The Origin of Revenue Management

Let's face it: revenue management is just a palatable way of saying "how to make the greatest possible amount of money," and even that's a little diplomatic. Revenue management, often called yield management, is the practice of dynamic pricing to help solve supply-allocation problems. And American Airlines was first to master the art. Their efforts in revenue management eventually led to the formation of a separate analytics business, now called Sabre, that employs more than 9,000 people worldwide.

What's a supply-allocation problem? Consider the travel industries: airlines, hotels, and rental car companies. They have a fixed supply of seats, rooms, and cars, respectively. The key to their profitability is high utilization -- as soon as a plane takes off, every empty seat is money lost, and any amount of money for those empty seats is better than no money. So revenue management allows the price of a seat to fall when a plane isn't filling up fast enough. In the same way, the price of a hotel room is allowed to sky-rocket when demand exceeds supply.

In essence, revenue management is a combination of web-based information systems and behind-the-scenes mathematics that help markets equilibrate. Travel Web sites like Expedia.com are real-world manifestations of revenue management, and while they can be maddeningly fickle in consumers' eyes, the travel industry would die without them.

(AA logo from American Airlines)