From Scratch to Strategy: Unveiling the Role of Revenue Management Software in Sculpting Profitable Pricing Models
Starting from Scratch
Around two years ago I joined a leading micro-mobility provider. With a small force of three we were tasked to build up their pricing department from scratch. But how to do that?
In the initial days, our approach was fairly straightforward, anchoring heavily on cost-based pricing i.e. calculating the overall cost of providing the service and then adding a margin to establish the price. Over time, with the growing need to enhance our profitability, we shifted our strategy towards value-based pricing.
Riding towards value-based pricing
The shift meant pivoting from cost to understanding what the service was truly ‘worth.’ But how do you go about measuring and quantifying ‘worth’ in a segment as varied as e-mobility?
In theory our strategies could encapsulate a myriad of factors such as battery life, vehicle speed, technological advancements or usage and even external variables like topography, seasonality and weather. Over time, we analysed lots of data and tried to understand patterns and predict behaviours that subtly nudged the pricing needle for our eScooters and eBikes. The narrative shifted from just ‘pricing’ to ‘strategic pricing’ — a model that was no longer a static entity, but an ever-evolving function allowing us to optimise pricing and boost profitability.
Despite our efforts, parts of our pricing management remained a rather manual, labor-intensive, and less-than-precise endeavor. This situation underscored a broader imperative: To refine our operations and achieve both accuracy and profit maximization, we realized the importance of adopting revenue management software. We understood that pricing was merely one aspect of the extensive domain of revenue management.
The Imperative Shift to Revenue Management Software: A $70+bn market
By integrating revenue management software we could not only enhance our day-to-day pricing activities but also gain wider insights across the entire spectrum of revenue optimization. One solution enabled us e.g. to A/B test diverse price points, effectively assessing riders’ price sensitivity, but it was not all about price setting. We also needed to manage discounts to acquire and retain customers which is why we implemented a promotion software called Voucherify.
Navigating through our e-mobility pricing journey, the crucial role of revenue management software became increasingly evident, in parallel with a global trend where such platforms are seeing a significant surge in market value and utilisation.
But which industries benefit most of revenue management software besides micro-mobility?
Usually industries with a high customer volume and high pricing complexity are those which can best leverage revenue software. While pricing complexity refers to how complex it is to determine a final price based on different factors (in the micro-mobility case e.g. weather, vehicle quality, temperature etc.), customer volume refers to the quantity of individual customers a business interacts with.
The market for revenue management software is on an upward trajectory, with projections suggesting a CAGR of 13.5%. By 2033, it’s anticipated that the market value will touch approximately US$ 70 billion. As of 2023, the worldwide market’s worth is poised to exceed US$ 20 billion. [1]
This raises the question: What are the key drivers behind this accelerated expansion, particularly considering that the concept of revenue management has been around for some time? Let’s briefly step back in time.
History of Revenue Management
Modern revenue management traces its roots back to the 1970s when BOAC, an ancestor of British Airways, initiated “early-bird bookings.” Recognising that leisure travellers, who were more price-sensitive, booked earlier than business travellers, BOAC offered them a discounted rate for early bookings. This move posed a dilemma: allocating too many discounted seats risked missing out on business clientele, the primary revenue source, while too few discounted seats could lead to unfilled planes.
Variables like seasonality, travel days, and flight times complicated matters further. What began as a single airline’s promotion evolved into comprehensive revenue management, spanning various industries from hotels to car rentals. [2]
Although revenue management is not a new concept, recent developments have significantly boosted the market for revenue management software:
- The surge of digital transformation and increased data availability, propelling companies to embed revenue management into their tech infrastructures, thereby increasing profits without impacting their cost base.
- With escalating economic challenges, epitomised by events like the COVID-19 pandemic, inflation and escalating market competition, optimal revenue strategies have become essential for companies, keeping profits healthy without alienating customers.
- The inception of AI/ML has improved the efficacy of revenue management, enabling real-time analysis of extensive data sets, and empowering businesses to adapt to market fluctuations, and even predict future outcomes.
Market Landscape
As mentioned, the market for revenue management software is vast, yet, despite numerous solutions, I encountered no market map spotlighting potential key players of today and the future. Hence, I created my own:
The market can generally be segmented in the following categories:
- Strategic Pricing & Optimization
This includes solutions focusing on dynamic pricing, A/B testing, promotion software and software working on competitor price scraping. - Financial Management & Forecasting
This segment looks at companies providing financial planning solutions including demand planning, revenue forecasting, budgeting. - Availability Management
Availability Management refers to solutions that help strategically managing and allocating inventory (such as rooms in a hotel or seats on a flight) to maximize revenue. It’s particularly crucial in industries with perishable inventory, where unsold items (like vacant hotel rooms or empty airplane seats) represent lost revenue that cannot be recovered. - Billing
Billing encompasses solutions for invoicing customers for goods and recurring services, managing subscription services, applying usage-based billing when applicable, and overseeing the subsequent payment collection processes.
However, which of these segments should command our attention?
Why we are interested in Usage-based Billing & Subscription Management solutions
Usage-Based Billing tools, such as m3ter and Octane, have ushered in an era where businesses can tailor their billing models to usage metrics, ensuring that customers are billed precisely for their consumption. This model not only aligns the revenue with the value provided, but also enhances customer satisfaction by offering a fair and transparent billing structure. Integrating usage-based billing can help businesses to optimise pricing strategies and increase revenue. According to OpenView, companies that adopt usage-based pricing models demonstrate a significant outperformance in revenue growth rates, surpassing their peers in the broader SaaS index by an impressive 31%. [3]
On the other hand, Subscription Management platforms, including names like Recurly and Adapty, cater to the growing subscription economy, including parts or the entire lifecycle of a subscription, from customer acquisition and price experimentation, to subscription analytics and billing as well as renewals and retention. Implementing effective subscription management software streamlines administrative tasks and strengthens customer relationships by ensuring consistent, reliable billing experiences. The flexibility offered by these platforms allows businesses to be more flexible with their subscription offerings and optimise pricing.
Both segments — Usage-Based Billing and Subscription Management — play important roles in contemporary revenue management, each carving out unique value propositions and challenges for businesses in today’s digital age. While the former emphasises flexible and fair billing practices, the latter focuses on streamlining and optimising the subscription lifecycle. Both are imperative in developing a robust revenue management strategy, ensuring businesses remain agile, customer-centric, and financially strategic in their operations.
Connect With Us
The market for revenue management software is experiencing vibrant growth, and it’s an area we’re truly passionate about. We’re on the lookout for promising investment opportunities ranging from Late Seed to Series B stages in this dynamic field. If you’re a seeking a partner to grow with, we’d love to start a conversation. Drop us a line! 😊
