Cost-cutting, Re-engineering, Downsizing, Now What?
In the twelve years since I started my Revenue Management company, I have worked with scores of companies around the world that were looking for ways to deal with today's increasingly chaotic marketplace. Many of these companies were already experiencing urgent financial pressures when they turned to my company for help. Others were preparing to face radical changes in their markets. Most had an acute dread of the unknown--uncertainty was their common enemy.
Some had tried cost-cutting, reengineering, and downsizing with varying degrees of success. These strategies, however, often led to "corporate anorexia," with serious side effects, including killing employee morale and crippling the company's ability to grow. All these companies had to answer to increasingly impatient investors who were not satisfied with squeezing profit out of a shrinking company. Understandably, they were demanding long-term, profitable growth.
But consumers are now more fractious, and competitors, more vicious. When previously successful executives come face-to-face with stubborn problems they have never experienced before, their anxiety is acute. Some of the frustrations they have expressed to me may sound familiar:*
"The lousy economy almost killed us, but we got through it. Now, business is finally moving again, and guess what? Our customers are being picked off by these new low-cost guys. We know our stuff is better than theirs. And we service the hell out of our customers. But we're still losing market share."*
"We're working hard. Real hard. We have more customers than ever before. But we're going nowhere on the bottom line--or the top line, for that matter. Look at the last six quarters. Absolutely flat. Nothing is working. This is the worst rut I've ever been in. Frankly, I'm fed up."*
"The good news is that business is picking up. The bad news is that it's only in some markets. Talk about a vicious cycle. Now we've got to spend money to meet new demand in a couple of markets, but the rest of our markets are going nowhere. We've got to get some serious profits, and fast."*
"Our whole industry is sucking wind. We've tried everything we can think of. Nothing seems to work. There's got to be something we're missing. I've never failed before, and I don't intend to start now."
These seasoned executives are savvy businesspeople, but their education and experience did not prepare them for these marketplace predicaments.
Other executives, however, face these same issues and have found a way not only to stay alive but to prosper. They have discovered an array of revenue-enhancing tactics that help them understand their markets better than ever before. They have learned to predict customer demand at the micromarket level and to respond rapidly, as demand changes. They have learned to convert market uncertainty to probability, and probability to profitability. In doing so, they have uncovered the secrets to revenue growth. Using these tactics, some have achieved spectacular results.*
Bob Crandall, who spearheaded the development of these revenue-enhancing tactics at American Airlines, credits them with contributing $500 million
annually to American's bottom line.*
The initial use of these tactics at Delta Air Lines yielded over $300 million
in increased revenue during the first year.*
Bill Marriott Jr. heard about these tactics directly from Crandall. The practice now generates over $100 million annually
for his hotels.*
Larry Ramaekers, as president of National Car Rental, used these tactics as an integral part of his turnaround strategy at that failing company. In eighteen months, National was pulled from the brink of bankruptcy and transformed into a viable, profitable, revenue-driven firm, growing at a 20% annual rate.*
Peter Kretz, general manager of the Canadian Broadcasting Corporation, adopted these tactics and realized a $2 million gain in the first two weeks.
These tactics have evolved into a powerful new business discipline now known as Revenue Management (RM), a new way to manage supply and demand. RM is a proven competitive weapon that enables companies to understand the complexities of today's diverse marketplace, deal with them on a micromarket basis, and make decisions confidently and rapidly.
Revenue Management first emerged in the airline industry as a tactic to deal with new low-cost competitors and fierce pricing wars that resulted from deregulation. Now, RM is an essential business practice at all surviving airlines, and RM techniques have been used successfully at hotels, rental car firms, and railroads and are being tested by broadcasters, utilities, manufacturers, cruise lines, and companies in other industries. It's clear that RM can be successfully applied to every kind of business.
Revenue Management is the art and science of predicting real-time customer demand at the micromarket level and optimizing the price and availability of products. The application of RM principles is limitless, and the potential in terms of revenue return is impressive. Firms employing RM techniques have seen revenues increase between 3% and 7% without significant capital expenditures, resulting in a 50% to 100% increase in profits!
In its most basic form, Revenue Management focuses managers on more keenly observing the buying behavior of customers and making price and product availability adjustments to achieve significant revenue gains. In its high-tech mode, RM is a disciplined process that enables companies to use massive amounts of customer data to dynamically forecast customer behavior at the micromarket level. In all cases, the objective of Revenue Management is to sell the right product to the right customer at the right time for the right price, thereby maximizing revenue from a company's products. RM focuses companies on revenue growth, not cost-cutting and downsizing. It drives bottom-line increases through top-line improvements.
Revenue Management has been the best-kept secret in business for over a decade, but now RM success stories are becoming known and the word is getting out to the broad business audience. The Wall Street Journal
recently called Revenue Management an emerging business strategy that is "poised to explode."Revenue Management: Hard-core Tactics for Market Domination
reveals secrets that are critical for long-term success in a chaotic marketplace, such as how to*
Discount with discretion to build market share.*
Uncover hidden demand which allows opportunistic pricing.*
Understand consumer tradeoffs between price and other product attributes.*
Increase revenue without increasing products or promotions.*
Identify "lost" revenue opportunity.*
Use market intelligence as a competitive weapon.*
Establish a revenue-driven organization focusing on profitable growth.
As word of RM successes has spread, business executives have increasingly asked me where they can find comprehensive information about this new strategy. Unfortunately, the available published material has been limited to a few articles in specialized trade magazines and academic papers, none of which provide a high-level discussion of RM techniques or answer basic questions about how RM can apply to a range of businesses. I wrote Revenue Management: Hard-core Tactics for Market Domination
to address these needs.
I hope this book will encourage executives who are faced with market turmoil to focus on solutions that address the external market, rather than relying solely on internal actions like downsizing. Shrinking a company is sometimes necessary, but it's not the way to ensure long-term profitability. Growth comes from the marketplace, not the workplace. The key to real growth is learning how to deal effectively and proactively with a constantly changing market. That's what Revenue Management is all about.From the Hardcover edition.
Excerpted from Revenue Management by Robert G. Cross. . Excerpted by permission of Crown Business, a division of Random House LLC. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.