What is revenue management?
Revenue management is the process companies use to match their sales with customer payments to reduce revenue leakage or any unnoticed or unintended loss of revenue from a company. Accountants leverage this process to recognize and allocate revenue to multiple business entities. Managers from sales, marketing, and operation teams use revenue management to monitor the performance of products and services sold by the company and to optimize their offerings. Using revenue management software (RMS), revenue data can be evaluated to identify which customers or contracts are most profitable for the company.
Benefits of revenue management
Revenue management has several benefits that help organizations reduce lost revenue and remain compliant. The following are some of the benefits:
- Minimize revenue leakage: Revenue leakage is a preventable loss of revenue from a company, which can be minimized by eliminating manual data entry, accurately tracking invoices, or attributing the correct costs to the jobs performed. Revenue management can help organizations manage these tasks better, minimizing revenue leakage.
- Eliminate manual processes: As mentioned above, manual processes can lead to revenue leakage, human error, and wasted time. Several actions in the revenue management process can be partially or fully automated to save time, reduce human interaction, and minimize the possibility of avoidable errors. Some of these processes are approving invoices or timesheets in real time, flagging invalid data, and tracking invoices.
- Stay compliant: The two most prominent frameworks for businesses to manage revenue more consistently are ASC 606 and IFRS 15, which affect all businesses that enter into contracts with customers to transfer goods or services. The higher the volume of contracts and transactions, the more challenging it is for companies to comply with these revenue recognition guidelines. Revenue management software contains tools to help determine the correct contract price while allocating the price to the correct services or goods delivered at the time of completion.
Basic elements of revenue management
The following are some core elements within revenue management that can help users manage revenue and stay compliant:
- Revenue recognition: Revenue recognition is a generally accepted accounting principle (GAAP) that determines how and when revenue should be recognized. This revenue management software feature helps save time by automatically logging customer or sales info into the system and providing accurate calculations quickly, eliminating human error. Usually, revenue can’t be recognized and accounted for until specific criteria, such as a price being determined, collection of payment, and delivery of goods or services, have been met. Once these criteria have been fulfilled, the dollar amount is measurable to a company. The revenue recognition standard, ASC 606, helps maintain a uniform framework for recognizing revenue from customers.
- Reporting: Reporting features in revenue management software include revenue from sales, product or customer profitability, pricing details for individual or groups of products and services, and analyzing the performance of special offers, packages, and incentives.
- Customer management: This feature allows users to create, approve, and track customers across the lifecycle of every contract. Capturing every contractual change creates greater visibility into a customer's behavior, which can help lower future risks of doing business with those customers.
- ASC 606 and IFRS 15 compliance: ASC 606 and IFRS 15 provide a framework for businesses to recognize revenue more consistently. It affects all companies— public, private and non-profit organizations, that enter into contracts with customers to transfer goods or services. Revenue management software can help with these compliances by determining and allocating the transaction price and recognizing revenue when the company performs its contractual obligations.
- Forecasting: When using revenue data from multiple sources, this feature allows companies to forecast future revenue, allowing teams to make more informed decisions for the future. Forecasting also gives insight into the financial impact of changing business models, pricing strategies, and customer contracts.
Revenue management best practices
Machines can do a lot, but they can’t do it all. If a company is looking to capitalize on revenue management, here are a few manual strategies to consider that machine learning can contribute toward but are ultimately in the hands of the user.
- Minimize churn rate: Customer churn rate is the percentage of customers that quit your product or services (churn) within a time frame. Getting a hold on churn rate and solutions to minimize that number is your first step to creating a more profitable business model.
- Focus on customer retention: Customer retention doesn’t stop at onboarding to beat customer churn. SaaS businesses today need to be continually striving to uplift, place, and justify their product to customers.
- Identify which channels have the highest return on investment (ROI): When the most profitable channels are identified, organizations can double down on them while cutting costs from less lucrative routes.
- Aim for organic growth: The best way of spending money is not to spend it at all. Organic growth certainly isn’t free, but it’s a lot cheaper than more traditional advertising strategies.
Revenue management vs. hospitality and travel revenue management
Revenue management has long been associated with the hospitality and travel industries. However, today most SaaS businesses are considering a revenue operations team (RevOps). This umbrella term combines finance, product, marketing, and sales to provide a product or service with the best chance of optimizing revenue. Despite originating in the hospitality sector, revenue management is now common in other industries, and its methodology is quickly maximizing profits for the SaaS sector today.
That being said, revenue management is still popular in hospitality and travel, which prompts these businesses to adapt their pricing and even the services or products they offer. Hotel managers can more accurately predict demand and other consumer behaviors with performance data and analytics.
Revenue management began in the airline industry, where companies found ways to anticipate consumer demand to introduce dynamic pricing. However, it is applicable in any industry where different customers are willing to pay different prices for the same product. This commonly occurs when there is only a certain amount of that product to be sold and when that product must be sold before a certain point in time.
Nathan Calabrese
Nathan is a Senior Research Analyst at G2 focusing on finance and accounting software and their respective markets. Coming from the world of finance, Nathan understands and is familiar with the importance of finance/accounting software, and the complexities, struggles, and nuances that come with them. He has over 15 years of analytical experience in industries ranging from health care and transportation logistics to food service and software. Nathan received his MBA in finance and international business administration from the University of Illinois, Chicago, and his B.S. in production and operations management from California State University, Chico.
