaLlllLy and
slmpllclLy. 1haL ls, lf an lnvesLmenL does noL have a poslLlve 8Cl, or lf Lhere are oLher opporLunlLles wlLh a
hlgher 8Cl, Lhen Lhe lnvesLmenL should be noL be underLaken.

keep ln mlnd LhaL Lhe calculaLlon for reLurn on lnvesLmenL and, Lherefore Lhe deflnlLlon, can be modlfled
Lo sulL Lhe slLuaLlon -lL all depends on whaL you lnclude as reLurns and cosLs. 1he deflnlLlon of Lhe Lerm ln
Lhe broadesL sense [usL aLLempLs Lo measure Lhe proflLablllLy of an lnvesLmenL and, as such, Lhere ls no
one "rlghL" calculaLlon.

lor example, a marketer may compare two d|fferent products by d|v|d|ng the gross prof|t that each
product has generated by |ts respect|ve market|ng expenses.

A f|nanc|a| ana|yst, however, may compare the same two products us|ng an ent|re|y d|fferent kCI
ca|cu|at|on, perhaps by d|v|d|ng the net |ncome of an |nvestment by the tota| va|ue of a|| resources that
have been emp|oyed to make and se|| the product.

1hls flexlblllLy has a downslde, as 8Cl calculaLlons can be easlly manlpulaLed Lo sulL Lhe user's purposes,
and Lhe resulL can be expressed ln many dlfferenL ways. When uslng Lhls meLrlc, make sure you
undersLand whaL lnpuLs are belng used.

?ou can use 8Cl ln several dlfferenL ways Lo gauge Lhe proflLablllLy of your buslness. lor lnsLance, you can
measure Lhe performance of your prlclng pollcles, lnvenLory lnvesLmenL, caplLal equlpmenL lnvesLmenL,
and so forLh. Some oLher ways Lo use 8Cl wlLhln your company are by:

ulvldlng neL lncome, lnLeresL, and Laxes by LoLal llablllLles Lo measure raLe of earnlngs of LoLal caplLal
employed.

ulvldlng neL lncome and lncome Laxes by proprleLary equlLy and flxed llablllLles Lo produce a raLe of
earnlngs on lnvesLed caplLal.

ulvldlng neL lncome by LoLal caplLal plus reserves Lo calculaLe Lhe raLe of earnlngs on proprleLary equlLy
and sLock equlLy.

Sa|es kevenue

"#$%&'()* +()#),& - "#./$ 0#$#)12&
rob|em

CASL 1A
An lnvesLor has shorLllsLed 2 lnvesLees.
lnvesLee A ls a resLauranL chaln, whlch requlres 8s 4 Crores Lo seL-up a resLauranL ln Mumbal. 1hey are
wllllng Lo payback 8s 1Crore every year for Lhe nexL 7 years from Lhe proflLs. 1hey clalm Lhe 8Cl Lo be 23
annually.
lnvesLee 8 ls a sLarL-up l1 roducL Company LhaL also requlres 8s 4 crores. 1hey are wllllng Lo offer a 23
equlLy sLake and clalm LhaL Lhe company would be valuaLed aL $30 mllllon ln Lhe nexL 7 years.
Compare Lhe Lwo lnvesLmenLs.

CASL 18
1he lnvesLor evenLually lnvesLs ln boLh Lhe buslnesses.
1he resLauranL does buslness as predlcLed ln Lhe flrsL four years. SLarLlng Lhe flfLh year Lhe sales show a
downward Lrend and Lhe lnvesLee can reLurn only 8s 73 lakhs ln Lhe 3
Lh
year & 8s 30 lakhs ln Lhe 6
Lh
year.
1he resLauranL shuLs down ln Lhe 7
Lh
year & Lhe lnvesLee cannoL reLurn any more money as he goes
bankrupL.
1he l1 roducL Company survlves Lhrough many ups & downs and ls made an offer of $10 mllllon for a
100 buyouL.
Compare Lhe Lwo lnvesLmenLs.

1A




18


78
8evenue ManagemenL

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Sa|es kevenue

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kevenue Management ls Lhe appllcaLlon of dlsclpllned analyLlcs LhaL predlcL consumer behavlor aL Lhe
mlcro-markeL level and opLlmlze producL avallablllLy and prlce Lo maxlmlze revenue growLh.

1he prlmary alm of 8evenue ManagemenL ls selllng Lhe rlghL producL Lo Lhe rlghL cusLomer aL Lhe rlghL
Llme for Lhe rlghL prlce. 1he essence of Lhls dlsclpllne ls ln undersLandlng cusLomers' percepLlon of
producL value and accuraLely allgnlng producL prlces, placemenL and avallablllLy wlLh each cusLomer
segmenL.

Cverv|ew
8uslnesses face lmporLanL declslons regardlng whaL Lo sell, when Lo sell, Lo whom Lo sell, and for how
much. 8evenue ManagemenL uses daLa-drlven LacLlcs and sLraLegy Lo answer Lhese quesLlons ln order Lo
lncrease revenue. 1he dlsclpllne of revenue managemenL comblnes daLa mlnlng and operaLlons research
wlLh sLraLegy, undersLandlng of cusLomer behavlor, and parLnerlng wlLh Lhe sales force. 1oday, Lhe
revenue managemenL pracLlLloner musL be analyLlcal and deLall orlenLed, yeL capable of Lhlnklng
sLraLeglcally and managlng Lhe relaLlonshlp wlLh sales.



1he kevenue Management Levers
Whereas yleld managemenL lnvolves speclflc acLlons Lo generaLe yleld Lhrough perlshable lnvenLory
managemenL, 8evenue ManagemenL encompasses a wlde range of opporLunlLles Lo lncrease revenue. A
company can uLlllze Lhese dlfferenL caLegorles llke a serles of levers ln Lhe sense LhaL all are usually
avallable, buL only one or Lwo may drlve revenue ln a glven slLuaLlon. 1he prlmary levers are:


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r|c|ng
1hls caLegory of 8evenue ManagemenL lnvolves redeflnlng prlclng sLraLegy and developlng dlsclpllned
prlclng LacLlcs. 1he key ob[ecLlve of a prlclng sLraLegy ls anLlclpaLlng Lhe value creaLed for cusLomers and
Lhen seLLlng speclflc prlces Lo capLure LhaL value. A company may declde Lo prlce agalnsL Lhelr
compeLlLors or even Lhelr own producLs, buL Lhe mosL value comes from prlclng sLraLegles LhaL closely
follow markeL condlLlons and demand, especlally aL a segmenL level. Cnce a prlclng sLraLegy dlcLaLes whaL
a company wanLs Lo do, prlclng LacLlcs deLermlne how a company acLually capLures Lhe value. 1acLlcs
lnvolve creaLlng prlclng Lools LhaL change dynamlcally, ln order Lo reacL Lo changes and conLlnually
capLure value and galn revenue. rlce CpLlmlzaLlon, for example, lnvolves consLanLly opLlmlzlng mulLlple
varlables such as prlce senslLlvlLy, prlce raLlos, and lnvenLory Lo maxlmlze revenues. A successful prlclng
sLraLegy, supporLed by analyLlcally-based prlclng LacLlcs, can drasLlcally lmprove a flrm's proflLablllLy.

Inventory
When focused on conLrolllng lnvenLory, 8evenue ManagemenL ls malnly concerned wlLh how besL Lo
prlce or allocaLe capaclLy. llrsL, a company can dlscounL producLs ln order Lo lncrease volume. 8y lowerlng
prlces on producLs, a company can overcome weak demand and galn markeL share, whlch ulLlmaLely
lncreases revenue so long as each producL sells for more Lhan lLs marglnal cosL. Cn Lhe oLher hand, ln
slLuaLlons where demand ls sLrong for a producL buL Lhe LhreaL of cancellaLlons looms (e.g. hoLel rooms or
alrllne seaLs), flrms ofLen overbook ln order Lo maxlmlze revenue from full capaclLy. Cverbooklng's focus
ls lncreaslng Lhe LoLal volume of sales ln Lhe presence of cancellaLlons raLher Lhan opLlmlzlng cusLomer
mlx.

Market|ng
rlce promoLlon allows companles Lo sell hlgher volumes by Lemporarlly decreaslng Lhe prlce of Lhelr
producLs. 8evenue ManagemenL Lechnlques measure cusLomer responslveness Lo promoLlons ln order Lo
sLrlke a balance beLween volume growLh and proflLablllLy. An effecLlve promoLlon helps maxlmlze
revenue when Lhere ls uncerLalnLy abouL Lhe dlsLrlbuLlon of cusLomer wllllngness Lo pay. When a
company's producLs are sold ln Lhe form of long-Lerm commlLmenLs, such as lnLerneL or Lelephone
servlce, promoLlons help aLLracL cusLomers who wlll Lhen commlL Lo conLracLs and produce revenue over
a long Llme horlzon. When Lhls occurs, companles musL also sLraLeglze Lhelr promoLlon roll-off pollcles,
Lhey musL declde when Lo begln lncreaslng Lhe conLracL fees and by whaL magnlLude Lo ralse Lhe fees ln
order Lo avold loslng cusLomers. 8evenue ManagemenL opLlmlzaLlon proves useful ln balanclng
promoLlon roll-off varlables ln order Lo maxlmlze revenue whlle mlnlmlzlng churn.

Channe|s
8evenue ManagemenL Lhrough channels lnvolves sLraLeglcally drlvlng revenue Lhrough dlfferenL
dlsLrlbuLlon channels. ulfferenL channels may represenL cusLomers wlLh dlfferenL prlce senslLlvlLles. lor
example, cusLomers who shop onllne are usually more prlce senslLlve Lhan cusLomers who shop ln a
physlcal sLore. ulfferenL channels ofLen have dlfferenL cosLs and marglns assoclaLed wlLh Lhose channels.
When faced wlLh mulLlple channels Lo reLallers and dlsLrlbuLors, 8evenue ManagemenL Lechnlques can
calculaLe approprlaLe levels of dlscounLs for companles Lo offer dlsLrlbuLors Lhrough opaque channels Lo
push more producLs wlLhouL loslng lnLegrlLy wlLh respecL Lo publlc percepLlon of quallLy.

Sa|es kevenue

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1he kevenue Management rocess
Data Co||ect|on
1he 8evenue ManagemenL process beglns wlLh daLa collecLlon.
8elevanL daLa are paramounL Lo a 8evenue ManagemenL SysLem's capablllLy Lo provlde accuraLe,
acLlonable lnformaLlon. A sysLem musL collecL and sLore hlsLorlcal daLa for lnvenLory, prlces, demand, and
oLher causal facLors. Any daLa LhaL reflecLs Lhe deLalls of producLs offered, Lhelr prlces, compeLlLlon, and
cusLomer behavlor musL be collecLed, sLored, and analyzed. ln some markeLs, speclallzed daLa collecLlon
meLhods have rapldly emerged Lo servlce Lhelr relevanL secLor, and someLlmes have even become a
norm. ln Lhe Luropean unlon for example, Lhe Luropean Commlsslon makes sure buslnesses and
governmenLs sLlck Lo Lu rules on falr compeLlLlon, whlle sLlll leavlng space for lnnovaLlon, unlfled
sLandards, and Lhe developmenL of small buslnesses. 1o supporL Lhls, Lhlrd parLy sources are uLlllzed Lo
collecL daLa and make only averages avallable for commerclal purposes, such as ls Lhe case wlLh Lhe hoLel
secLor - ln Lurope and Lhe Mlddle LasL & norLh Afrlca reglon, where key operaLlng lndlcaLors are
monlLored, such as Cccupancy 8aLe (C8), Average ually 8aLe (Au8) and 8evenue per Avallable 8oom
(8evA8). uaLa ls supplled dlrecLly by hoLel chalns and groups (as well as lndependenL properLles) and
benchmark averages are produced by dlrecL markeL (compeLlLlve seL) or wlder macro markeL. 1hls daLa ls
also uLlllzed for flnanclal reporLlng, forecasLlng Lrends and developmenL purposes. lnformaLlon abouL
cusLomer behavlor ls a valuable asseL LhaL can reveal consumer behavloral paLLerns, Lhe lmpacL of
compeLlLors' acLlons, and oLher lmporLanL markeL lnformaLlon. 1hls lnformaLlon ls cruclal Lo sLarLlng Lhe
8evenue ManagemenL process

Segmentat|on
AfLer collecLlng Lhe relevanL daLa, markeL segmenLaLlon ls Lhe key Lo markeL-based prlclng and revenue
maxlmlzaLlon. Success hlnges on Lhe ablllLy Lo segmenL cusLomers lnLo slmllar groups based on a
calculaLlon of prlce responslveness of cusLomers Lo cerLaln producLs based upon Lhe clrcumsLances of
Llme and place. 8evenue ManagemenL sLrlves Lo deLermlne Lhe value of a producL Lo a very narrow mlcro-
markeL aL a speclflc momenL ln Llme and Lhen charL cusLomer behavlor aL Lhe margln Lo deLermlne Lhe
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maxlmum obLalnable revenue from Lhose mlcro-markeLs. useful Lools such as ClusLer Analysls allow
8evenue Managers Lo creaLe a seL of daLa-drlven parLlLlonlng Lechnlques LhaL gaLher lnLerpreLable groups
of ob[ecLs LogeLher for conslderaLlon. MarkeL segmenLaLlon based upon cusLomer behavlor ls essenLlal Lo
Lhe nexL sLep, whlch ls forecasLlng demand assoclaLed wlLh Lhe clusLered segmenLs.

Iorecast|ng
8evenue ManagemenL requlres forecasLlng varlous elemenLs such as demand, lnvenLory avallablllLy,
markeL share, and LoLal markeL. lLs performance depends crlLlcally on Lhe quallLy of Lhese forecasLs.
lorecasLlng ls a crlLlcal Lask of 8evenue ManagemenL and Lakes much Llme Lo develop, malnLaln, and
lmplemenL. CuanLlLy-based forecasLs, whlch use Llme-serles models, booklng curves, cancellaLlon curves,
eLc., pro[ecL fuLure quanLlLles of demand, such as reservaLlons or producLs boughL. rlce-based forecasLs
seek Lo forecasL demand as a funcLlon of markeLlng varlables, such as prlce or promoLlon. 1hese lnvolve
bulldlng speclallzed forecasLs such as markeL response models or cross-prlce elasLlclLy esLlmaLes Lo
predlcL cusLomer behavlor aL cerLaln prlce polnLs. 8y comblnlng Lhese forecasLs wlLh calculaLed prlce
senslLlvlLles and prlce raLlos, a 8evenue ManagemenL SysLem can Lhen quanLlfy Lhese beneflLs and
develop prlce opLlmlzaLlon sLraLegles Lo maxlmlze revenue.

Cpt|m|zat|on
Whlle forecasLlng suggesLs whaL cusLomers are llkely Lo do, opLlmlzaLlon suggesLs how a flrm should
respond. CfLen consldered Lhe plnnacle of Lhe 8evenue ManagemenL process, opLlmlzaLlon ls abouL
evaluaLlng mulLlple opLlons on how Lo sell your producL and Lo whom Lo sell your producL. CpLlmlzaLlon
lnvolves solvlng Lwo lmporLanL problems ln order Lo achleve Lhe hlghesL posslble revenue. 1he flrsL ls
deLermlnlng whlch ob[ecLlve funcLlon Lo opLlmlze. A buslness musL declde beLween opLlmlzlng prlces,
LoLal sales, conLrlbuLlon marglns, or even cusLomer llfeLlme values. Secondly, Lhe buslness musL declde
whlch opLlmlzaLlon Lechnlque Lo uLlllze. lor example, many flrms uLlllze llnear programmlng, a complex
Lechnlque for deLermlnlng Lhe besL ouLcome from a seL of llnear relaLlonshlps, Lo seL prlces ln order Lo
maxlmlze revenue. 8egresslon analysls, anoLher sLaLlsLlcal Lool, lnvolves flndlng Lhe ldeal relaLlonshlp
beLween several varlables Lhrough complex models and analysls. ulscreLe cholce models can serve Lo
predlcL cusLomer behavlor ln order Lo LargeL Lhem wlLh Lhe rlghL producLs for Lhe rlghL prlce. 1ools such as
Lhese allow a flrm Lo opLlmlze lLs producL offerlngs, lnvenLory levels, and prlclng polnLs ln order Lo achleve
Lhe hlghesL revenue posslble.

Dynam|c ke-eva|uat|on
8evenue ManagemenL requlres LhaL a flrm musL conLlnually re-evaluaLe Lhelr prlces, producLs, and
processes ln order Lo maxlmlze revenue. ln a dynamlc markeL, an effecLlve 8evenue ManagemenL SysLem
consLanLly re-evaluaLes Lhe varlables lnvolved ln order Lo move dynamlcally wlLh Lhe markeL. As mlcro-
markeLs evolve, so musL Lhe sLraLegy and LacLlcs of 8evenue ManagemenL ad[usL.


Sa|es kevenue

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8evenue managemenL (8M) ls Lhe process of evaluaLlng and flndlng beLLer soluLlons for brlnglng ln
addlLlonal (marglnal) revenue. unllke many of Lhe more popular quallLy lnlLlaLlves, such as lean
producLlon (dolng more wlLh less) and Slx Slgma, 8M orlenLs Lhe workforce Loward Lop-llne growLh, whlch
can geL losL ln error and wasLe-reducLlon sLraLegles. Ior kM to be effect|ve, however, certa|n cond|t|ons
must be met.

I|xed Costs
llxed cosLs are cosLs Lhe organlzaLlon musL pay regardless of Lhe amounL of producLlon, lncludlng
overhead cosLs, salarles, uLlllLles and renL. 1he hlgher Lhls LoLal, Lhe more effecLlve 8M wlll be. use 8M
here Lo galn more lnslghL on whaL lL Lakes Lo lncrease proflLs as addlLlonal revenue, earned over flxed
cosLs, conLrlbuLes dlrecLly Lo overall proflLablllLy.


1|me Irame
ueLermlne lf Lhe resources you sell have a Llme llmlL. 1haL ls, does your producL lose value aL some polnL?
lf so, Lhere ls also a Llme llmlL for sales. 1he more perlshable Lhe resources are LhaL are sold, Lhe more you
can beneflL from 8M sLraLegles. lf your producL ls noL perlshable, use 8M less and focus on
loglsLlcs. volume vs. CosLs
Some cusLomers are wllllng Lo pay a dlfferenL prlce for Lhe same producL. lf so, 8M wlll be a more
effecLlve Lool. lf noL, Lhe lssue ls more speclflc Lo Lhe producL and you wlll need Lo develop a dynamlc
prlclng sLraLegy Lrlggered by volume raLher Lhan cosLs.

W||||ngness 1o ay
ConcenLraLe 8M on "wllllngness Lo pay" acLlvlLles. 1he cusLomer's wllllngness Lo pay, deflned ln Lerms of
speed of purchase and purchase prlce, should be Lhe prlmary focus area. MarkeLlng, adverLlslng and
brandlng wlll become key ln Lhese efforLs, as wlll human resources ln anclllary deparLmenLs relaLed Lo
human caplLal.

Iocus
SLay focused. 8emember Lhe goal of 8M ls Lo lncrease marglnal revenue by achlevlng a hlgher reLurn over
your flxed cosLs. Managlng flxed cosLs, Lracklng perlshable producLs and developlng a dynamlc prlclng
schema wlll help your organlzaLlon maxlmlze revenue managemenL efforLs.

now to Use kevenue Management
8evenue managemenL---also known as yleld managemenL ln Lhe buslness envlronmenL---ls a process
companles use Lo lncrease Lhelr sales of flxed, perlshable resources. 1he Lwo classlc examples of Lhese
resource Lypes lnclude alrllne seaLs and hoLel rooms. Companles ln Lhese lndusLrles have a llmlLed selllng
perlod before Lhe goods lose value and creaLe a draln on resources. uslng revenue managemenL pracLlces
can help companles llmlL or prohlblL flnanclal loss from low sales.
1 Create a prof|t max|m|zat|on mode|. 1hls model help buslness owners and managers undersLand Lhe
mlnlmum number of lLems Lo sell ln order Lo break even. 8reaklng even lndlcaLes a company has made
enough money Lo pay all expenses wlLhouL earnlng a proflL. Alrllnes and hoLels use Lhese models Lo
calculaLe how many unlLs Lhey need Lo sell ln order Lo be proflLable.
2 Use coupons or d|scount pr|c|ng. As companles near Lhe deadllnes for selllng goods, companles ofLen
lower prlces uslng dlscounLs or coupons. 1hls helps companles earn some money even lf Lhey do noL meeL
sLandard gross proflL marglns. Alrllnes and hoLels use Lhls sLraLegy Lo lmprove cash flow and llmlL losL
proflL.
3 Cffer benef|ts for s|gn|ng up ear|y. Companles can offer consumers low-cosL beneflLs for drlvlng early
sales. 1hls allows companles Lo avold Lhe dlfflculL slLuaLlon of geLLlng Lo Lhe end of a selllng perlod and
havlng coplous amounLs of unsold seaLs or hoLel rooms. Cwners and managers may also offer oLher goods
or servlces aL a dlscounL, leadlng consumers Lo slgn up and purchase addlLlonal lLems.


75
What |s kevenue Ana|ys|s?
8evenue Analysls allows you Lo analyze and compare Lhe value of your users orlglnaLlng from dlfferenL ad
channels. ?ou can also analyze your users' spendlng behavlours whlch can help drlve your appllcaLlon
deslgn Lo maxlmlze revenue.

What va|ue does the kevenue Ana|ys|s br|ng?
8evenue Analysls ls lndlspensable for all companles regardless of Lhe producL's llfe sLage.
WlLh Lhls feaLure, you can conLlnuously evaluaLe and dlrecL your markeLlng sLraLegy, as well as measure
and analyze spendlng behavlour for appllcaLlon deslgn.

?ou can ask a varleLy of revenue-relaLed quesLlons wlLh 8evenue Analysls Lo help you answer crlLlcal
quesLlons, whlch lnclude buL are noL llmlLed Lo:
1. Whlch channel brlngs ln greaLer value?
2. WhaL spendlng behavlor dlfferences are Lhere beLween users and paylng users?
3. When are users paylng? AL whaL polnL ln Llme do Lhey pay more or less?
4. Whlch user groups are hlgh quallLy?
3. Are we brlnglng ln Lhe rlghL klnd of users (LhaL we wanL)?
6. uoes Lhe revenue curve change as l release new feaLures ln my app?
7. uoes Lhe revenue curve of my app change over Llme?

WheLher you are sLrlvlng for popularlLy or conLrol over spendlng behavlor for your appllcaLlon, Lhe
8evenue Analysls expands Lhe scope of revenue daLa so you can make well-lnformed and Llmely declslons.