Perfect Match

Boost profits by matching the right customer with the right price.
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This story appears in the June 1997 issue of Entrepreneur. Subscribe »

If a dentist asks Peter Chwalisz to handle his tax return, he'll get a referral to another accountant, while a doctor asking the same question will get an appointment. If you want Chwalisz, president and co-owner of a 10-person Mississauga, Ontario, accounting firm, to do your taxes after April 30, you'll get a nice discount compared to people who want to file earlier.

What may sound whimsical is actually sound business practice, says Chwalisz, a student of an emerging discipline called revenue management. He's found he makes money on doctors' returns but loses on dentists'. And he cuts prices May 1 because it's the day after the Canadian tax filing deadline.

"You have to charge more when there's bigger demand, but if someone wants to save money, he can," Chwalisz says of his deadline-tied pricing scheme. And on the subject of turning down certain clients, he explains, "You don't do the jobs that are not profitable, period."

Revenue management, or RM, ensures you sell the right product to the right customer at the right price to maximize profitability, according to Bob Cross, an Atlanta RM consultant and author of Revenue Management (Broadway Books). RM can help almost any business succeed and may be essential to survival in some cases, he says.

"There are a lot of things you can do to differentiate your company, but all of them can be matched or surpassed by your competitors," says Cross. "But one of them will make you an invincible competitor, and that's having a strong revenue stream. There's nothing like a huge revenue stream to wash away a lot of problems."

In The Beginning

Airlines started doing what they called yield management about 15 years ago, says Steve Kretsch, vice president of Sabre Decision Technologies, an RM consulting company and former subsidiary of American Airlines. The recently deregulated airlines were struggling in a competitive marketplace at about the same time advances in computer technology made it possible to manage complex ticket pricing schemes.

Since then, hotels, car rental agencies and numerous other businesses have embraced RM. But its principles have remained the same. Cross defines RM as the application of disciplined tactics that predict consumer behavior at the micromarket level and optimize product availability and price to maximize revenue growth.

RM differs from traditional pricing practice in several key ways. One basic concept is using price to manage supply and demand. For instance, a restaurant that's overcrowded on Fridays and Saturdays may raise weekend prices to reduce demand without having to turn customers away.

Another core principle is basing price on markets rather than cost. That is, instead of starting with what it costs to produce something, RM looks at its perceived value to customers. A product may be priced far above its cost if customers find it worth the price.

Careful market research, segmentation and micromarketing are other essential RM tools. Chwalisz charges clients in each of the seven Canadian provinces he serves differently, as well as bases pricing on the customer's industry and other factors. Revenue management is highly segmented, he says. "You have to have information about your client to do it."

Finally, RM requires the discipline to turn down unprofitable business. Kretsch says, "The first question we ask is, `Are you willing to say no to customers?' If you aren't, there's not much reason to do [RM]."

Anyone Can Do It

RM can be complex. Kretsch says large clients may invest millions in computer systems, data gathering, analysis and marketing to set up a comprehensive RM program. The payoffs, however, can be impressive. Companies such as American Airlines, Marriott International and Southwest Airlines report RM adds hundreds of millions of dollars in sales each year.

Yet revenue management isn't only for large companies, nor does it always require a major investment. Cross cites a one-chair barber shop to illustrate how the concept can work for small firms.

In his example, the barber noticed Saturday customers often waited hours for a trim, and many left without getting their hair cut, while Tuesdays were very slow. The barber guessed some Saturday customers, such as retirees and schoolchildren, could come on Tuesdays. For many working people, however, Saturday was the only option.

The barber considered an across-the-board price increase but figured it would drive away people on limited and fixed incomes. He thought of adding an assistant and another chair but couldn't justify the cost.

The barber's solution was to raise Saturday prices 20 percent and cut Tuesday prices 20 percent. As a result, flexible bargain seekers flocked to Tuesdays. People to whom convenience was more important than price came on Saturdays, including some who had previously been turned away. Wait times shrank to 30 minutes tops, pleasing customers, while the shop's overall revenues rose 20 percent.

Knowing The Limits

Revenue management isn't for all companies or all industries. It requires customers who place different values on your product or service. And it works best when fixed costs are high and inventory is perishable. These traits are closely identified with airlines, which spend billions for planes, deal with many different types of customers, and whose inventory of unsold seats becomes worthless once a plane takes off. Printing companies, with their high fixed costs and large overhead, can also benefit from RM.

RM doesn't work well in industries with little or no inventory, Kretsch says. For example, a tour operator who arranges travel on demand for customers, without buying anything in advance, will benefit little from RM. "The perishability of inventory is very important," he says.

RM is also of limited use to businesses that are government-regulated or controlled by some other outside agency, Kretsch adds. That's the case with Bob Bennett, founder and owner of the 20-employee Edgewater Inn in Biloxi, Mississippi.

As a condition of receiving a higher rating in the American Automobile Association's travel guides, Bennett says, he has to stick to his published prices. That forces him to plan pricing a year in advance and takes away the flexibility to raise prices to meet short-term surges in demand.

Revenue management is risky. One risk is that you'll raise prices too high or for the wrong customers. Bennett believes some of his competitors do this. "On weekends, they may get $115, when during the week they may [charge] $29," he says. "This person has an unhappy guest."

Another risk is that you'll price below cost or turn away more customers than you should. When you're playing with revenues, you've got to be extra careful, both in setting prices and in developing systems to carry out the RM strategy. As an example of the risks, Cross says a glitch in the computer system running a new American Airlines RM program in 1988 mistakenly told ticket agents that all discounted seats on certain flights had been sold. Customers calling about advertised low fares were told the low-fare seats were sold out and were then referred to American's competitors. Meanwhile, American planes were taking off with plenty of empty discounted seats. The RM error cost the airline $50 million in lost revenues in a single quarter.

The Sum Total

RM experts often describe the technique as more a change in philosophy than an implementation of technology or complex marketing systems. But entrepreneurs who do it insist that effective RM requires a great deal of attention to detail.

Peter Chwalisz uses off-the-shelf professional practice management software to make sure he knows both his costs and his customers intimately. He carefully discriminates in pricing based on seasons and markets. And he ruthlessly disciplines himself to micromarket to those he has found are his most profitable customers, such as truckers and doctors, and turn away those who don't yield adequate return.

Trying to manage revenues with any less commitment is unlikely to produce any significant competitive edge. "You already have higher prices before Christmas and lower prices after Christmas," he says. "A lot of [business owners] already do this without knowing it's a revenue management principle."

Contact Sources

Aeronomics Inc., Waterstone, #300, 4751 Best Rd., Atlanta, GA 30337,;

Edgewater Inn, 1936 Beach Blvd., Biloxi, MS 39531, (800) 323-9676, (601) 388-1100;

Peter Chwalisz, c/o Peter Chwalisz Tax Experts Inc., 1655 Brentano Blvd., Mississauga, ON CAN, L4X 1A7, (800) 665-5306, (905) 949-1408;

Sabre Decision Technologies, P.O. Box 619615, MD 4366, DFW Airport, TX 75261, (817) 967-1121.

Mark Henricks is an Austin, Texas, writer specializing in business topics.

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