Revenue Management And Its Importance for Railway Industry - Term Paper Example

REVENUE MANAGEMENT Contents Contents 2 2.3.Typology 6 0. Introduction 1. Revenue management Revenue management is the application of disciplined analytics that influences the consumer behavior at the micro-market level hence optimizing the availability of the product and price to maximize revenue growth (Huefner, 2011). The basic objective of revenue management is to sell the right product to the right customer at the right time following the right channel. The concept of Revenue Management is to understand the customer’s perception of product value and accurately aligning product service placement and availability with each customer segment (Yeoman, 2005). As the concept of RM continues to grow in complexity with new emerging markets and ancillary products, outperformers remain calm (Huefner, 2011). In other words, revenue management is a widely tool implemented with the aim of maximization of revenue in a firm, that helps to decide how much of inventory to allocate to different types of market segments and at what prices/fares. 2.0. Body 2.1. Railway industry Firms that operate in railway industry need to implement effective pricing strategies, consistently analyzing the deals, effectively managing contract sales opportunities and channel relationships, and executing well timed incentive payments to avoid loss in revenues (Yeoman, 2005). In some countries, railway companies have depended on disjointed patchwork of manual processes, spreadsheets and legacy systems to manage their revenue processes (Cross, 1997). However, it has been proved that these processes are prone to errors, labor intensive and costly hence resulting to missed revenue opportunities and increased revenue compliance risk (Cross, 1997). Revenue management in railway industry solves these critical business challenges through linking together and automating the complex process of developing and executing contracts, pricing, regulatory and incentives into a more advanced system that manage the end-to-end revenue lifecycle (Huefner, 2011). The revenue lifecycle is shown below: (Cross, 1997) 2.2. Importance of RM on railway industry The railway industry is by far-efficient mode of transportation, and the role it plays has become increasingly important around the globe with ever growing concerns about the global energy crisis and climate change (Great Britain & Great Britain, 2011). Formulating and developing Revenue Management strategy for railways is expected to contribute to a significant lessening of this environmental burden by making proper use of the existing railway infrastructure (Great Britain & Great Britain, 2011). This benefit does not only apply to operators but also passengers those benefits from improved fares. In fact, most governments in many countries are adopting the strategy of RM to in their respective railway industries. Some railway companies-if not all-follow two types of revenue management techniques namely; price-based RM (also called retailing) or quantity based RM. However, most industries follow a combination of both, with the choice on which one to follow depending on the quantity and price flexibility of the rail service delivered. It is worth noting that pricing of services is largely on a cost-plus basis, with a subsidy element (on fares) and a mix of political and social considerations to some extent determines the type of revenue management strategy used by a railway company (Great Britain & Great Britain, 2011). Many railway companies mostly use Revenue management strategies as the actors and/or stages that are needed to bring their services to the market and thus to the final consumer of their products. This is because proper analyses of Revenue will results to greater value of the companies’ services (Talluri, & Van, 2004). Not only do the companies target various personalities, but the companies have vast services to offer to the customers. Most railway companies also consider RM strategies as a direct connection and drive to decision making (Talluri, & Van, 2004). It is like a web connection of all the company’s structural and functional connections between all the stakeholders of the firm. The quality of the planning department is responsible for the choices made for service delivery, for example (Great Britain & Great Britain, 2011). When service delivery becomes more efficient and effective, little or no scrap is created and what remains are turned into materials an inputs for new products. According to Harper, (2010), recycling has worked effectively in the railway industry as the companies have majorly inclined to recycling as a way of reducing wastes as a means of improving, gaining and advancing on their technical design of products. This decision has increased the perceived company products values and quality. Schmitz (2005) also argues that working for the right company is one of the positive expectations from proper RM objectives in the sense that there is better and improved insight and thus control of quality (Goldman, & Papson, 2000). The performance rates of the workers are improved as well through value chain. Notably, as argued earlier, choosing the right partner, according to Schmitz (2005), is among the best ways of moving railway products and improving the company’s ability to track and gather relevant information on transportation issues and distributing the products to expected positions. More than that, each choice made at every point of the product production, distribution, and sales has a financial, environmental, and a social impact on the performance of the company and thus are interconnected and dependent to each other (Great Britain & Great Britain, 2011). 2.3. Typology Precondition Based on Rothacher, (2004) assertions, Revenue Management analysis allows a company in the railway industry to identify the parts of its operations that adds value to it. In this case, through analysis of the activities of the company in terms of those that adds value and those that do not add value to the company, the company is able to determine its high return achievements and the cost incurred that are used in the process of creating value. Some railway companies operate beyond their country’s borders and thus needs some critical examinations of its value chains in the global perspective (Talluri, & Van, 2004). Through its well-developed RM system, these companies will be able to be in a position of reconfiguring both modern and tradition shoe designs to suit different tastes and preference. Moreover, the company is able to manufacture value chain out of the contracted partners to produce valued and quality associated products (Yeoman, 2005). In this way therefore, the company will be in a great position to have a great focus of global interconnection and network that require an extensive Revenue Management strategy (Talluri, & Van, 2004). In as much as many companies in the railway industry has been focusing on designing and marketing elements of the value chain through appropriately managing their revenues, the performance of the companies and their competitive efforts have not been based only on the production and outsourcing strategies (Talluri, & Van, 2004). On the contrary, their performances have been supported by the creation of sustained profitability, value production, better pricing strategies and cost a minimization mechanism that works best over their competitors. This reputation of RM will be enhanced by the company’s brand name and its utilized tangible and intangible resources. Revenue management uses the basic principles of supply and demand economics, in a tactical way, to generate incremental revenues. The overview of revenue management in the railway industry is derived from many dimensions. Such dimensions are based on every product and partners, every decisions made, and every channel of distribution. According Rothacher, (2004), revenue management involves also every stage of production and a concept that adds value and is thus increase an infinite ecosystem of cause and effects to the company. For clarity purposes and according to Harper, (2010), a company’s strategy on RM revolves around the following key factor; planning, designing, making, moving, selling, using, and reusing. Based on the current performance and positioning of the company in the industry, it is believed that these stages are more valuable in the chain of sustained profitability. It is also believed that these stages are critical in providing the best way to track, report, move, as well as measure the influence of the company when compared to the control of the company. They are also very important in determining how decisions are made and their impacts to the company in terms of energy, climate, labor, wastes, water, as well as to the community. Revenue management analysis strategy for a railway industry In the railway industry, yield can be regarded as either yield per available seat mile or yield per revenue passenger mile. Revenue management is not an easy task in the railway industry due to: uncertainty, variation in price elasticity, seasonal or time variation and wide regional variations. In a capital extensive industry like railway industry, revenue management is closely associated with revenue maximization. This is because the fixed costs of the industry are quite high and the marginal costs of transporting another passenger or selling another seat are quite small and can be ignored as compared to the MR. therefore, In managing their revenues, some railway companies prefer approaches such as; overbooking (which is a quantity based revenue management strategy), discounted fares (priced-based revenue management strategy) and discretized booking (which is both quantity and price-based revenue management strategy). The table below shows the basic concept used in the railway industry in managing their revenues. Management strategy How it is done Price management Most railway companies manage the entire pricing life cycle from strategy to execution. Price management is basically considered the pricing foundation and system of record. Usually, these companies implement sophisticated pricing rules and guidelines that enable them enforce pricing consistency across all the areas in which they operate (Talluri, & Van, 2004). This in turn results to accurate pricing and improved margins. In addition, they divide customers into standard class and first class; provide different prices based on the day of travel and the time of the day to increase revenue (Talluri, & Van, 2004). Contract management Basically, the railway industry is characterized by improvements in the pricing and incentives strategies on contracts and enforcement of pricing policies (Talluri, & Van, 2004). They proper manage the contract from the development stage to contract compliance. Deal management This involves proper development and optimization of deals and contracts. The main reason for doing this is to maximize the revenues through integration of lead and opportunity tracking, contract terms and performance metrics (Talluri, & Van, 2004). Regulatory compliance management This involves complying with statutory and financial regulation and their revenue recognition. It is achieved through calculating and reporting the required company financial statements (Talluri, & Van, 2004). Brand management Brand is a very vital concept in business thereby most companies in the railway industry identify and implement the drivers of brand performance that influence their market demand (Akan, 2008). This helps in optimizing sales and marketing spend at the regional and national levels (Akan, 2008). Forecasting: forecasting in railway industry is done by collecting data from previous years by analyzing the changes in the number of passengers year by year. This will result in the ultimate forecasting of the revenues. Revenue management system for a railway industry (Cross, 1997) 2.3.3 Tools Set different admission charge levels; provide joint-entry, tickets, group discounts, coupons, membership rates. In most instances, many railway companies engage in these exercises to attract more passengers hence increasing their revenues. A proper and well planned RM will enable the company to implement these plans effectively. Usually, these plans are outlined in the company’s strategic plan. Provide luxury class, economy class; change prices frequently according to demand. These are form of product differentiation. The passengers are charged according to the class of services they receive and they elasticity in demand. This will make sure that they reach all the target market irrespective of their economic status. Sell more tickets than seats to avoid cancellation. Railway industry always depends on the number of trips they train made. This is because the assumption is that most of the railway companies are majorly transport oriented. A cancelation of a journey means reduction of the job. Therefore to avoid cancellation, the companies opt to sell more tickets. 2.4. Typology chosen RM TYPOLOGY The product (Unit analysis): Time     RM Pre-Conditions:   Constrained capacity Yes Perishability No Appropriate cost structure Yes Fluctuating demand Yes Ability to segment markets Yes Advances sales/bookings Yes Freedom to set prices Yes Time line No Transaction volume Low     Strategic Levers   Pricing (differential) Yes Capacity Management (controlled & managed) Yes Duration controlled No Tools   Overbooking yes Forecasting Yes     External Factors   Economic (stiff competition) Yes According to all these details, railway industry do not fit in any typology since only some tools from revenue management are used. Some pre-conditions are not very well defined and the capacity strategy does not have as main goal to maximize the revenue. However, this industry has a proper forecasting method which it can be compare with the airline industry. 2.6. Challenges of revenue management Revenue management has become part of the mainstream in the railway industry for quite some time. Railway industry is a tight schedule industry whereby passengers book their travels time differently on different times. These diversions in time pose the greatest challenge when managing revenue in a company (Cross, 1997). For one, some booking time is coming closer to the arrival date. In this regard, the consumer confidence-pricing confidence-is limited because you are literally not committed far in advance (Akan, 2008). In addition, the composition of demand in the railway industry limits the effectiveness in the railway industry. These changes in business mix basically changes the lead-time dynamics, losing some pricing confidence hence limitations in revenue management (Cross, 1997). 3.0. Conclusion Just like other service providing industries, the railway industry drives its success from the capabilities and efficiency of the each and every company’s management. A company’s top management, middle management and the employees should have a well-motivated zeal and focused culture to make the company more productive (Cross, 1997). Through better resources allocation, data gathering clear and effective interpretation of the company’s goals and objectives, most railway companies have been at the outstanding edge of the industrial competition in their respective countries (Cross, 1997). References Akan, M. (2008). Essays on revenue management. (Dissertation Abstracts International, 69-3.) Bititci, U. S., & International Conference of the Manufacturing Value Chain (1998, Troon). (1998). Strategic management of the manufacturing value chain: Proceedings of the International Conference of the Manufacturing Value-Chain, August 98, Troon, Scotland, UK. Boston [u.a.: Kluwer Acad. 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T., & Van, R. G. J. (2004). The theory and practice of revenue management. Boston, Mass. [u.a.: Kluwer Academic Publ. Yeoman, I. (2005). Revenue management and pricing: Case studies and applications. London [u.a.: Thomson. Read More