Revenue Management: A Strategy for Increasing Sales Revenue in Small Businesses

By Shields, Jeff | Journal of Small Business Strategy, Fall/Winter 2005 | Go to article overview

Revenue Management: A Strategy for Increasing Sales Revenue in Small Businesses


Shields, Jeff, Journal of Small Business Strategy


ABSTRACT

Revenue management is a strategy used by companies in many industries to match products and services to customers in order to increase sales revenues. Although revenue management is well suited to meet some of the challenges of small businesses, there has been no prior research on its use in a small business setting. This paper presents the results from a survey of 76 small businesses on the use and effect of revenue management. The results demonstrate that revenue management is employed by small businesses and that it has a significant and positive effect on sales revenue. The results also reveal practices most commonly engaged in and the extent to which the strategy is applied by small businesses.

INTRODUCTION

Revenue management refers to a process of seeking to maximize a business's revenues.3 It is a system of inventory controls and pricing to manage capacity (Harris & Finder, 1995) that has been shown to increase revenues (Geraghty & Johnson, 1997; Marmorstein, Rossomme, & Sarel, 2003). Initially developed in the airline industry as yield management (Boyd & Bilegan, 2003), revenue management has spread to other industries, including hospitality, media and broadcasting, retailing, and transportation (Talluri & Van Ryzin, 2004).

Although revenue management has been developed and utilized by large companies, it can be implemented in a simple form that addresses many of the constraints faced by small businesses.

These constraints include scarce resources for marketing and data gathering, a preference for relying on internal rather than external information, and a preference for informal sources of marketing information (Pineda, Lerner, & Miller, 1998; Smeltzer, Fann, & Nikolaisen, 1988). Revenue management may help small businesses to increase their sales revenue.

The empirical evidence on revenue management's characteristics and effects is derived from a mix of anecdotal reports, case studies, and mathematical models, primarily reported in the operations management literature (see Carroll & Grimes, 1995; Cross, 1997; Smith, Leimkuhler, & Darro,1992; Talluri & Van Ryzin, 2004; Weatherford & Bodily, 1992). There has been no research using large samples that offers empirical evidence on how widely revenue management is practiced. Thus, although revenue management represents a potential opportunity for small businesses, there is no empirical evidence to show the extent to which revenue management is practiced in small businesses, much less its effects on them.

In order to address this gap, the current research was guided by the following research questions. First, do small businesses use revenue management practices? second, if they do use revenue management then to what extent and which elements of revenue management practice do small businesses use? Lastly, how does the use of revenue management affect small businesses?

The findings of this study should offer guidance for the application of revenue management in small business. Knowing the current level and nature of practice provides a benchmark. Efforts to develop a systematic program can use this as a foundation. Identification of the relative importance of the various elements of revenue management will enable a small business owner to implement a tailored program founded on empirical evidence from other small businesses. More information can help small businesses avoid the potential pitfalls that can arise from transferring management practices proven only in big businesses. Most importantly, demonstration of positive effects on revenue from a large sample of small businesses supports a decision to invest in revenue management activities.

In the next section, the practice of revenue management is defined and its elements are outlined. This is followed by presentation of the study's methodology and results of the investigation. Finally, the implications of findings are discussed. …

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