Revenue management was pioneered as “yield management” by American Airlines in the 1980’s and subsequently deployed by Marriott International and others in diverse industries attempting to maximize their revenues. It has been defined as “the application of disciplined analytics that predict consumer behaviour at the micro-market levels and optimize product availability and price to maximize revenue growth. The primary aim of revenue management is selling the right product to the right customer at the right time for the right price and with the right pack.” (Wikipeida, 7/12/20).
Yet maximizing revenues is not synonymous with maximizing profits and that’s where the skills of management accountants/controllers come in. In management accounting we traditionally focus on costs and cost management, giving little thought to revenue decisions. Yet revenue management decisions are important financial decisions. Management accountants/controllers need to be concerned with all aspects of their organizations’ financial success, bring the tools of their profession to bear on the analysis of revenue, cost, and investment decisions.
This is basic premise of Profitability Analytics - providing decision makers with better information grounded on sound economic principles and on operational models of organizations’ revenues and costs. By employing profitability analytics management accountants/controllers can better serve as strategic business partners within their organizations, helping to increase their profitability, and helping to ensure their long-term sustainability.
The purpose of managerial costing is business insight, not computational virtuosity. The relevance of cost information and the insight it provides are more important that its degree of accuracy. In revenue management, understanding product or service cost may be important, but it’s only one part of the equation for measuring the value a customer’s business brings to an organization. Other factors that fall outside the scope of traditional costing practices must be measured and used in the evaluation. These “cost to serve” include (but are not limited to) special indirect services provided to the customer (design assistance, preferred customer benefits), the cost of winning the customer’s business (marketing effort, quote / requote effort), the cost of administering the customer’s business once it’s won (engineering / schedule changes, in-process oversight), the cost of fulfilling the customer’s orders (finished goods storage and handling, order picking, sequencing) and post-sale costs (collections, warranty work).
Measuring the cost of activities such as these is challenging, but it must be done if revenue is to be managed effectively. These “costs to serve” are required if an organization is to fully understand customer profitability after-the-fact, but it is even more important that these costs – and the activities that drive them – be known to those individuals marketing and selling the company’s products and services and used by them to pursue revenue that generates profits, not just revenue itself.
The financial measure of a for-profit company’s success is its return on investment (ROI). It’s important to note that “revenue” is not part of the ROI equation, but “profit” is. Management accountants need to support their organization’s revenue generators by providing them with the insight necessary to insure that the revenues they generate provide the profits required for financial success.