Revenue optimization

Examples of Revenue optimization in the following topics:

• Profit Optimization

  • Firms utilize strategies such as price and promotional reduction to minimize cost, maximize revenue, and thereby optimize profits.
  • Yield management can help firms optimize profits.
  • Since total demand normally exceeds what the particular firm can produce in that period, the models attempt to optimize the firm's outputs to maximize revenue.
  • Revenue optimization is a method of determining 'optimal' profits or expenditures, and can be related to quadratics, as the vertex of a parabola can illustrate the point where the ‘maximum' revenue can be attained.
  • Revenue optimization requires finding the x-intercepts and vertex, which can be done utilizing the quadratic formula (x-intercepts), and completing the square (vertex/ maximum).

• Yield Management Systems

  • Yield management systems give managers optimal control of inventory to sell it to the right customer at the right time for the right price.
  • Yield management is a large revenue generator for several major industries.
  • Since total demand normally exceeds what the particular firm can produce in that period, the models attempt to optimize the firm's output to maximize revenue.
  • The optimization attempts to answer the question: "Given our operating constraints, what is the best mix of products and or services for us to produce and sell in this period, and at what prices will generate the highest expected revenue?
  • While yield management systems tend to generate higher revenues, the revenue streams tend to arrive later in the booking horizon as more capacity is held for late sale at premium prices.

• Monopoly Production Decision

  • If we assume increasing marginal costs and exogenous input prices, the optimal decision for all firms is to equate the marginal cost and marginal revenue of production.
  • Because of this, rather than finding the point where the marginal cost curve intersects a horizontal marginal revenue curve (which is equivalent to good's price), we must find the point where the marginal cost curve intersect a downward-sloping marginal revenue curve.
  • Like non-monopolies, monopolists will produce the at the quantity such that marginal revenue (MR) equals marginal cost (MC).
  • Calculate and graph the firm's marginal revenue, marginal cost, and demand curves
  • Identify the point at which the marginal revenue and marginal cost curves intersect and determine the level of output at that point

• Marginal Product of Labor (Revenue)

  • The marginal revenue product of labor is the change in revenue that results from employing an additional unit of labor.
  • The marginal revenue product of labor (MRPL) is the change in revenue that results from employing an additional unit of labor, holding all other inputs constant.
  • The marginal revenue product of a worker is equal to the product of the marginal product of labor (MPL) and the marginal revenue (MR) of output, given by MR×MP: = MRPL.
  • This can be used to determine the optimal number of workers to employ at an exogenously determined market wage rate.
  • Define the marginal product of labor under the marginal revenue productivity theory of wages

• Profit-Maximization Pricing

  • Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph.
  • If, contrary to what is assumed in the graph, the firm is not a perfect competitor in the output market, the price to sell the product at can be read off the demand curve at the firm's optimal quantity of output.
  • The above method takes the perspective of total revenue and total cost.
  • A firm may also take the perspective of marginal revenue and marginal cost, which is based on the fact that total profit reaches its maximum point where marginal revenue equals marginal cost.
  • This linear total revenue curve represents the case in which the firm is a perfect competitor in the goods market, and thus cannot set its own selling price.

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • In a free market economy, firms use cost curves to find the optimal point of production (minimizing cost).
  • By locating the optimal point of production, firms can decide what output quantities are needed.
  • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
  • The total revenue-total cost perspective recognizes that profit is equal to the total revenue (TR) minus the total cost (TC).

• Profit

  • Target revenue ($) is the corresponding figure for dollar sales.
  • In target volume and target revenue calculations, managers go beyond break-even analysis (the point at which a company sells enough to cover its fixed costs) to determine the level of unit sales or revenues needed to cover a firm's costs and attain its profit targets.
  • Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph.
  • If, contrary to what is assumed in the graph, the firm is not a perfect competitor in the output market, the price to sell the product at can be read off the demand curve at the firm's optimal quantity of output.
  • Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.

• Transfer Pricing

  • The firm must set the optimal transfer prices to maximize company profits, or each division will try to maximize their own profits leading to lower overall profits for the firm.
  • Double marginalization is when both divisions mark up prices in excess of marginal cost and overall firm profits are not optimal.
  • One can use marginal price determination theory to analyze optimal transfer pricing, with optimal being defined as transfer pricing that maximizes overall firm profits in a non-realistic world with no taxes, no capital risk, no development risk, no externalities, or any other frictions which exist in the real world.
  • Likewise, the marginal revenue associated with the production division can be separated from the marginal revenue for the total firm.
  • This is referred to as the Net Marginal Revenue in production (NMR) and is calculated as the marginal revenue from the firm minus the marginal costs of distribution.

• Benefits of Inventory Management

  • Improved inventory management can lead to increased revenue, lower handling and holding costs, and improved cash flows.
  • The intent of inventory management is to continuously hold optimal inventory levels.
  • Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.
  • All of these practices leads to optimal product storage, helping minimize holding and handling costs.

• Streamlining Distribution

  • In order to optimize the work of the logistics and distribution centers, one should define the criteria according to which the optimization shall be carried out:
  • Analyses and simulations allow testing of various combinations, i. e., the influence that opening a facility or moving the current infrastructure facilities will have on the total revenue and level of service.
  • This process may include the planning of production and/or optimization of supply chains in order to determine the possibility of meeting the demand.
  • Stock planning allows the optimal level and location of finished products that meet the demand and the level of service of the end users.
  • In principle, stock planning is used to calculate the optimal level of safety stocks at every location.