How The Macro View Drives Your Pricing Strategy
Updated: Apr 3
Planning your revenue and yield management strategies for 2023.
For any revenue strategy to be effective, you must start with the big picture. High-demand months require extra attention to finish in the best yield position, whether you are a price leader or a follower.
There are four quadrants where you could find yourself as a station or cluster at any given time. * Let's examine the characteristics of each quadrant below to plan for next year.
1. Over Budget/Inventory Available - This is a sweet spot and typically results from a solid yield management program, regular management oversight, and robust demand forecasting relative to price. You also have a buffer in billing booked over the budget to absorb unforeseen cancellations and remain on track to your goal.
2. Over Budget/Oversold - In this quadrant, you can do the "high fives" with the team as you are above goal. However, money is left on the table, and there was a missed opportunity to raise rates earlier in the sales cycle. In addition, there will be disruption in the sales department. You could have created a bigger revenue buffer to offset a weaker month in the year.
3. Under Budget/Inventory Available - Caused by several factors, including turnover in sales staff, poor product differentiation, aggressive negotiations that lowered rates, or overestimated pending activity. As a result, you are falling short and possibly out of time to get to the revenue goal.
4. Under Budget/Oversold - You are missing the budget in this quadrant, and no inventory is left to close the gap. This quadrant tempts managers to add units with its negative consequences, including bumped clients. There is also disruption to staff and support teams with wasted time when you are oversold or tampering with capacity.
What Strategies Lead To Success?
Why the First Rate Charged Matters: Market demand helps establish the floor levels of rate curves before demand on inventory increases the price. You have heard the expression, "it's not how you start; it's how you finish." In this case, the start is vital and will determine the finish and deserves a solid footing. If you look at January over May months and their demand behavior, seasonality plays a role in the starting position. A good starting point should not be too high that it suppresses demand along the curve or too low to reach sell-out from pricing moves to slow down inventory consumption.
The Incremental Rate Benefit: A starting point for any rate curve described above has a ripple effect on incremental revenues as each rate is defined and published along the curve. Selling hundreds and thousands of ads monthly with even a slight adjustment will help get you over the finish line and land in the number one spot.
Let us start with a straightforward example; if you charge two dollars more for all your inventory, the price change might not even be noticed by customers or sellers. If you are a music-based format in radio, that can represent annually 80,000 sixty-second units or $160,000 in incremental revenue. Consider the impact with shorter units like thirty-second ads, fifteen-second ads, and billboards in this calculation. The annual unit count might reach 200,000 units or $400,000. This increase incurs no cost of sales other than the commissions associated with the incremental order totals.
Takeaway:
Think about the macro when planning your yield management strategies. Take all your data and historical knowledge and prepare for the best outcome to reach or exceed your budget. The four quadrants of inventory vs. budget are an excellent place to determine where you want to be and what to avoid. Any plan is subject to changes for various reasons, and you may find yourself in the wrong quadrant sometimes.
Applying best practices like the following will result in having inventory available and over budget.
Manage the first rate charged and build from there as demand drives price; it matters.
Make frequent rate adjustments to capture incremental revenue.
Lower turnover on your sales team to protect sales momentum.
Create less disruption from overselling inventory, leading to lost selling time.
Incorporate more balanced negotiations based on solid terms and conditions.
Remember, for an effective revenue management strategy, you must start with a macro view to land in the sweet spot of success.
*Source: Broadcast Revenue Management – Pricing and Inventory Management in Today's Broadcast Environment. Written by Shane Fox and Published in 1997 by the NAB. The Revenue Management Matrix™
Alec Drake writes on revenue management and sales improvement strategies. He recently founded “The Radio Invigoration Project” (T.R.I.P.), a new LinkedIn group supporting local radio sales; email him at contact@alecdrake.com. Read his previous columns at Radioink.com/author/adrake.