Revenue Management is the art and science of price differentiation according to capacity utilization. In this blog article we will discuss how to implement it for Parcel & Freight networks. This article introduces one of its key elements: Price Differentiation.
The Power of Price Differentiation
The basic principle of Revenue Management is to sell the right product at the right price to the right customer in order to maximize profit.
Instead of selling all products at the same price, companies applying Revenue Management differentiate the product and the price in order to target customers having different willingness to pay.
The chart at the left illustrates how prices are managed without Revenue Management: for each product or service, a price P0 maximizing contribution to margin (i.e. net revenue minus variable cost) given the price demand curve predicting the quantity of product sold at a given price.
With Revenue Management, different prices are offered for the same product:
- A promotion enables to add a volume effect to margin because the product can now be purchased under restricted conditions by customers that are willing to pay a lower price P-. It is here represented by the orange area.
- A premium version of the product sold at a higher price P+ enables to add a value effect to margin, enabling to capture a higher price from customers with lower price sensitivity. It is here represented by the red area.
The result of this price differentiation (i.e. same product sold with different variations/conditions) enables to increase margin sometimes by up to 20%.
Download our free article to learn more about Simulation: Impact of more accurate cost and willingness to pay calculation on margin.