Statement on

Management Accounting

REVENUE
MANAGEMENT
FUNDAMENTALS
 REVENUE MANAGEMENT FUNDAMENTALS

TABLE OF CONTENTS
Introduction................................................................................................................................................................ 4
A Little ROI History ............................................................................................................................................4
Is This SMA for You?...........................................................................................................................................7
Defining Key Characteristics of Revenue Management............................................................................... 10
Evolving Yield Management Forward............................................................................................................. 10
Assessing Your Current Revenue Management Practices............................................................................... 13
Improving Your Current Revenue Management Practices.............................................................................. 13
Aligning Revenue Management Practices with the Business Context...................................................... 20
Industry and Business Model Characteristics.................................................................................................. 20
Market Environment and Business Structure Characteristics.......................................................................... 22
Revenue and Cost Drivers.................................................................................................................................... 23
Conceptual Model of Revenue and Cost........................................................................................................ 23
Identifying Revenue and Cost Drivers............................................................................................................. 27
Data Analytics to Support Revenue Management......................................................................................... 30
Data Practice Intensity..................................................................................................................................... 30
Considerations for Adopting Revenue Management Practices...................................................................... 31
Conclusion................................................................................................................................................................. 33
Main Takeaways............................................................................................................................................... 33
Expanding the ROI Model.............................................................................................................................. 34
Appendix: Case Study Examples of Revenue Management Practice Intensity...................................... 36

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 REVENUE MANAGEMENT FUNDAMENTALS

ABOUT THE AUTHORS

Julie Harrison, Ph.D., FCA, is an associate Paul Rouse, Ph.D., CA, is a professor of
professor in the Graduate School of management accounting at the University of
Management at the University of Auckland Auckland Business School. Prior to this, Paul
Business School. Prior to this, Julie worked worked as an accountant in audit and finance
as a transfer pricing specialist in public in the United Kingdom and New Zealand. He
practice. She can be reached at can be reached at [email protected].
[email protected].
Monte R. Swain, Ph.D., CMA, CPA, CGMA,
Frederick Ng, Ph.D., is a lecturer in the is the Deloitte Professor of Accountancy at
Department of Accounting and Finance Brigham Young University. He is the recipient
at the University of Auckland Business of the IMA Brummet Distinguished Award
School. His research focuses on revenue for Management Accounting Educators and
management and the role of accounting to previously was CFO at Authorize.Net, a
understand customers. He can be reached at payment processing service for e-commerce.
[email protected]. He can be reached at [email protected].

Development support and editorial review provided by the Profitability Analytics Center of
Excellence (PACE), a nonprofit collaboration of practitioners and academics working together
to help management accountants and the broader business community recognize the need for
improved information for internal decision support. The PACE leadership group is composed
of Gary Cokins, Doug Hicks, Monte Swain, and Larry White.

Statement
on Management
Accounting
SMAs present IMA’s position
on best practices in management
accounting. These authoritative
IMA® (Institute of Management Accountants) is a monographs cover the broad
range of issues encoun-
global professional association focused exclusively on
tered in practice.
advancing the management accounting profession.

For more information, please visit www.imanet.org.

October 2020 // Institute of Management Accountants, 10 Paragon Drive, Suite 1, Montvale, NJ 07645

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 REVENUE MANAGEMENT FUNDAMENTALS

INTRODUCTION
A Little ROI History Profit Sales Profit
= x
In the summer of 1914, a young staffer in the Investment Investment Sales
general management office was tasked by the
company president to develop a detailed report Which component is most present (i.e.,
on the operating performance of all the company’s impactful) in the ROI computation? The most
departments. The company was DuPont. The impactful component is, of course, sales (or
young staffer was Donaldson Brown, who would revenue). In fact, sales has not two, but three
go on to a meteoric rise in one of America’s great impact points in ROI. (Remember that Profit =
companies, followed quickly by another impactful Sales – Cost.) Strangely, revenue management is
career as an executive and director at General not a central focus for management accounting
Motors. Brown’s story, though fascinating, is not so systems in most organizations. This characteristic
may be explained by the inherent nature of the
traditional DuPont model (see Figure 1).
In this model, sales is essentially an “orphan”
component. Unlike costs and investment, this
model does not indicate any forerunning sources
or root causes that describe or define how sales
functions. The message of this orphaning in
the DuPont model may explain why traditional
corporate finance has focused too much on cost
management or investment management at the
expense of revenue management.
A key change thus required in management
accounting thinking is that a major reason
resources are acquired and employed by
organizations is to acquire revenue, either in
well known as the management accounting tool he the form of sales or valued service (e.g., public
developed in 1914 that transformed DuPont and, service or charities). This, in turn, requires a
beginning in 1921, was used subsequently to save greater focus on client needs and the recognition
General Motors. That tool, often referred to as the of variations in need for different clients.
DuPont formula, is the return on investment (ROI) Segmenting clients into groups based around
computation.1 need is also described as market segmentation,
The classic ROI (DuPont) formula has been but the missing link is the coupling of resource
a mainstay in management accounting and use with each group. The “any color that he wants
corporate finance for nearly 100 years. In its so long as it is black,” attributed to Henry Ford,
original form, Brown developed ROI as equal to suggests a supply side-dominant view where
investment turnover multiplied by profit margin. revenue took second place to cost management.
Consider the actual math for this management Yet in his autobiography, Ford’s third principle
accounting tool: suggests that service (or a focus on clients) was

1
Dale L. Flesher and Gary John Previts, “Donaldson Brown (1885-1965): The power of an individual and his ideas over time,” Accounting Historians
Journal, June 2013, pp. 51-78.

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 REVENUE MANAGEMENT FUNDAMENTALS

FIGURE 1: THE HISTORIC DUPONT ROI MODEL

An Orphan?

Sales

Cash
Investment ÷
Turnover
Working + Accounts
Capital + Receivable
Total
Investment +
Long-Term Inventories
Assets
Return on
Investment
x
Production
Sales
Costs
Profit −
Cost of + Selling
Expenses
Sales +
Profit
Margin
÷ Administrative
Overhead
An Orphan?
Adapted from T.C. Davis, How the DuPont Organization
Sales Appraises its Performance, American Management
Association, New York, N.Y., 1950.

dominant: “…profit must and inevitably will come managers without the full support and expertise of
as a reward for good service. It cannot be the management accountants and financial analysts.
basis—it must be the result of service.”2 That gap presents a competitive opportunity
Client segmentation tends to be a marketing for organizations and professionals to invest in
issue in many companies, but most managers rigorous causal modeling, analytics, and systematic
understand that effective segmentation also support of revenue drivers that can dramatically
involves product or service design, production and move forward value creation. Again, revenue
delivery involving all activities, and resources within management work is taking place in organizations,
an organization. Understanding how servicing but this Statement on Management Accounting
different client groups drives revenues must also (SMA) presents an argument, and an opportunity,
encompass how different client groups drive costs; for management accounting to strengthen and
typically, the same driver applies to both. Revenue accelerate that work.
and cost management are two sides of the same Commentators have noted that the lack of a
coin. Neglect of one will hinder the other. comprehensive revenue management framework
Revenue management does not go without hinders the study of how management accounting
attention in most organizations. Yet too often that functions support customer value and profitability
attention is in the hands of marketing and sales across all types of competitive organizations.3

2
Henry Ford and Samuel Crowther, My Life And Work, Doubleday, Page & Company, Garden City, N.Y., 1922.
3
Ronald J. Huefner, “Incorporating Revenue Management into Management Accounting Courses,” Journal of Higher Education Theory and Practice,
2015, pp. 32-36; Jeff Shields and Michael D. Shields, “Revenue Drivers: Reviewing and Extending the Accounting Literature,” Advances in Manage-
ment Accounting, December 2005, pp. 33-60.

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 REVENUE MANAGEMENT FUNDAMENTALS

Revenue management models, often invested in modeling cost causality and cost
described as yield management models, have drivers. In concert with that work, we establish
been established and applied in organizations in this SMA a classification scheme for modeling
for many years. These models are limited to causal revenue drivers. This work is presented to
particular types of organization structures
operating in specific types of markets. This SMA
sets out a descriptive framework for revenue “…profit must and inevitably
management that can be applied across all types
of competitive organizations and industries. will come as a reward for
We begin this SMA with a self-assessment
process for identifying improvement good service. It cannot be
opportunities in your organization’s revenue
management practices. Next, we define the key
the basis—it must be the
characteristics of revenue management work. We result of service.”
then establish context factors that organizations
should consider when designing their revenue
management strategy and systems. We then harmonize with modeling concepts presented in
present a template similar in nature to the the IMA Conceptual Framework for Managerial
sophistication levels approach as laid out in the Costing (CFMC).5 Finally, we describe the range
IMA® (Institute of Management Accountants) of data analytics practices that management
SMA Developing an Effective Managerial accountants can choose to deploy in support of
Costing Model.4 Organizations can use this revenue management.
template to assess the sophistication of their The appendix presents brief case studies on
own revenue management system with respect how three separate organizations describe the
to intended strategy in order to determine if intensity of their own revenue management
further investment is needed. For many years, practice using the sophistication levels we
the management accounting discipline has provide in this SMA.

4
IMA Managerial Costing Task Force, Developing an Effective Managerial Costing Model, IMA, April 2019, www.imanet.org/insights-and-trends/
strategic-cost-management/developing-an-effective-managerial-costing-model.
5
Larry R. White and B. Douglas Clinton, The Conceptual Framework for Managerial Costing, IMA, September 2014, www.imanet.org/insights-and-
trends/strategic-cost-management/conceptual-framework-for-managerial-costing.

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 REVENUE MANAGEMENT FUNDAMENTALS

Overall, this SMA provides an essential STEP 1: Do a quick assessment of the

foundation to understanding revenue organization’s use of the four revenue
management as a discipline across many types of management levers.
organizations and how management accountants The purpose of the quick assessment is to evaluate
can work effectively with their organization to how your business’s context and practices affect
design systems that capture and analyze specific the relevance for revenue management. This can
types of revenue drivers in order to improve help get early buy-in from top management and
revenue management practices. other business functions on the need to develop
the organization’s revenue management approach.
Is This SMA for You? As the role of the management accountant is to
A six-step methodology is described below partner with other business functions, this buy-in
that can be used to develop a revenue is critical.
management approach where management An initial quick assessment can be made by
accounting is an effective partner with other answering the questions in Table 1. This table
business functions. is organized by the four levers of revenue
To improve the organization’s revenue management (defined in the next section,
management approach, a cross-functional “Defining Key Characteristics of Revenue
team should make an initial assessment of Management”), business setting, and the role of
the organization’s current revenue, customer, current management accounting information to
and market practices; develop a revenue support decision making. Answer “yes” or “no”
management system that is appropriate for the to these questions. The more “yes” responses in
business’s needs; and then implement a system any given section indicate the importance and
tailored to the organization’s objectives and the value for your organization of investing in revenue
needs of its various business functions. management practices. The subsequent sections
This process can be accomplished in six point you to different sections of the SMA to learn
steps, which are detailed subsequently in more. Regardless of the score, most companies
this SMA. can benefit by critically reviewing their revenue
The description, along with recommended management approaches and the management
tactics and tools, are provided for each step in accounting information provided to other business
the following sections. functions.

STEP 1: Do a quick assessment of the organization’s use of the four revenue management levers.

STEP 2: Review levels of revenue management details to determine current practice and
understand different intensities of practice.

STEP 3: Analyze the organization’s business strategy and business environment to find issues that
can assist or hinder revenue management improvement.

STEP 4: Evaluate revenue and cost driver importance in the organization’s strategy and identify
gaps in current managerial and accounting attention.

STEP 5: Engage with other functional roles to design the appropriate level of revenue management
and revenue driver attention for the organization, consistent with its strategy.

STEP 6: Establish a cross-functional team to implement new revenue management practices,

supported by management accounting skills and tools.

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 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 1: QUICK ASSESSMENT OF REVENUE MANAGEMENT PRACTICE

FOUR LEVERS OF REVENUE MANAGEMENT

PRICING BASIS • Do you tend to charge the same price for your products or services to all customers?
• Are your prices based mainly on costs and/or direct responses to competitor price movements?

INVENTORY • Do you sell your product or service on a first-come-first-served basis?

ALLOCATION • Do you charge the same price for your product or services during both high- and low-demand periods?

PRODUCT • Does your product or service range require a wide variety of different resources to produce?
CONFIGURATION • Does your product or service innovation usually involve radically new products?

DURATION • Do you have the same operating procedures during both busy and slow periods?
CONTROL • Do you accept variation in customer behavior as a given?

BUSINESS CONTEXT

VARYING DEMAND • Are there periods when you have too much capacity and periods when you have too little capacity?
• Do you experience wide variation in customer demand across time periods?

PERISHABILITY • Is it difficult to store your finished product or delay the availability of your service?
• Are your business’s outputs subject to loss of value over time?

CUSTOMER •D
 oes your business serve a wide variety of customers who vary in their needs and willingness to
VARIATION pay for your product or service?

ROLE OF MANAGEMENT ACCOUNTING INFORMATION

• Do business functions such as marketing, sales, and distribution consider your cost information irrelevant?

• Do your business functions work on different strategic goals with limited coordination?

• Is the accounting information provided for decision making in your business primarily focused on costs or budget targets?

STEP 2: Review levels of revenue STEP 3: Analyze the organization’s business

management details to determine strategy and business environment to find
current practice and understand different issues that can assist or hinder revenue
intensities of practice. management improvement.
If you answered “yes” to one or more questions If you answered “yes” to one or more questions
in the Four Levers of Revenue Management in the Business Context section, your business
section, your business would benefit from closely would benefit broadly from revenue management
examining the relevant revenue management practices. See the section “Aligning Revenue
practices. See the next section to learn more about Management Practices with the Business Context”
each practice. to learn more.

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 REVENUE MANAGEMENT FUNDAMENTALS

STEP 4: Evaluate revenue and cost driver • A desired revenue management approach.
importance in the organization’s strategy • An understanding of how contextual factors
and identify gaps in current managerial and hinder or assist revenue management
accounting attention. development.
If you answered “yes” to one or more questions in • A map of key revenue and cost drivers.
the Role of Management Accounting Information “Data Analytics to Support Revenue
section, your management accounting information Management” outlines the role of analytical
may be too focused on cost analysis for internal thinking to inform revenue management
decisions without supporting the analysis of practice. It describes the types of information
revenue. See the section “Revenue and Cost and data collection needed.
Drivers” to learn more.
STEP 6: Establish a cross-functional team
STEP 5: Engage with other functional roles to implement new revenue management
to design the appropriate level of revenue practices, supported by management
management and revenue driver attention accounting skills and tools.
for the organization, consistent with its With a revenue management approach designed
strategy. specifically for the organization’s business context,
After reviewing the information in this SMA for cross-functional support is crucial to the final step
steps 2 to 4, you should have a clear view or of implementing a specific revenue management
plan for improvement, including the following: solution across the organization that is based
• The current use of the four levers in the on clear measures, aligned incentives, and
organization. coordinated systems and structure. •

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 REVENUE MANAGEMENT FUNDAMENTALS

Defining Key Characteristics

of Revenue Management
Evolving Yield Management Forward management techniques have migrated into other
Returning to history, the deregulation of the industries with similar market and firm structure
U.S. airline industry in 1979 created tremendous characteristics, such as hotels, car rentals, railways,
competitive pressure on airline revenues. Robert ride sharing, advertising, and recreational (e.g.,
Crandall, who became CEO of American Airlines ski) resorts. Industry 4.0 and the digital economy,
in 1985, worked with his company to develop which emphasizes high operating leverage cost
an analytical approach to varying the proportion structures, are expanding these opportunities.
of discount and full-fare seats on a day-by- For example, the integration of products,
day, departure-by-departure basis.6 This work sensors, the Internet of Things, and advanced
dramatically changed the airline reservation analytics provide manufacturers the ability
system SABRE (Semi-Automated Business to reconfigure the sale of traditional tangible
Research Environment) and evolved into a revenue products into the sale of a service that includes
optimization approach known as yield management. predictive maintenance, continuous performance
Using yield management, airlines formalized and improvement, and quality guarantees.
focused on the accounting measure revenue per For many if not most organizations, the yield
available seat mile (RASM), alternatively referred to management approach to revenue has focused on
as “passenger load factor.” optimizing the sale of goods and services to
Yield management (comprising operations, customers at various price points depending on
economics, and marketing tools) is a revenue demand and shifting inventory availability. Figure 2
management practice that applies to very specific illustrates how various price points can be used to
market and company structure characteristics. optimize both revenue and capacity utilization. In
Typically, yield management techniques apply when the graph on the left-hand side, only one price is
three specific circumstances are present: charged by a business and only customers willing
1. A fixed amount of inventory is available for sale, to pay that price (or higher) will purchase the
2. The inventory is perishable (i.e., inventory has product. This results in unsatisfied customer
no value after passing the deadline to sell), and demand from customers who want the product
3. Different customers are willing to pay different but not at the price offered and a consumer
prices for the inventory. surplus for customers who would have paid a
Revenue management has a broad concept of higher price. Further, the business has unutilized
inventory ranging from conventional stocks of goods capacity as demand at the single price is less than
available for sale to units of capacity such as seats on total capacity. Yield management solutions
an airplane. Inventory represents the fixed amount increase revenue using customer segmentation,
of capacity available to provide goods or services. which is crucial. If the business can segment its
These circumstances for yield management customers by charging prices aligned to each
are particularly critical for companies with high segment’s willingness to pay, as shown on the
operating leverage (i.e., high ratios of fixed costs right-hand side of Figure 2, then it may be able
to variable costs) operating in competitive markets to better utilize its capacity and capture the
where demand outstrips supply. As a result, yield consumer surplus.

6
Anthony W. Donovan, “Yield Management in the Airline Industry,” Journal of Aviation/Aerospace Education & Research, Spring 2005, pp. 11-19.

10
 REVENUE MANAGEMENT FUNDAMENTALS

FIGURE 2: CUSTOMER SEGMENTATION AND MULTIPLE PRICE POINTS

ONE PRICE - NO SEGMENTATION SEVERAL PRICES - SEGMENTATION

Price Price
Customer Demand Curve Customer Demand Curve

P1

P2
Customer
Surplus 70% Capacity Utilization 95% Capacity Utilization
P3 P3

P4

Unsatisfied
P5
Demand

Q3 Q1 Q2 Q3 Q4 Q5
Quantity Quantity
Adapted from William Maguire and Paul Rouse, Revenue and Cost Management for Service Organisations, second edition, Pearson Education New
Zealand Limited, Auckland,New Zealand, 2006.

Yet given the characteristics that define yield value placed on the service attributes provided
management practice, this view actually limits the by the product or service. That is, service is the
development of more robust revenue management key objective, even for tangible products that are
practices that can apply to all types of business regarded as distributors of service.7
settings. By expanding on the foundation of yield Pricing basis and inventory allocation practices
management, this SMA provides a framework for are the two main levers for demand management.
revenue management that reflects the complexity When supplemented by resource management
of revenue generation in all industries and markets. levers (product configuration and duration control),
Demand management incorporates well- pricing basis practices and inventory allocation
established yield management practices to practices can be applied to revenue strategy work
optimize the average selling price and capacity for all kinds of organizations.
utilization attained using customer segmentation, Pricing basis practices determine the extent of
with a view to serving the most profitable mix differential pricing in a business. By determining
of customers. Demand management helps how and when different prices are charged to
maximize revenue from a business’s fixed different customer groups, organizations employ
capacity. This approach requires organizations this revenue management lever optimally to
to segment customers around their willingness provide service as customers express their demand
to pay according to their respective needs and by their willingness to pay.

7
This idea is from the theories of Service-Dominant Logic, which views all goods and services in terms of the services valued by individual customers
(Stephen L. Vargo and Robert Lusch, “Evolving to a New Dominant Logic for Marketing,” Journal of Marketing, January 2004, pp. 1-17). For example,
different customers could value the services of an electric drill for different reasons such as compatibility with other electric tools, ease of use, or dura-
bility. For convenience, “product” can refer to both goods and services.

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 REVENUE MANAGEMENT FUNDAMENTALS

Inventory allocation practices determine how on targeting and controlling customization of

a business matches its inventory of productive the service or product to segments of customers
resource capability with customer demand. The based on demand management needs (i.e., pricing
definition of inventory here comes from yield basis practices and inventory allocation practices).
management, which incorporates both the Duration control practices determine how
traditional concept of goods available for sale and product or service duration is managed in a
the concept in services industries regarding units business; in other words, how the total time
of capacity to serve customer demand. Inventory and variation in time is managed for a particular
allocation practices work in tandem with pricing product or service. Organizations often experience
basis practices to manage product availability variability in how long it takes to serve different
depending on customer demand. types of customers. Duration control practices are
Resource management encompasses the designed to manage both the overall time taken
practices used to manage the products and and the variability in time to serve. These practices
business processes needed to serve customer can increase the number of customers that can be
segments. Resource management systems facilitate served for a fixed level of capacity.
demand management systems. Special emphasis The defining characteristics of revenue
is placed on reducing the resource requirements management relate to how a business manages
and process variation needed to achieve customer its customer demand and its limited resources.
segmentation. Product configuration practices and Together, demand management and resource
duration control practices are the two main levers management enable businesses to focus
for resource management. on improving overall profitability. Demand
Product configuration practices determine the management and resource management require
extent of product differentiation in a business. management accounting systems that support
Organizations generally experience constant relevant data collection, data analysis, and
pressure to tailor the features of the service or modeling. Table 2 provides an overview of revenue
product usefulness, or fulfillment and delivery management practices and how they can be
features of the service or product, for individual supported by related management accounting
customers. Product configuration practices focus concepts, techniques, and tools.

TABLE 2: REVENUE MANAGEMENT AND POTENTIAL

MANAGEMENT ACCOUNTING INTERFACE

REVENUE MANAGEMENT PRACTICE MANAGEMENT ACCOUNTING PRACTICE

DEMAND MANAGEMENT Price and allocate inventory Customer profitability analysis. Pricing bases, including target
by willingness to pay. Demand-side focus. costing and product attribute (value) pricing.

RESOURCE MANAGEMENT Configure products and Budgeting. Activity-based management. Capacity analysis and
business processes for target customers. Supply-side focus. optimization using constraint management (Lean) techniques.

DATA ANALYSIS AND MODELING Identify customer Revenue behavior and causality analysis. Identifying cost and
segments and demand patterns. Rigorous and systematic analysis. revenue drivers. Scenario planning.

DATA COLLECTION Track customer demand, habits, and Market and sales data, including financial transaction data and
volumes. Data foundation for other areas. nonfinancial customer/market engagement data.

Adapted from Frederick Ng, Julie Harrison, and Chris Akroyd, “A revenue management perspective of management accounting practice in small
businesses,” Meditari Accountancy Research, November 2013, pp. 92-116.

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 REVENUE MANAGEMENT FUNDAMENTALS

Table 2 illustrates that the revenue Higher intensity of practice is more complex and
management perspective offers a generalizable resource-intensive but may have potentially greater
lens that brings together the individual impact on profitability. Accordingly, higher-intensity
techniques used to grow revenue. Researchers practices are more likely to be employed by large
highlight the synergies between revenue organizations that have greater resources and
management and management accounting.8 operate in highly competitive markets.
Yet, despite the growing popularity of The framework in Table 3 applies across
revenue management practice in industry, different business models, industry settings, and
this area remains relatively unexplored within organizational structures. The scales (from lower
management accounting.9 By breaking down to higher intensity) shown provide a comparative
systems of practice into component parts, a view on how organizations choose to engage in
revenue management perspective provides management processes within each of the four
insight on sets of activities that might otherwise revenue management practices (levers). Each
be viewed as disparate (for larger organizations) practice is anchored at two ends of a continuum
or simple (for small organizations). representing the intensity of revenue management.
As Industry 4.0 expands into Service 4.0, Higher intensity of practice is not always best.
both manufacturing and service companies are Managers must consider their strategy and resources
evolving to create sustainable business solutions with respect to their customers and competition in
capable of mass customization to individual order to determine their ideal level of practice for
customer needs. New thinking about revenue each revenue management lever.
management is necessary to maximize revenue Barriers to higher-intensity practices are
and profitability in this highly automated and determined by company structure, and usefulness
flexible environment.10 of higher-intensity practices is established by market
conditions. Each organization must conduct its own
Assessing Your Current Revenue analysis of strategic alignment and cost-benefit
Management Practices computations to determine its ideal combination of
The starting point for improving revenue intensities across these four levers. To illustrate this
management in the organization is analysis, we provide examples of three companies
understanding current business practices being in the appendix.
used to manage customer demand (practices
designed to increase revenue) and resources Improving Your Current Revenue
(practices designed to improve the use of Management Practices
resources). Different intensities of revenue The four key levers of revenue management
management practice will be appropriate practice can be used to improve a business’s
depending on the business and the environment revenue management processes. Each lever
in which the organization operates. Table 3 provides levels of sophistication from relatively
provides a framework describing different low-cost activities usable by all businesses to
intensities of revenue management practice. activities requiring higher levels of investment.

8
Michael Bromwich, “Thoughts on Management Accounting and Strategy,” Pacific Accounting Review, January 1999, pp. 41-48; Ronald J. Huefner,
“A Guide to Integrating Revenue Management and Capacity Analysis,” Management Accounting Quarterly, Fall 2011, pp. 40-46; Ronald J. Huefner
and James A. Largay, “The role of accounting information in revenue management,” Business Horizons, May-June 2008, pp. 245-255; Frederick Ng,
Julie Harrison, and Chris Akroyd, “A revenue management perspective of management accounting practice in small businesses,” Meditari Accountan-
cy Research, November 2013, pp. 92-116.
9
Huefner, 2011; Paul Rouse, William Maguire, and Julie Harrison, Revenue Management in Service Organizations, Business Expert Press, New York,
N.Y., 2010.
10
Paul Juras and Lauren Johnson, “The Path to Industry 4.0 Implementation,” Strategic Finance, June 2020, pp. 26-33, sfmagazine.com/post-entry/
june-2020-the-path-to-industry-4-0-implementation.

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 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 3: FRAMEWORK OF REVENUE MANAGEMENT PRACTICES

REVENUE MANAGE- LOWER INTENSITY LOWER INTENSITY LOWER INTENSITY HIGHER INTENSITY
MENT PRACTICE (LEVEL 1) (LEVEL 2) (LEVEL 3) (LEVEL 4)

RESOURCE-FOCUSED Pricing follows market Pricing is strategic, aimed CUSTOMER

Pricing is primarily cost-plus standard prices. Limited at a price point relative to NEEDS-FOCUSED
or following not-for-profit variation in prices among the market. Pricing captures Pricing is based on the value
PRICING BASIS
objectives. different groups or area differences among groups or of specific product attributes.
trends. area trends. It captures differences among
customer segments.

AD HOC A fixed schedule determines Periodic review to inform SYSTEMATIC

No change or infrequent how prices and priorities price and priority changes. Constant review to inform
INVENTORY changes in price and change over the year. These Changes target groups of price and priority changes.
ALLOCATION customer priorities, often are across-the-board changes. products and broad time Changes target individual
informed by unstructured periods. products and specific time
judgment. periods.

PHYSICAL Offerings vary in either inputs Offerings are built from a set NONPHYSICAL
DIFFERENCES or processes. Radical new of core inputs and processes. DIFFERENCE
Offerings are made using products are introduced as Occasional use of radical new New products are regularly
PRODUCT
diverse inputs and processes. tactical responses. products. Product range is created using existing core
CONFIGURATION
Product range does not aim structured around add-ons. inputs and processes. Product
to segment customers. range is structured around
restrictions and add-ons.

REACTIVE Initiatives detect and alleviate Initiatives actively mitigate STABILIZING

IMPROVEMENTS bottlenecks. The focus is on the internal effect of customer USAGE
Initiatives target overall internal activity, with indirect variation. There is limited Initiatives regulate customer
DURATION improvement or to speed effects on reducing customer focus on changing customer arrivals and discourage
CONTROL up internal processes as variation. behavior. bespoke requests with a
problems arise without strong focus on changing
focusing on reducing customer behavior.
customer variation.

Adopting higher intensities of pricing business (e.g., a hotel chain), differential pricing is
basis practices implemented either by varying individual attributes
Table 4 describes pricing basis practices that of products and services provided or by varying the
determine the degree of differential pricing in an price charged based on customer characteristics.
organization. Differential pricing involves charging From a revenue management perspective, the
different prices for products or services based on better pricing bases set prices according to the
what different customer segments are willing to willingness to pay expressed by specific customer
pay. This assists in maximizing the revenue from segments.11 Hence, techniques that get the
each individual customer. In a resource-focused business closer to achieving individual optimal
business (e.g., a stand-alone restaurant), there pricing reflect higher intensities of revenue
is relatively little differential pricing with only ad management practice. Examples of customer
hoc price changes. In a customer needs-focused needs-focused pricing can be found at the

11
Irene C.L. Ng, The Pricing and Revenue Management of Services, Routledge, Abingdon, United Kingdom, 2008.

14
 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 4: PRICING BASIS PRACTICES

RESOURCE-FOCUSED CUSTOMER NEEDS-FOCUSED

(LEVEL 1) (LEVEL 4)

Pricing is primarily cost-plus or Pricing follows market Pricing is strategically aimed at a price Pricing is based on the value of
following not-for-profit objectives. standard prices. Limited variation point relative to the market. Pricing specific product attributes. It captures
in prices among different groups captures differences among groups differences among individual
or area trends. or area trends. customer segments.

Cost-plus Seasonal pricing Differential pricing Individual attributes

• Labor, materials, overhead • Winter vs. summer • Time/day part • Pay for features
• Manufacturer’s suggested • Public holidays • Different channels • Terms and conditions
retail price • Artist is touring • Zone pricing • Advance bookings
Fixed prices Matching competitors Group attributes Eliciting willingness to pay
• Set and forget • Follow market rate • New target market • Dutch auctions
• Recession-adjusted • Corporate rates • Negotiation
Ad hoc goals
Product popularity Strategic • Customer elasticity
• Reaching a one-off target
• Prices up if sales are high • Lead-in prices • “Tall” price range
• Sustainability
• Quality level • Customer psychology • Dynamic pricing

individual or group level. Dutch auctions and availability to match changes in demand. This
payment for additional features represent pricing can be achieved by reserving product and
at the individual customer level.12 Examples of service capacity for more profitable customer
customer needs-focused pricing at the customer segments or by changing prices to manage
group level include corporate rates, pricing by demand levels. This assists in maximizing
regional zone, and pricing to target new markets. the revenue earned from a limited supply of
Practices that approach the resource-focused products or services by prioritizing the most
level include competitor-based pricing, which only profitable customers. In a business using ad
indirectly captures customer willingness to pay hoc inventory allocation, there are either limited
through the value of alternative products but is changes in allocations during the period or
not driven by costing decisions. Examples include changes occur in an unstructured way. In a
simple price matching and strategic responses. business using systematic inventory allocation,
Cost-based pricing is least likely to achieve the there is frequent monitoring of inventory
goal of pricing by customer attributes as product utilization with dynamic adjustments made based
cost is an imperfect proxy for the value provided on sophisticated modeling of customer demand.
to customers. Ad hoc goals that do not capture Inventory allocation practices encompass
customer willingness to pay or are not aimed approaches used by organizations to respond
at improving ongoing revenue generation also to demand trends, manage the release of
indicate lower intensity of practice. inventory, and apply manager judgment.
Differences in the level of sophistication
Adopting higher intensities of inventory reflect the granularity of change (capturing
allocation practices specificity and frequency of changes) and the
Table 5 describes inventory allocation practices structure of the change (ad hoc vs. formalized
that determine how a business shifts inventory decision making).

12
A Dutch auction is one of several similar types of auctions for buying or selling goods. Most commonly, a Dutch auction begins with a high asking
price and lowers the price until some participant accepts the price or it reaches a predetermined reserve price.

15
 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 5: INVENTORY ALLOCATION PRACTICES

AD HOC SYSTEMATIC
(LEVEL 1) (LEVEL 4)

No change or infrequent A fixed schedule determines Periodic review to inform price Constant review to inform price
changes in price and customer how prices and priorities change and priority changes. Changes and priority changes. Changes
priorities, often informed by over the year. These are across-the- target groups of products and target individual products and
unstructured judgment. board changes. broad time periods. specific time periods.

No priorities or price changes Seasonal changes Specific changes Constant review

• Fixed from start of year • Peak and low rates • By individual product • Daily review
• Inventory available to everyone • By events • Shop-level promotions Model-based
Unstructured changes Across-the-board changes Ongoing structured system • Built from forecasts
• Irregular demand checks • Increase/decrease capacity • Regular review • Analysts only adjust parameters
• Discount by customer attitude • Nationwide promotion • Formulaic decisions Dynamic rules
• Case-by-case judgment After-problem response Restrictions when busy • Adjusts by circumstances
Other objectives emphasized • Turning customers away • Close off cheaper products • Appropriate size movements
• First come, first served • Dumping excess stock • Peak period surcharge
• Customer goodwill One-off studies Strategic sales mix
• Structure often overridden • High price on definite sales
• Randomize tactical action

Businesses with greater information about practices are likely to have a higher commitment
customer demand can perform at higher intensity to structured observation and decision making.
of revenue management when making inventory Lower-intensity inventory allocation practices
decisions. Those that adjust specific portions of are likely to rely on unstructured observations by
their inventory in response to shorter periods of managers to identify future shocks or capture ad
variation have more sophisticated systems than hoc changes in customer willingness to pay. In
those that implement across-the-board changes.13 contrast to this reliance on human experience,
For example, increases in the frequency of change more systematic models use formalized
(from annual change to hourly change) can be structures, systems, and data collection and
applied over increasingly specific portions of analyses to detect the need for change and to
inventory (from broad, network changes to changes determine the amount of change required. These
applied to individual products or services). are included as parameters in analytical models
Higher intensity of inventory allocation is of demand where structured analysis or revenue
also found in businesses that use structured management software helps determine the
approaches, such as analytical models or rule- appropriate decisions and priorities.
based approaches, with continuous review.14
Relying solely on irregular manager actions runs a Adopting higher intensities of product
risk of observation bias, where managers respond configuration practices
to noise rather than underlying trends or ignore Table 6 describes product configuration
certain key indicators.15 For example, businesses practices that determine the extent of product
with higher intensity of inventory allocation differentiation in a business. Product differentiation

13
Sheryl E. Kimes and Richard B. Chase, “The Strategic Levers of Yield Management,” Journal of Services Research, November 1998, pp. 156-166.
14
Charles W. Chase, “Revenue management: A review,” The Journal of Business Forecasting Methods & Systems, 1999, pp. 2, 28-30.
15
Kalyan T. Talluri and Garrett van Ryzin, The Theory and Practice of Revenue Management, Springer Science & Business Media Inc., New York, N.Y., 2004.

16
 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 6: PRODUCT CONFIGURATION PRACTICES

PHYSICAL DIFFERENCES NONPHYSICAL DIFFERENCES

(LEVEL 1) (LEVEL 4)

Offerings are made using diverse Offerings vary in either inputs or Offerings are built from a set of core New products are regularly created
inputs and processes. Product range processes. Radical new products are inputs and processes. Occasional use using existing core inputs and
does not aim to segment customers. introduced as tactical responses. of radical new products. Product range processes. Product range is structured
is structured around add-ons. around restrictions and add-ons.

Inputs radically differ Same input, different process Same input, same process Identical resources
• Different facilities/equipment • Common components • Flexible product configuration • Only administration costs differ
• Varying processing costs • Effort or skill differs • Restrict product offerings between products
Not to segment customers Customization on request when busy • Differences in how price variations
• Artisan or historical focus • Bespoke product Incremental additions are formed
• Only one product • Ancillary services • Add-ons for products Imposing restrictions
• Medical or humanitarian need Products as tactical responses • Ancillary retail sales • Terms and conditions
Unusual products • Novelty effect “Outsource” cost of variation • Pitching same product differently
• Limited-run item • To match competitors • One-stop suppliers • Limits on usage
• Sourced from secondhand Using inherent differences • Small order batches Enabling segmentation
markets • Location of delivery • Membership plans
• Different channels

is the practice of designing the product or service where there are significant differences in the menu
range to target different customer segments. This of products and services available to respond to a
practice assists in the use of differential pricing more sophisticated segmentation of customers. It is
and yield controls that discourage customers from crucial that customer groups are able to understand
buying a cheaper product. these differences and that the differences are
Many businesses use physical distinctions and aligned with their willingness to pay.
processes to differentiate products or services Physical characteristics refer to the use of
in the marketplace, which results in the need different input processes. In a hotel setting,
for different resources to support the product. examples of physical characteristics include
Conversely, a business using nonphysical different bed configurations, different room sizes,
distinctions to differentiate products or services or different views (e.g., lake vs. street) from the
that are physically similar may do so by varying rooms. Using different physical characteristics
terms of sale or distribution channels. Accordingly, to configure products or services affects
the resources used in these businesses are usually resources and is likely to be a more expensive
the same for all products or services. way of achieving customer segmentation.
From a revenue management perspective, the Using nonphysical characteristics to configure
goal of providing multiple products is to segment products or services generally has fewer resource
the customer base and facilitate differential implications, but there is a risk in some cases
pricing.16 Differences in product configuration arise that customers will not understand why they
from an understanding of customer segmentation are being charged different prices. Examples of
and whether differences are created by using nonphysical characteristics are airline ticket terms
physical vs. nonphysical characteristics. Higher and conditions or a restaurant offering happy hour
intensities of product configuration practice exist discounts on the same meal items on the menu.

16
Talluri and van Ryzin, 2004.

17
 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 7: DURATION CONTROL PRACTICES

REACTIVE IMPROVEMENTS STABILIZING USAGE

(LEVEL 1) (LEVEL 4)

Initiatives target overall Initiatives detect and alleviate Initiatives actively mitigate the Initiatives regulate customer arrivals
improvement to speed up bottlenecks. The focus is on internal internal effect of customer variation. and discourage bespoke requests
internal processes as problems activity, with indirect effects on There is limited focus on changing with a strong focus on changing
arise without focusing on reducing reducing customer variation. customer behavior. customer behavior.
customer variation.

Focus on entire process Focus on bottlenecks Stabilize with business controls Stabilize with customer controls
• Adding more staff • Manager paces production • Restricting product range • Change customer behavior
Fighting fires • Reengineering • One-stop-shop suppliers • Minimize bespoke orders
• Expediting late production • Prioritize valued customers • Overbooking • Cancellation penalties
• Ad hoc policies introduced Static guidelines Formal policies • Late checkout fee
Resigned to variation • Even if industry shifts • Process guidelines • Encourage advance orders
• Growing product range • Always upsell • Formulaic controls Minimize on-shift interaction
• Business model relies on variance Problem detection systems • Regularly reviewed • Self-service processing
• Benchmarking processes Policies differ in busy periods • Advance order taking
• Measuring service time • Busy vs. slow procedures
• Different menus of products
or services

Adopting higher intensities of duration The revenue management literature identifies

control practices that variation in customer behavior is problematic
Table 7 describes practices that determine how as it makes it difficult to accurately predict and
duration controls are used in a business. Duration anticipate customer behavior.17 It requires a focus
control is the approach to manage the time taken on finding root causes of variation in a business
(overall time and variation in time) to provide process rather than simply implementing ad hoc
a product or service to a customer. Duration improvements.18
control supports the use of differential pricing At the lower intensity of practice are reactive
and yield controls by making customers more improvements that do not necessarily manage
predictable. It also helps to increase the number underlying causes of variation. For example,
of customers that can be served by a business. during times of high demand, a business may
Where a business relies on reactive improvements, speed up an entire process rather than change
duration controls only change in response to the subset of activities needed to meet the
external events or when the business redesigns its higher demand. Similarly, time-consuming
systems. Accordingly, improvements tend to occur upselling might be used at all times, rather
infrequently or on an ad hoc basis. In businesses than just during periods of low demand. These
that seek to stabilize usage, duration controls are practices reflect a “fighting fires” approach.
specifically designed to change customer behavior During busy periods, managers can expedite
in order to reduce variation in the time it takes to slow orders or schedule additional staff as
serve customers. needed, but these are reactive improvements

17
Sheryl E. Kimes, Deborah I. Barrash, and John E. Alexander, “Developing a Restaurant Revenue-management Strategy,” Cornell Hospitality Quarterly,
October 1, 1999, pp.18-29; Kimes and Chase, 1998.
18
Eliyahu M. Goldratt, The Goal, second edition, North River Press, Croton on Hudson, N.Y., 1992; Kimes, Barrash, and Alexander, 1999.

18
 REVENUE MANAGEMENT FUNDAMENTALS

rather than curing the root cause of varied customer arrivals and no-shows, simplifying
customer behavior. Practices aimed at mitigating the menu of products or services available to
variation when creating products or services reduce customer time to order, and overbooking
lead to improvements in duration control. For to offset no-shows. High intensity of duration
example, automated and advance check-in control practices can actively stabilize customer
procedures used by airlines and hotels can behavior. In contrast, lower intensity of duration
reduce variation in process times. control treats the variation in customer behavior
The highest intensity of duration control as unavoidable and focuses solely on managing
uses policies to stabilize customer behavior. business practices to mitigate the effect of varied
Practices include introducing penalties for late customer behavior. •

19
 REVENUE MANAGEMENT FUNDAMENTALS

Aligning Revenue
Management Practices
with the Business Context

A
key issue when expanding revenue This section discusses several contextual factors
management practices is to identify how that should impact how organizations appropriately
a business’s context affects the four levers deploy revenue management levers. We organize
of revenue management practices (described these contextual factors by (1) industry and business
in Table 3). For many organizations, the classic model characteristics and (2) market environment
yield management applications found in airlines and business structure characteristics.
and hotels do not seem to fit their business. Yet
understanding the four levers discussed previously Industry and Business Model
reveals that revenue management does not look Characteristics
the same in all settings. Instead, organizations Industry and business model characteristics
should establish the appropriate levers of revenue arise from the type of product or service the
management practice to fit their context. organization delivers, which can be described in

20
 REVENUE MANAGEMENT FUNDAMENTALS

broad terms as “industry features” or “business Varying demand

model features.” Traditional revenue (yield) Demand often fluctuates more than supply
management arose in airlines and hotels due due to seasonal trends, special events, or
to the ease of customer segmentation, capacity demand patterns that shift across time of day
perishability, and varying demand. (e.g., lunchtime vs. dinnertime). In situations
with high variability in demand, businesses
Customer segmentation have greater incentive to analyze trends
Customer segmentation refers to the ability and implement pricing basis and inventory
to distinguish between the needs of different allocation to maximize profitability during
market groups, depending on how much busy periods. Additionally, duration controls
variation actually exists and is observable. become useful in reducing the time it takes
When different customer segments are easily to serve customers (thereby increasing
identified, organizations can specifically target capacity during busy periods) and reducing
their products or services to customer groups variation in customer use (which makes
according to the customers’ willingness to pay. planning easier due to more predictable
When there is clear variation among customers, demand patterns).
it is easier to design products and services to
encourage customers who are willing to pay a Ability to charge varied prices
higher price. For example, the needs of business Revenue management is impacted by
travelers vs. leisure travelers are different in a differences in customer willingness-to-pay
number of aspects. Business travelers generally varying prices. That said, managing revenue
require flexible travel arrangements and are less using the pricing basis lever may be hampered
price-sensitive. In contrast, leisure customers are in particular settings where prices need to
willing to accept less flexible arrangements and be consistent to stay competitive, such as
are more price-sensitive. Hence, airline customer for commodity goods or services. Yet many
groups can be segmented using advance businesses miss revenue management
purchase requirements and conditions of sale opportunities by not recognizing or searching
(e.g., refund policies, availability of loyalty for creative pricing basis conditions in their
points, etc.). market. This is the role of pricing basis and
product configuration.
Perishability
Perishability refers to whether resource capacity, Predictable customer duration
or the products or services provided by the Revenue management practices benefit
capacity, are sensitive to losing value over time. from predictable customer duration. This
For example, manufacturing organizations are predictability allows the business to plan
able to produce finished goods and store them and implement inventory allocation and
in inventory. In contrast, service organizations to design product and service offerings to
generally have to deliver service at the time match customer needs and behavior. Some
it is demanded. Hence, idle capacity is lost if settings experience greater degrees of
not used. When capacity is highly perishable, variability in how much time it takes to serve
inventory controls and pricing basis become a customer, such as continuing care hospitals,
more important. Therefore, organizations golf courses, and consulting firms. In these
practicing revenue management should charge settings, duration control practices help
higher prices when demand is elevated and identify causes of variation and work with that
reduce prices when demand decreases and variation to mitigate the negative impact on
capacity would otherwise be wasted. revenue and profit.

21
 REVENUE MANAGEMENT FUNDAMENTALS

Market Environment and Business of product or service units. In contrast, this level of
Structure Characteristics analysis is unnecessary in small retail stores where
Competitive environment managers can easily monitor daily sales activity
The sophistication of revenue management without the need for sophisticated systems.
practices was originally driven by intense
competition in airlines and hotels. More recently, Growing and new organizations
pricing and product transparency due to internet When a business is rapidly growing or newly
technology, as well as the pressure of recessionary established, variation in customer behavior may be
trends, has heightened competition in many more difficult to detect due to a lack of established
businesses. As a result, businesses in competitive history and because the organization’s systems are
environments have responded by increasing continually developing during this phase. While
the level of detail in their demand and resource new processes are being established, unforeseen
analyses and introducing more frequent changes problems and other unexpected events may arise,
to pricing and inventory allocations. For example, leading to delays and even system failures, such as
responses to greater price sensitivity include when clients give up in the queue and take their
introducing shorter booking windows and using business elsewhere. Hence, failure to pay attention
more tactical promotions. to appropriate duration controls until processes
have been fully developed can lead to serious
Scale of business problems involving customer variation.
Industry research finds that improvements in
revenue management are associated with Formalized organizational structure
4%-7% improvements in revenue.19 Yet complex Formalized organizational structures are
revenue management practices require accuracy associated with structured analysis rather than
and precision in analysis used to inform decision intuitive analysis, with a focus on control and
making. accountability.20 Managers in more formal
Larger organizations can practice higher-intensity structures are likely required to prepare regular
levels because they have more resources available reports regarding prior performance and expected
to invest in the required support systems. High sales future trends. Hence, more formalized structures
volume levels also mean that the benefits of revenue are likely to be used for demand management
management analysis can be leveraged over a decisions and to oversee resource management.21
greater number of transactions. The reality of larger
organizations reflects economies of scale, where Functional organizational structure
a fixed cost of conducting revenue management Organizations with dedicated business functions,
analysis benefits a bigger scale of operations. As such as sales, marketing, production, and
a result, smaller organizations without access to R&D, will have staff with expertise in analyzing
significant resources may employ less-intensive levels and developing the various levers of revenue
of these techniques, and this is quite appropriate. management. At the same time, having a range
For example, in a retail store environment, of business functions requires more coordination
detailed analysis of customer demand and to ensure staff is making changes that support
identification of demand predictors are valuable revenue management practice as opposed to
where businesses are buying and selling thousands other business objectives. •

19
E. Boyd, The Future of Pricing: How Airline Ticket Pricing Has Inspired a Revolution, Palgrave Macmillan, New York, N.Y., 2007; Chase, 1999.
20
Robert H. Chenhall, “Theorizing Contingencies in Management Control Systems Research,” Handbook of Management Accounting Research, edited
by Christopher S. Chapman, Anthony G. Hopwood, and Michael D. Shields, Elsevier, Amsterdam, The Netherlands, Oxford, United Kingdom, 2007.
21
Arthur Andersen & Co., Yield Management in Small and Medium-sized Enterprises in the Tourist Industry, European Commission, Directorate-
General XXIII, Brussels, 1997.

22
 REVENUE MANAGEMENT FUNDAMENTALS

Revenue and Cost Drivers

R
evenue and cost drivers refer to Conceptual Model of Revenue
identifiable parts of business operations, and Cost
such as service outcomes or activities, The guiding principle for cost driver modeling in
that explain the amount of revenue earned or the IMA Conceptual Framework for Managerial
cost incurred. Cost drivers are incorporated Costing (CFMC) is causality, which is fundamentally
in many management accounting techniques defined as the ability to reflect cause-and-effect
to help measure resource use or describe relationships.22 This same guiding principle applies
how operations and objectives cause costs. to revenue driver modeling.
The revenue management levers mentioned A useful revenue model must efficiently guide a
previously can also be interpreted from a manager in two ways to (1) show how a monetary
revenue and cost driver perspective. effect is linked to the operational cause and (2)
Revenue drivers and how they can be modeled provide clear and direct insight into the probable
in conjunction with established cost driver models monetary effect of a particular operational action (or
are described in this section and show how cause) being considered. That is, organizations make
revenue management thinking can be integrated monetary investments to create and capture revenue
with cost management and resource thinking. value, which in turn can be measured monetarily.

22
White and Clinton, 2014.

23
 REVENUE MANAGEMENT FUNDAMENTALS

By applying the principle of causality and its the resources, products, and services about which
associated concepts, management accountants managers make decisions. Money serves as a
can create an operational model that represents common denominator to compare diverse and
their organization’s processes and then collect often incomparable nonmonetary operational
financial information to inform the operational decision alternatives. This modeling approach
model. The resulting financial model will supports managers’ information needs in two ways:
represent the causal relationships of strategic and 1. Nonmonetarily, it presents a quantitative
operational impacts on costs or on revenue. In fact, representation of relevant cause-and-effect
when revenue drivers are modeled to demonstrate relationships between resources, processes,
the causal relationship between operational inputs and customer value attributes, and
and operational outputs, then revenue drivers 2. Monetarily, it provides the financial valuation
are also cost drivers in the organization.23 The of the resource quantity relationships with
principle of causality in modeling revenue drivers revenue quantity.
establishes the baseline that managers use to Analogy fundamentally underlies all managerial
optimally achieve their revenue strategy. decisions and actions. It forms a mechanism upon
The design, implementation, and use of a which valuable business experience can be gained
revenue driver model must apply two principles— and applied. Analogy can be applied by using
causality and analogy. Causality, as described the information from a revenue model built on
above, deals with capturing and understanding operational cause-and-effect relationships. Such
quantitative cause-and-effect relationships in the a causal model facilitates learning and decision
organization. Analogy is concerned with applying making by providing for all managers clear,
causal information to optimize management logical insights into the operational relationships
decisions. That is, causal information describes and related monetary outcomes (both costs and
interactions—how do parts of the business interact revenues) of an organization.
and what are the associated financial outcomes? Based on the CFMC, we lay out 12 concepts
Analogy refers to management decisions—given essential to establishing a causal revenue model
our understanding of causal interactions, what that can be classified as follows:
changes can we make to improve performance? 1. Managerial objectives: Specific results
For example, two revenue drivers commonly or outcomes based on the application of
associated with yield management are market resources that managers choose to employ for
segments with a diverse range of price points. The the purpose of deploying work activities that
causal model should inform management of the build or protect revenue.
impact on processes and resources to service each 2. Resources: The people, technology,
segment with a matching of the consequent effect inventory, and intellectual property that
to price points. This can then enable managers have been developed or employed by
to evaluate profitability of segments and pricing the organization. Resources are combined
strategies. This becomes especially pertinent if the with work activities to establish revenue
decision-making problem concerns new market attributes.
segments and new products or services. 3. Work: Resources engaged in specific
The backbone of revenue management is an work activities or processes to accomplish
operational model composed of outputs and their managerial objectives. The ability to model
required input (resource) quantities. A quantity- specific work activities and processes assists
based causal revenue model directly connects in optimizing the capacity of resources. Work

23
Note that while all revenue drivers also represent cost drivers in the organization, the reverse is not necessarily true: Not all cost drivers can be
represented as revenue drivers.

24
 REVENUE MANAGEMENT FUNDAMENTALS

activities, combined with resources, create 12. Integrated data orientation: Information
attributes that may or may not be valued about an organization’s economic resources,
by customers. events, and their corresponding monetary
4. Attributes: The service outcomes created values that allows for the aggregation of
by resources and work activities. Ideally, the elementary data elements and their values
application of resources and work activities for any purpose. Managerial accounting
should be valuable to customers. depends on integrated operational
5. Revenue: A monetary measure of the bundle and financial data sources that can be
of product or service outcomes provided to consistently stored for access and retrieval
customers. throughout the organization, independent of
6. Cost: A monetary measure of (a) consuming the general ledger.
a resource to achieve a managerial objective Note that managerial objectives and
or (b) making a resource available and not resources form the constructs that make up the
using it. organization’s revenue model. Revenue, cost,
7. Homogeneity: The characteristic of one homogeneity, capacity, work, and attributes
or more resources that share a similarity describe the characteristics of the constructs,
that allows their managerial objectives and while responsiveness and attributability
costs to be governed by the same set of describe the relationships between the
determinants. For example, customers who constructs and integrated data orientation
share similar needs that are met by similar denotes the nature of high-quality information
resources. in the revenue model.
8. Traceability: The characteristic of a resource The CFMC also establishes four characteristics
input that permits it to be observed and that are critical to using the causal revenue
recorded with respect to its managerial model as an analogy for managerial decisions
objective or customer group (segmentation). and actions. These concepts are briefly
9. Capacity: The potential for a resource to do described below.
work that generates revenue and achieves 1. Avoidability: Resources that can be
managerial objectives. Knowledge of excess eliminated (within a reasonable time period)
or idle capacity represents a significant as a result of a decision demonstrate the
optimization opportunity. characteristic of avoidability.
10. Responsiveness: The correlation between 2. Divisibility: Resource volumes that are
the output of managerial objectives and associated with change in the volume or
the input quantities of a particular resource. nature of a managerial objective’s output
Responsiveness captures the essence of the demonstrate the characteristic of divisibility.
cause-and-effect relationship. 3. Interdependence: More or less
11. Attributability: The concept of interdependence exists in the organization’s
attributability guards against arbitrary revenue model to the extent that decisions
decisions to quantitatively associate involving multiple managerial objectives
resources with specific revenue outputs affect the amount or quality of resources
when responsiveness cannot be observed. available for one managerial objective vs.
Instead of making arbitrary quantitative another.
associations, revenue-related resources 4. Interchangeability: As the organization’s
without clear connections to revenue resources have the capability to be deployed
outputs are assigned to business or in multiple managerial objectives, the
organization levels based on control and revenue model demonstrates increasing
responsibility factors. interchangeability.

25
 REVENUE MANAGEMENT FUNDAMENTALS

FIGURE 3: REVENUE DRIVER FRAMEWORK

Revenue
Outcome

Value
vers Value
e Dri Attributes
Valu Cost)
e nue and
v
(Re

Managerial Resources and Basic Drivers Basic

Attributes Survival
Objectives Work Activities (Revenue and Cost)

Was
te Dr
(Cos ivers
t Only Wasteful Waste
) Attributes
Cost
Outcome

With respect to these revenue model customer willingness to pay. Examples of

characteristics that describe usefulness for attributes include the final outcome of the product
management actions, note that avoidability and (e.g., one night’s accommodation), features of
divisibility are primarily relevant to analysis activities, the product (e.g., quality or novelty), and the
while interdependence and interchangeability relate method of delivery (e.g., convenience, speed
primarily to decision making. of delivery, and friendliness of staff). Service is a
Focusing on revenue and cost relationships defining characteristic of attributes that directly
relevant for revenue management, Figure 3 drive customer value, influencing the revenue
presents a framework that illustrates the character earned.25 Together, resources and work activity
of revenue drivers and draws a connection create revenue based on the value of attributes
between revenue drivers and cost drivers. they produce. That said, it is important to
Figure 3 shows that revenue and cost are understand that when deciding whether to buy
connected through resources and work activities a product, customers assess the attributes they
that are used to deliver goods and services will receive from the product or service (e.g., one
to customer segments. Based on managerial night’s accommodation), rather than valuing the
objectives, organizations acquire resources and resources and work activities used by the business
generate work activity with the goal of delivering (e.g., cleaning the accommodation). The role of
value and achieving revenue objectives. All work resources and work activity in driving revenue is
activities in an organization require resources.24 in creating the final attributes. Staff training, for
Examples of resources include buildings, example, can improve the quality of product and
equipment, labor, inventory, and management. delivery method, yet it only adds value through the
Attributes determine how resources and work outcomes it produces for the customer’s use.
link to value to the customer. These are features Customers buy products because of attributes
of the product that customers value, determining they value and are willing to pay for, thus generating

24
This is a self-evident assumption that businesses cannot produce positive output with zero input, i.e., there is no free lunch. Conversely, a business
can incur cost with zero output; Robert S. Kaplan, “Introduction to Activity-Based Costing,” Harvard Business School Background Note 197-076, revised
July 2001 from February 1997, pp. 1-14.
25
Vargo and Lusch, 2004.

26
 REVENUE MANAGEMENT FUNDAMENTALS

revenue for the business. Resources and activities already acquired and activities already put in place.
that combine to create value attributes for a hotel In other words, cost drivers do not always mean that
customer, for example, may involve upgraded costs will increase. Instead, cost drivers can explain
mattresses, surround-sound music systems, high- the amount of cost already incurred.
quality room cleaning, and airport transfer service. Not all cost drivers are revenue drivers. More
For manufacturing and retail customers, value resources and activities increase revenue only by
attributes often involve innovative product features, increasing the value a customer receives from the
product durability, and service after sale. product. Accordingly, only resources and work
Resources and work activities are also critical to activities that offer value or basic attributes are
providing basic attributes that, while essential, do revenue drivers. Resources and work activities
not directly increase revenue. In a hotel business, leading to waste attributes should be reduced
basic resources and activities may include a and the related cost drivers removed from the
parking lot and online invoicing. Customers organization. Another source of costs in the
are frustrated if these basic attributes are not organization not related to revenue attributes is
provided, but they do not value these attributes the opportunity costs of idle resources (i.e., excess
to the point of factoring them into how often they capacity). Idle resources create costs that do not
book rooms or how much they expect to pay for contribute directly to revenue attributes, but idle
a hotel room. Similarly, resources and activities resources are not necessarily a wasteful attribute
involved in product order fulfillment, for example, in the organization. Idle resources may result from
are essential but typically not value-adding for the issues involving market demand, management
manufacturing or retail customer. policy, legal requirements, or contractual
Organizations are constantly battling the problem expectations. If the idle capacity is excessive, then
of resources and work being spent on nonvalue- the attending cost is wasteful. On the other hand, if
adding attributes that only produce waste or, worse, the capacity represents opportunities for flexibility,
frustration for the customer. Misunderstanding customization, speed, or development, then idle
customer needs and failure to segment markets resources put the organization in a position to create
can result in delivering attributes that would have more value attributes. Hence, idle resources can be
no impact on buying or paying more (in contrast to a potential source of revenue.
value attributes) or any impact on the decision to
purchase if the attribute was removed (in contrast to Identifying Revenue and Cost Drivers
basic attributes). Quality, delivery time, and product The revenue model highlights that revenue
functions that are surplus to customer expectations drivers and cost drivers are connected through
can incur costs without an increase in customer resources and work activities. Decision making
value. Of course, low-quality and ill-timed resources must simultaneously examine both revenue drivers
and work activities will negatively impact customers, and cost drivers. This reflects the core focus of
causing revenues to decline. Attributes that have no businesses on profitable ROI as the ultimate
or a negative impact on revenue are waste drivers in objective and not separately on the revenue and
the organization. cost components. The absence of a balanced
Figure 3 illustrates the connection that resources perspective has the potential for dysfunctional
and work activities have with costs and demonstrates decision making, which can harm overall profitability.
that connection in relationship to revenue. All Resources and work activities engaged to increase
initiatives to improve or sustain revenue require revenue also incur costs, and this combination
resources and work activities to produce value determines the final profitability of the business.
attributes and basic attributes that drive revenue A key exercise to align management accounting
and that drive costs. Cost drivers can involve direct information with revenue management practice is
expenditures or the opportunity cost of resources to identify the central revenue and cost drivers in

27
 REVENUE MANAGEMENT FUNDAMENTALS

your business. Table 8 provides examples of drivers You can evaluate the importance of each driver
associated with the levers of revenue management in your organization, making sure to identify any
and illustrations of the impact they can have on new important drivers arising from changes in
revenue and cost. The descriptions are designed revenue management practices. You can work with
to apply broadly and trigger discussions in your other business functions to model the interactions
organization. The examples, likewise, are chosen to among drivers with the principles of causality and
provide illustrations from a variety of settings and analogy and find gaps where further management
are not meant to be a comprehensive list. accounting information is needed. •

TABLE 8: EXAMPLES OF REVENUE AND COST DRIVERS

PRICING BASIS
DRIVERS DESCRIPTION DRIVER EXAMPLE REVENUE IMPACT COST IMPACT

Price points Diversity of price points Dynamic sales system that Higher prices for time periods of Higher investment
served by products/services enables different prices based high demand in flexible-response
on the time of day monitoring systems

Special events Special events that generate Holiday promotion event Increased customer demand Higher operating costs in
increased customer demand offering discount prices during the event promoting and running
the event

Brand image Reputation of products/ Marketing for high-quality Increased customer demand at Increased advertising and
services and organization in products/services higher price points quality control costs
the market

Market share A bigger market share with Targeted marketing campaigns Greater customer awareness of Increased marketing costs
a greater presence in size to different customer segments the company’s service offerings to preserve and enhance
and scope market position

INVENTORY
ALLOCATION DESCRIPTION DRIVER EXAMPLE REVENUE IMPACT COST IMPACT
DRIVERS

Customer loyalty Ability to engage and retain Training program for frontline Improved customer experience Increased training costs
existing customers employees

Range of customer Serving a diverse range of Number of distinct customer Better matching of capacity to Higher customer
segments customer segments groups customer groups relationship management
(CRM) costs

Location of service Being located close to target Main street location Increased foot traffic Higher rent
centers customers

Scale of service Size of organization and Workforce size and diversity Increased capacity and capability Diseconomies of scale from
total capacity of production available for sale complexity and monitoring
processes

Product/service range Diversity of product/service Number of available product Greater flexibility in meeting Drives cost through product
range offered to customers features customer demand management needs

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 REVENUE MANAGEMENT FUNDAMENTALS

TABLE 8: EXAMPLES OF REVENUE AND COST DRIVERS (continued)

PRODUCT
CONFIGURATION DESCRIPTION DRIVER EXAMPLE REVENUE IMPACT COST IMPACT
DRIVERS

Specialized Technology or activities Advanced manufacturing Higher prices for customized Higher investment and
technology or designed for the production equipment used to customize service operating costs for advanced
activities of specialized products or customer products technology
services

Close B2B and B2C Supply chain relationships Investment in new CRM system Better matching of production to Higher investment and
relationships and customer relationships to track customer demand demand patterns operating costs
patterns

Employee skill and Capability of employees to Training employees to produce Increased employee flexibility to Increased training costs
experience produce different goods and multiple goods and services address customer demand shifts
services

Total quality The level and consistency of Six Sigma-quality programs in Increased customer propensity to Increased design review and
management product/service standard design or production recommend the product or brand production control costs

New products/ Level and frequency of Product innovation rate Increased version rollouts that Additional information costs
services product or service innovation target value attributes in educating consumers

DURATION
CONTROL DESCRIPTION DRIVER EXAMPLE REVENUE IMPACT COST IMPACT
DRIVERS

Production/service The speed with which inputs Implementation of new Increased capacity in time and Higher investment in
efficiency are converted into product technologies scope training and technology
and service outputs

Service lead time Speed of response to a Improved processes to increase Reduced lead time and variability Higher training costs
customer order speed of service delivery in response time incurred for new process
designs

Product/service Level of complexity of Design for manufacture Enhances product/service Higher product design cost;
design production reliability and functionality offset by cheaper production
costs

Capacity utilization Enabling capacity potential Incentivizing flexible work Better matching of capacity to Higher coordination and
schedules customer demand patterns communication costs

29
 REVENUE MANAGEMENT FUNDAMENTALS

Data Analytics to Support

Revenue Management
Data Practice Intensity approaches. In general, higher intensity of
To improve revenue management practices, revenue management practice requires higher
organizations need to examine the types of intensity of data analytics.
data collected, the method used to collect More intense data analytics can help detect
data, and how data are analyzed. Table 9 patterns in demand, incorporate a broad
describes the intensity of data practice used range of internal and external information, and
across a spectrum of practice. Lower intensity improve confidence in decision making.
of practice involves limited record keeping, The analytical approach, types of data, and
experience-based collection methods (such as collection methods are the three main areas of
on-the-job observation or anecdotal evidence), data practice. Analytical revenue management
and intuitive analysis. Higher intensity of relies on statistical models investigating causality
practice involves continuous data collection to understand customer demand. This helps
that is broad in nature, specific to particular detect patterns in demand to inform pricing
revenue management techniques, and reliant basis, inventory allocation, product configuration,
on sophisticated computational models and duration control. Demand data incude data
that support complex revenue management on customer and competitor behavior, together

TABLE 9: SPECTRUM OF DATA PRACTICES

LOWER INTENSITY LOWER INTENSITY LOWER INTENSITY HIGHER INTENSITY

DATA ANALYTICS
(LEVEL 1) (LEVEL 2) (LEVEL 3) (LEVEL 4)

INTUITIVE Analysis is mainly Analysis blends intuition COMPUTATIONAL

Analysis is intuitive, relying intuitive but informed and formulaic techniques. Analysis relies on causality
ANALYTICAL
predominantly on manager by visualizations and Frameworks used to consider models, which systematically
APPROACH
judgment and experience. comparisons. Ad hoc a range of revenue drivers. incorporate key revenue
attention to revenue drivers. drivers.

INTERNAL, Moderately aggregated Customer and product data BROAD-SCOPE,

AGGREGATE transaction data. Some are kept alongside individual SPECIFIC
Record keeping is limited records are kept about transaction records. Broad Extensive internal and
to internal activity. Data customers and external range of external influences external information
TYPES OF DATA
are highly aggregated and environment, but they are are recorded to help is recorded alongside
primarily for compliance or separate from transaction understand future trends. transactions. Detailed records
accountability. records. about competitor and
environment activity.

EXPERIENCE-BASED Point-of-sale systems capture Regular, documented CONTINUOUS

Data collection relies on a range of transaction details. research into customers Fully automated collection is
COLLECTION on-the-job observation and Some research into trends and industry trends to used for internal and external
METHOD casual feedback. Records but it is infrequent or only for complement automated data. Any manual research is
are updated manually and special projects. transaction records. structured for use alongside
limited to transaction data. automated records.

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 REVENUE MANAGEMENT FUNDAMENTALS

with demand trends and patterns. Analytical compared to lower intensity of this revenue
revenue management relies on in-depth records management lever. This commitment requires
of historical trends. Recording transaction modifying business processes and adjusting
details, operating performance, and customer customer conditions to affect behavior. Barriers
characteristics for individual transactions enriches to implementation are organizational strategy,
demand analysis. Analytical revenue management competitive environment, and customer
relies on accurate records of historical trends. resistance to change. These barriers dictate the
Regular collection of transactional, competitive, ability businesses have to make these changes.
and environmental demand data improves For duration control practices, barriers may be
accuracy in demand analysis. difficult to penetrate when the organization
has little market power or no strongly defined
Considerations for Adopting Revenue strategic niche.
Management Practices
The revenue management framework
presented in this SMA (Table 3) provides “Implementation and day-
businesses with functional objectives that can
contribute to achieving higher intensity of to-day operational demands
revenue management practice. These priorities
may conflict with traditional management can create barriers to
accounting functions that focus on cost control
and external financial reporting. Yet priorities
implementing new revenue
involving revenue management can motivate management practices.”
synergies between revenue and cost systems.
Some practices are relatively cost-neutral
and so are determined based on competitive Comparatively higher resource requirements
pressures and strategic choices. Other practices are likely to arise when increasing the intensity
require additional resource investment for of inventory allocation practices, which
improved practice and so are more closely require regular managerial attention and
related to cost-benefit notions. computational analytical approaches. These
Pricing by customer needs may not be more demands on organization structure introduce
expensive than cost-based pricing in light the need for additional resources and costs
of the challenge to separate and develop during implementation as well as day-to-day
effective managerial costing systems that rise investment. Inventory allocation procedures
above external financial reporting purposes.26 require frequent review and alterations to
Product configuration encourages searching prices and product availability, with the highest
for cost-effective ways of enacting product intensity of practice requiring the review of
differentiation, suggesting that higher intensity many products in detail.
of practice (based more on contractual In addition, higher investment is required for
differences) is cheaper to implement than lower more sophisticated data analytics required to
intensity of practice (based more on physical support more complex revenue management
differences). practices. These investments may include
Higher intensity of duration control demands advanced software packages or more highly
higher levels of management attention trained staff who are skilled in applying

26
IMA Managerial Costing Task Force, April 2019; IMA Managerial Costing Task Force, Costing System Attributes That Support Good Decision Making,
IMA, October 2019, www.imanet.org/insights-and-trends/strategic-cost-management/costing-system-attributes-that-support-good-decision-making.

31
 REVENUE MANAGEMENT FUNDAMENTALS

analytical frameworks. The collection of external exceeds the required investment.

data may be required together with internal Many organizations are continuously
records, which typically increases the size of improving and extending technology
investment in the revenue management system. investments for other business needs. If the
Improving the method of data collection may design of these investments can incorporate
also increase the investment required and the improvements in revenue management
cost of collection. Implementation and day-to- practices, then the incremental investment
day operational demands can create barriers in technology for revenue management data
to implementing new revenue management gathering and analysis is more likely justified
practices. Hence, organizations are likely to by benefits resulting from intensified revenue
improve practice only if the additional benefit management practices. •

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 REVENUE MANAGEMENT FUNDAMENTALS

CONCLUSION
R
evenue management is not just an interesting • Pricing basis and inventory allocation are the
area for management accounting. It two main levers for demand management.
is an essential area that complements o Pricing basis reflects willingness to pay and
accountants’ resource management expertise, recognizes differences across segmented
providing the knowledge skills necessary for the customer groups. For example, corporate
effective future-proofing of the management customers may have a higher need for
accounting role. Management accounting has cutting-edge personal technology devices
achieved considerable success in making resource and are willing to pay more, as compared
management more transparent and purposive, to retail customers whose technology
but its involvement in price setting has led to needs and willingness to pay are lower.
criticisms in some organizations that price-setting o Inventory allocation determines how
procedures have caused price to be a hostage of resource capacity can be exploited and
the organization’s cost structure.27 shared across customer segments, whether
The revenue management role for the it be traditional inventories of product
management accountant must encompass demand or units of available service capacity. For
management as well as resource management. example, as client demand increases
Indeed, revenue management extends during busy season(s), the allocation
conventional resource management to focus on of audit staff time at a CPA firm should
the best use of resources to optimize customer be carefully prioritized and coordinated
profitability. With a dominant focus on customers with pricing basis analysis of customer
and their willingness to pay, management segments.
accounting should tailor its resource management • Product configuration and duration control are
efforts to emphasize revenue management the two main levers for resource management.
objectives. Relevance is regained, indeed, “where o Product configuration tailors the service
the customer is in charge.”28 to customer segment needs using
combinations of physical and non-
Main Takeaways physical elements. For example,
The main takeaways from this SMA are as follows: certain concert seats have closer
• Understanding the customer and recognizing proximity to the
differences in needs and willingness to pay
are the foundations of revenue management.
The ability to segment customers enables
service delivery and resources to be aligned
and optimized by delivering the right
product at the right price at the right
time to the right customer. This
requires demand and resource
management to work hand
in hand.

27
Reinaldo Guerreiro, Sérgio Rodrigues Bio, and Elvira Vazquez Villamor Merschmann, “Cost-to-serve measurement and customer profitability analy-
sis,” The International Journal of Logistics Management, November 2008, pp. 389-407.
28
H. Thomas Johnson, “Relevance Regained: Total Quality Management and the Role of Management Accounting,” Critical Perspectives on Accounting,
September 1994, pp. 259-267.

33
 REVENUE MANAGEMENT FUNDAMENTALS

 p  erformer (physical), while types of concert • A

 key insight from contemplation of both
tickets can have different conditions revenue and cost drivers is that all revenue
around refunds and advance payment drivers are cost drivers, but not all cost drivers
(nonphysical). are revenue drivers. Many organizations have
o Duration control focuses on time variability ignored the former at their peril—slashing costs
and how this can be managed for to only discover that they also slashed revenue.
individual customers and time of day. For Nevertheless, cost reduction can and should
example, a golf course may require players be accomplished by identifying and focusing
to use a golf cart to shorten playing time efficiency efforts on resource use and work
during peak hours of play. activities that do not drive revenue.
• Revenue management is not a one-size-fits-all
model. The four levers of revenue management Expanding the ROI Model
should be deployed to recognize and support We began this SMA noting that the DuPont ROI
the different environments in which model “orphans” the sales elements of ROI (see
organizations operate, as well as different Figure 1). Why? Perhaps early 20th Century thinking
organizational structures and objectives. Cost- in management had a strong supply-side
benefit considerations should guide the perspective with an emphasis on direct control of
appropriate level of revenue management costs and investments. As displayed in Figure 1,
intensity as set out in Table 1. In particular, the the DuPont model expands logically. Its cost and
types of data, collection methods, and investment elements can be mathematically
sophistication of analysis will vary across decomposed into finer detail. The exactness of
different organizations. While not every business drilling down into these elements is compelling.
needs the same intensity of revenue On the other hand, revenues are more difficult to
management sophistication, management plan, control, and evaluate. External environment
accountants should be on the lookout for factors have a greater impact on sales than they
opportunities to adjust the intensity level if the do on costs and investments. The sales element
payoff is positive. A self-assessment using the that runs throughout the DuPont model is not a
tools provided in this SMA may reveal such function of a formulaic linear process. Compared
opportunities. to cost and investments, there is more uncertainty
• The inclusion of revenue drivers with about the underlying control factors that drive
cost drivers provides a powerful tool for sales, perhaps so much that management
modeling and analysis built on causality and accountants hesitate to commit their resources to
facilitating analogy, as introduced in the IMA comparable systems and analytics in support of
CFMC. Causality provides the foundation sales and revenue management.
between an underlying reality and the Figure 4 illustrates how the DuPont model
financial model, whereas analogy applies might be extended with sales, no longer
this knowledge to optimize management orphaned, but now firmly established with
decisions. Knowledge of revenue and cost its own family comprising both demand and
driver causal relationships can identify resource management drivers. Note that resource
opportunities to improve revenues by management is associated with the investment
reexamining customer segments and further turnover arm in the DuPont model, which
adjusting the four levers. Management decomposes into product configuration and
accountants who bring forward this duration control levers. Demand management is
knowledge to the design of performance aligned with the profit margin arm of the model
measures and control systems can partner and branches out into the pricing basis and
with executives to accelerate strategy. inventory allocation levers. The example drivers

34
 REVENUE MANAGEMENT FUNDAMENTALS

in Table 8 are used to illustrate how an organization in this critical work in organizations, including:
can further decompose the model into specific • Rigorous modeling
implementations of a revenue strategy. • Performance metricizing
This expanded DuPont model demonstrates • Data quality and control
a pathway for finer-grained revenue analysis • Systematized data analytics
and performance capability investigation. When
integrated with the original DuPont model that For the last century, management
breaks down the elements using income statement accountants have been successfully employing
and balance sheet items with a strong financial management models and establishing causal
accounting focus, we believe that a century after its drivers in partnership with executives to
development it is time for this model to be revised achieve strategic objectives involving costs and
and expanded to incorporate advances in revenue investments. This same work can and should
and resource management concepts. be accomplished with sales and revenue. In
Management accountants and educators of partnership with marketing and sales functions,
management accountants need a better vehicle to accountants can use this SMA to lay out a
be involved in the revenue value creation process management model and causal driver approach
and move into stronger roles that contribute that can be used to evaluate the sophistication
to strategy realization. Clearly accountants are of an organization’s revenue management
not the harbingers of revenue management in system and then redesign that system with
the organization, but the accounting profession optimal analytics and metrics that support the
provides certain key qualities that are often missing organization’s strategic objectives. •

FIGURE 4: THE DUPONT ROI MODEL (EXPANDED ON SALES)

Levers Drivers (Example)

With Family! B2C Customer
Product Relationships tracking system
Sales
Configuration
Total Quality Six Sigma
Management quality programs
Investment ÷ Resource
Turnover Management
Service Employee
Lead Time training programs
Total Duration
Investment Control Capacity Flexible
Utilization work incentives

Return on
Investment
x
Dynamic
Price Points
sales system
Profit Pricing Basis
Targeted
Brand Image
advertising
Profit Demand
Margin
÷ Sales
Management
With Family! Customer Distinct
Segmenting customer groups
Sales Inventory
Allocation
Service Available
Range product features

For more information, please visit imanet.org/thought_leadership.

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 REVENUE MANAGEMENT FUNDAMENTALS

APPENDIX: Case Study Examples of

Revenue Management Practice Intensity
This appendix provides three brief case studies BigFood management is relatively free to make
describing actual organizations (names have strategic and day-to-day management decisions
been changed). We include two restaurants within broadly prescribed limits. Revenue-focused
and a retailer to provide examples of revenue decisions are primarily centralized, with the marketing
management beyond the traditional examples in and operations department responsible for pricing,
the airline and hotel industries. promotional activity, and product availability that are
The two restaurants are a stand-alone family consistent nationwide. Restaurant-level managers
restaurant and an international fast-food chain. They operate within a structured set of standard operating
illustrate the different approaches that companies procedures, although they have some scope to use
can take to revenue management based on the four store-specific promotional offers. The organization
levers of revenue management. The retail example had recently undergone a change in ownership,
is provided to show revenue management principles which led to a change in business philosophy to
in a goods-based context. For each organization revenue-focused decisions, rather than the previous
we provide a description of the company, classify its internal cost focus. This revenue focus incorporates
revenue management practice using the four levers competitor and customer behavior. At the head
of revenue management, and note examples of its office level, pricing and product availability decisions
practice for each lever. emphasize data collection and quantifiable results.
BigFood is part of an international fast-food Support for these decisions include financial analysis
company. It has more than 70 restaurants around the (variances and trends, and scenario modeling) and
country and employs more than 2,000 people. While qualitative data collection (competitor site visits and
the restaurant is part of an international franchise, benchmarking products).

TABLE A1: REVENUE MANAGEMENT AT BIGFOOD

PRICING BASIS INVENTORY ALLOCATION PRODUCT CONFIGURATION DURATION CONTROL

Pricing is strategic, aimed at a price A fixed schedule determines New products are regularly created Initiatives regulate customer arrivals
point relative to the market. Pricing how prices and priorities change using existing core inputs and and discourage bespoke requests
captures differences among groups over the year. These are across-the- processes. Product range is structured with a strong focus on changing
or area trends. board changes. around restrictions and add-ons. customer behavior.
(Level 3) (Level 2) (Level 4) (Level 4)

• P ricing is one of many levers • P roduct mix and drive-through • S trong evidence that product •H  ead office operations actively
of revenue management, emphasis are the main methods of range is linked with customer manage national systems used to
complementing product mix and prioritizing higher-value customers. segmentation. regulate duration.
duration management. • Static menus and an inability to • Product range is created from • The network formulaically controls
• Changing pricing across the formally prioritize higher-value a common set of ingredients standard operating procedures.
network is a costly and formal customers cause mismatches and resources. • Sample initiatives: Layout
process. during different time periods and • Stores are required to follow and equipment changes are
in different locations. head office decisions about product being implemented to improve
range, but this intended product operations processes.
mix does not always fit at the
store level.

36
 REVENUE MANAGEMENT FUNDAMENTALS

SmallFood is a stand-alone Malaysian target students and office staff, with an average
restaurant owned by a husband and wife team price of about $11 per meal. The owner team
that has been operating for two years. It seats jointly makes all internal decisions, with an
a maximum of 36 guests and is located close to external accounting firm hired for compliance
several academic institutions, apartments, and work. Revenue-focused decisions are made
student hostels. The owners previously held exclusively using managerial experience. Sparse
managerial and head office positions at several records are kept of day-to-day sales, limited
international fast-food chains. SmallFood to handwritten orders and a cash register that
is the fifth restaurant they have set up over only records total amounts received. Managerial
approximately 30 years and is the only one effort is focused on operations and developing
they currently manage. They have established new menu items rather than formulating
a “middle of the road” market position to revenue-focused strategies.

TABLE A2: REVENUE MANAGEMENT AT SMALLFOOD

PRICING BASIS INVENTORY ALLOCATION PRODUCT CONFIGURATION DURATION CONTROL

Pricing is primarily cost-plus or No change or infrequent changes in Offerings vary in either inputs or Initiatives target overall improvement
following not-for-profit objectives. price and customer priorities, often processes. Radical new products are or to speed up internal processes as
(Level 1) informed by unstructured judgment. introduced as tactical responses. problems arise without focusing on
(Level 1) (Level 2) reducing customer variation.
(Level 1)

• P rices are mainly based on •N  o examples of capacity •M  enu items are chosen based on •O  perating procedures are
competitor benchmarking and reservation found. authenticity and for variety rather unchanged between busy and
ingredient costs. • Some customers are lost during than customer segmentation. slow periods.
• Prices are purposefully held periods of high demand. • New products are positioned at • Duration controls focus on entire
constant for the first three a higher price point to existing processes; employees aim to do
years of business to encourage menu items. the same activities faster.
repeat patronage.

Retailer is a stand-alone entertainment the cost of processing a diverse inventory

store that sells a range of music formats, base and the benefit of price movements
gaming formats, clothing, and books. It is in response to demand patterns. This relies
positioned as a specialty retailer, aiming to on a try-and-see approach using small,
provide an immersive shopping experience. frequent orders to gauge product popularity
Compared to its larger competitors, Retailer and the need for price changes. Decisions
maintains an extensive product catalog, about pricing and product availability make
preferring to compete through differentiation strong use of item-level and product-level
rather than price. This objective is achieved transaction histories. These data are collected
through a strong secondhand market, using point-of-sale systems and inventory
supplemented with an in-depth range of management software. Yet given the nature
new products. Retailer is run by two owner- of the entertainment industry, there is also
operators who oversee 27 staff members. a strong reliance on manager experience to
Revenue-focused decisions aim to balance understand industry trends.

37
 REVENUE MANAGEMENT FUNDAMENTALS

TABLE A3: REVENUE MANAGEMENT AT RETAILER

PRICING BASIS INVENTORY ALLOCATION PRODUCT CONFIGURATION DURATION CONTROL

Pricing follows market standard Periodic review to inform price Offerings vary in either inputs or Initiatives target overall improvement
prices. Limited variation in prices and priority changes. Changes target processes. Radical new products are or to speed up internal processes as
among different groups or groups of products and broad introduced as tactical responses. problems arise without focusing on
area trends. time periods. (Level 2) reducing customer variation.
(Level 2) (Level 3) (Level 1)

•N  ew products are first priced at • A try-and-see approach is used to • T he business model has evolved • C ustomer behavior is relatively
cost-plus. The price is adjusted for incrementally move prices of new from a secondhand shop stable in this retail environment.
popularity when the product is product. This is based on speed of “discovery” experience toward a Accordingly, fewer duration
restocked. stockout. deep-catalog “comprehensive” controls are needed.
• Some evidence of differential • A business model of small, frequent experience.
pricing by customer segment; orders determines the appropriate • Working capital cost of maintaining
this is in the form of a club yield control methods. a deep catalog is controlled using
member program. • Yield control methods are chosen small order sizes. This may require
to balance the cost of processing more staff costs than if larger orders
stock and the benefit of price were used.
movements. • Cost of certain promotions and
products is prohibitively high
due to the nature of the market
and customers.

10/27/20 11 a.m. FINAL1

38