by Javier Carvallo, Vice President at BTS
Over the last few years many consumer packaged goods (CPG) companies have seen volumes decrease across markets as consumers alter their habits. Products like tobacco, alcohol and, more recently, soft drinks and snacks, are all facing the prospect of a shrinking market – which has serious consequences for both revenues and long term profitability.
Originally pioneered by airlines and hotels, where users of services can be “locked-in” through reservations which are non-transferable, Revenue Management (RM; understood as the use of disciplined analysis to optimize product availability and price to maximize revenue growth) allowed companies to offer alternative prices for the same service depending on how much the user was willing to spend. Think about an airline seat on a plane from London to New York: all passengers will board in one location and disembark at the same destination but depending on when they want to travel, which class they will travel in and other options, the seat will have a very different price. This differentiated pricing will have important consequences for the airline’s top and bottom line results.
In the case of CPG companies, consumers cannot be locked-in as purchases can be easily deferred. This poses serious challenges when applying similar principles, yet some industry players have been able to successfully apply RM across their global operations by focusing on a few priorities (which will be described below) that make RM stick. Despite the fact that the discipline has adopted many different names and acronyms including: Net Revenue Management (NRM), Profitable Revenue Growth Management (PRGM) and Strategic Net Revenue Management (SNRM), its main objective is to understand the customers' perception of product value and accurately align product prices, placement and availability with consumption and shopping occasions.
The above goal might seem like something that any CPG company would obviously strive to achieve. However, creating this alignment is quite challenging. Additionally, moving from a concept to an applicable reality can be a huge undertaking given the size of some organizations and the different goals that functions like Sales, Marketing, Insights and Innovation are trying to achieve. We have worked with many companies during the last 15 years to help them address these challenges and effectively implement RM. Below we introduce some of the areas where we believe particular emphasis should be made if RM implementation is to be successful:
1. Focus on creating a RM culture: Despite the fact that many of the aspects of Revenue Management can be perceived as “technical” in nature (estimating demand curves, calculating cross-elasticities, identifying revenue pools, etc.), companies that are most successful in implementing RM start by developing a strong culture that supports it. This basically entails ensuring that there is a common understanding across the organization of what is meant by RM, which business pillars it touches and why it is important for the entire company to adopt the new ways of working that support RM. Building a sound business case for the implementation of RM and how it will improve business results is crucial in getting everyone’s buy-in. The RM message must also be taken beyond the organization to include customers and retail partners, for when customers are not brought on board, RM initiatives can easily fall flat on their faces, as these partners are the ones truly in touch with consumers and Point of Sale (POS) execution is largely their responsibility and a key enabler of RM.
2. Develop both specialized and broad RM capabilities: If the expertise does not exist within the company so as to allow teams to make informed decisions on pricing, packaging and the ideal promotions that will unlock value, it must be developed or acquired externally. It is imperative that experts have the right skills and knowledge to support commercial teams and collaborate effectively. On the flip side, however, when the RM concepts and tools are only understood and managed by specialized teams, they might seem foreign to brand and customer teams who need to be able to execute RM strategies and bring them to life. Therefore, when companies follow an inclusive approach and develop RM capabilities broadly – for example, by ensuring everyone has an understanding of the trade-offs between volume growth, revenue growth and profit growth - the time and effort needed to make RM a reality in the company can be accelerated.
3. Don’t forget how to “make it work”: Companies often struggle with figuring out where RM needs to sit within the organizational matrix. Should RM be part of the Sales or Marketing organization? Or should it naturally exist within Finance? We have seen success with different accommodations, and exactly where RM sits isn’t crucial as long as it is closely connected with Commercial operations overall. More important is the need to define clear ways of working that allow RM teams to have a seat at the table in the key decision making forums that plan and drive the business cycle including the innovation agenda, the customer and promotion agenda and the long term commercial strategy. Without RM’s input in these forums, only serious disconnects can be expected when it comes to execution.
4. Sustain over the long term: In our current fast-changing environment where employees tend to rotate quickly or move to new assignments regularly, RM “know-how” can be easily weakened and even lost to an organization. Establishing a Center of Excellence focused on RM and assigning RM Champions that are recognized across the company for their expertise can help the organization avoid this pitfall. Likewise, understanding what career trajectories and opportunities RM experts can have over the long term in the company will help to retain talent and ensure that the capability keeps thriving and evolves as needed.
Sadly there isn’t a single “silver bullet” that will guarantee the success of any RM implementation but by not overlooking the four areas mentioned above, organizations can start their RM journey on a surer footing.
See how Coca-Cola used a business simulation to develop Revenue Management capabilities and drive success: