How to Increase Marginal Returns

It does not matter what business cycle a company is in; attaining incremental revenue is always a chief concern. Executives become executives by boosting revenue levels without increasing incremental costs. Yield management is one tool executives are using to achieve these results. Also known as "revenue management," yield management is a systematic approach to managing inventory and the sale of perishable goods to maximize incremental revenue. This is especially useful in determining pricing strategy.

Instructions

1. Make the commitment. Increasing marginal returns requires buy-in from across the organization. Senior managers must demonstrate their support for the initiative, and resources should be dedicated appropriately.

2. Be specific; then expand. It is easy to bite off more than you can chew with marginal revenue programs. Increasing marginal revenue for one product may result in additional gains for other products. However, start small. Once you record successful results from the initial programs, you can expand your scope.

3. Identify your business model. How does your business operate differently? How exactly does it make it a profit? What makes it different from the competition, and what are the main drivers of revenue growth?

4. Incorporate your pricing strategy into the business model. If you have a low-fixed-cost business model you don't need a low-fixed-cost pricing strategy. Your pricing model should be dynamic and respond to changes in both supply and demand.

5. Take advantage of opportunities and pricing anomalies. If your business model is a low-cost airline, pricing should still take advantage of opportunities to make additional revenue. The essence of increasing marginal revenue is exploiting opportunities to make additional revenue while preserving quality. Review each segment of your business model. Match pricing strategy to the specific product. Understand what drives revenue growth and higher prices.

6. Implement performance measures to track, monitor and reward successes that result in profitability (increase in marginal returns). Performance measures should be directly connected to profitability. Allow employees to learn from mistakes and best practices. Communicate updates and successes often.

References

• Making Yield Management Work for You: Ten Steps to Enhanced Revenues
• Marginal Costs Versus Marginal Returns: Why Cutting Costs Is Not Always the Answer

Resources

• Pricing and Revenue Optimization; Robert Lewis Phillips