Introduction
These are challenging times in the CPG world. Disruptive forces like rising inflation, regulatory changes, exogenous shocks, and changing customer behavior continue to shake up the industry. These changes are not only exposing serious gaps in revenue growth but also forcing companies to rethink their RGM and innovation strategy.
Eighty percent of businesses remain dissatisfied with their revenue growth management, despite years of resource-intense investments into their initiatives. Executives can turn the tide by having an introspective look at the past, present, and future of revenue growth management and leverage that knowledge to create and maintain sustainable competitive advantage.
Read on to learn more about the history of revenue growth management, its current impact, and the potential trends for the future.
Revenue growth management: A Historical Perspective
The earliest description of forecasting models, the predecessors of modern revenue management can be found in passenger bookings and cancellation models of the airline industry roughly 50 years ago. As the focus was occupancy optimization meaning cancellations, no shows and misconnections, it was not until the development of the Littlewood’s rule in 1972 that data was used to forecast load factors
based upon advanced bookings.
The opportunity to develop an algorithm to address revenue maximization was linked to technological developments with the introduction of a sophisticated computer reservations system.
Littlewood’s algorithm enabled a forecasting system to be built based upon a seat inventory problem for a single leg with two fare classes. Years later, yield management which is closely related to RGM came into existence on a significant scale after the deregulation of the US airline industry with American Airlines (AA) and PEOPLExpress fighting for the lowest fares, completely transforming the industry. Yield management is a variable pricing strategy, based on understanding, anticipating and influencing customer behavior in order to maximize revenue or profits from a fixed, time-limited resource (e.g., seats in an airplane or hotel rooms). In the end it was AA who managed it for the first time to control the availability of deeply discounted seats forcing their competitor into irrelevance.
Based on the airline industry’s yield management, the hotel industry started to apply revenue management strategies in the late 1980s, as the products shared similar characteristics, such as perishability, fixed capacity and the need for segmentation based on customers’ levels of price sensitivity. Revenue management is critical for hotels as it’s a service, not just a product on the shelf. Demand varies by day of the week and by season, and there are many services that hoteliers can attach or package to a simple room night to capture the interest of many different types of customers.
Although challenges in the CPG industry are more complex than in the hospitality or aviation sector, the idea of using advanced analytics to predict customer behavior became crucial for the survival of CPG companies. CPGs really need to focus on “Profit Management” – employing the use of top line growth to drive revenue and profitability.
Since 2017, over 60% of revenue growth in the world’s top 50 FMCGs did not emerge from volume increase but the optimization of pricing, product mix and promotion management. With the increasing power of retailers and the above-mentioned external and internal challenges in the industry, successfully executed revenue growth management will be the crucial factor for the survival of businesses in the next decades.
Revenue Growth Management Today
Today, the scope and influence of revenue growth management goes beyond the hotel and airline industry. CPGs strongly rely on advanced analytical tools like machine learning or artificial intelligence to predict customer behavior and optimize their pricing, portfolios, product development and promotion planning.
Revenue growth management strategies evolved from the traditional periodic assessment and in the last decades the CPG industry invented new processes and tools that seemingly revolutionized profit optimization and revenue growth. Companies were able respond faster to changes in customer behavior and strengthened their position facing the rising power of intermediaries and retailers.
However, the operation landscape seems to be shifting faster than expected and internal as well as external factors are exposing the big problems in outdated RGM programs. Processes are not sufficient, silos in the organizations lead to inefficiencies and legacy tools are simply inaccurate and lead to unnecessary high costs.The revenue managers of tomorrow must reimagine their tactics and strategy to effectively cope with today’s challenges.
One of the key issues today is that CPG companies experience broken links between real-time data collection and insight execution. It results in ineffective spending and low returns on investment.
CPG brands spend between 11% to 27% of revenue on trade promotion. It is the second-largest expense on the profit and loss table. Yet, 72% of all trade promotions in North America lose money. The same problem can be seen in pricing decisions that often rely on legacy tools like elasticities or outdated heuristics like value-based or cost-plus pricing.
At the same moment, new external factors need to be considered. Rising inflation rates lead to massive spikes in commodity prices. The US is experiencing the highest year-on-year leap in inflation rates at 7.9% for February 2022. Rebounding customer demand with disrupted global supply chains increases the burden.
Legacy revenue growth management strategies cannot keep pace with the rapidly changing industry standards. They no longer ensure the creation of sustainable competitive advantage leaving CPG brands with no choice but to completely rethink their strategies.
The Future of Revenue Management
The ever-shifting dynamics amidst an inflationary market warrant an innovation of revenue growth management strategies. CPGs must be aware of the following trends and innovations to remain profitable in the coming years.
- Building a Multi-Channel Approach
Traditional revenue growth management techniques are tactical-based, focused on pricing and inventory controls. Brands need to adopt a holistic enterprise approach to their revenue growth targets. Strategic revenue growth management solutions rely on deep insights from sophisticated analysis of data while simultaneously built the capabilities to effectively transform these insights into action. Take advantage of the shifts in consumer behavior and commodity pricing.
Right now is the perfect time to undertake a comprehensive review of your revenue growth management. Assess your firm’s channels, customers, and competitors using innovative tools in advanced analytics. Stop relying on legacy tools and plan your actions with evidence-based insights.
- Leveraging AI
Revenue management strategies need to result in actions taken by shoppers. Real-time insights are an integral part of the equation. They allow businesses to tailor products fast to match the changing market dynamics. Legacy models like value based pricing rely on gut feeling and heuristics and do not serve the demands of customers today. Using sophisticated analytical tools and systems can drive top-line growth as well as recording a better return on investment.
Automation and innovative tools enable businesses to achieve long term profitability, support their trade term negotiations, plan and execute data-driven promotion and customer-centric product development. About 43% of CPG brands target Artificial Intelligence and Machine Learning as priority investments.
- Mending the Loopholes with Cloud Technology
The lag between data analysis and executed insights is the leading cause of revenue growth management failure. Siloed legacy analytics only provides rear-view insights. The flawed data cannot match the demands of the ever-changing revenue growth management landscape. Cloud technology can create a closed-loop, integrated, and holistic approach for data-driven decision-making. Cloud-based solutions offer basically infinite computing power, high scaling capabilities and the complete integration of insights enabling a holistic view on revenue growth management and sustainable competitive advantage.
- Transitioning from Data and Insights to Brand-telling and Action
The problem is not a shortage in data supply. CPG brands generate mountains of data and insights about sales, customers, and products while primary and secondary sources continue to increase. Yet 70% of the SKUs developed deliver less than 5% of total revenues.
Therefore, CPGs are moving away from sifting terabytes of data but distill fast actionable insights to make conclusions and set them up for immediate action and implementation. With the support of cloud-based systems CPGs can achieve rapid time to value and quick decision-making allows them to remain competitive in a cut-throat market.
Conclusion
Revenue growth management emerged in a world defined by high fixed costs and regulatory innovation but transformed into the most relevant mechanism to maintain profitability for CPG companies in the 21st century. Shifting consumer behavior and an inflationary environment render most outdated systems useless and confront businesses with the need for innovative tools and processes. To retain a sustainable competitive advantage CPGs must rethink their approach to revenue growth management and find a way to integrate real-time insights into profitable actions.
Look out for the trends above to set up your brand for consistent growth through optimized revenue growth management. Redefine your pricing, product development, and insights with deep analytics. Buynomics, as a cloud-based revenue growth management solution, enables you to leverage your real-time data to create actionable insights in minutes. Its virtual customer technology based on a proprietary machine learning algorithm allows you to understand and predict your customers in a completely novel way and opens up new possibilities for price, product, portfolio and promotion optimization.
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