What are the basic principles of revenue management?

In the 1980s, the U.S. airline industry faced a major shift. The rise of low-cost carriers such as People Express forced traditional airlines to react. American Airlines, for example, responded to the new competitor by launching super-discounted fares for purchases made more than 21 days in advance. This allowed it to attract the most price-sensitive customers without sacrificing revenue from those who valued flexibility.

People Express, with a reservation system that only allowed a single fare, could not match this strategy profitably. It went bankrupt in 1985. This victory marked the beginning of the sophisticated development of revenue management, which later expanded beyond the airline sector.

An everyday case: the car wash
A simple yet powerful example helps illustrate the principles of revenue management. An entrepreneur who ran a car wash wanted to raise prices to offset rising costs but feared losing customers to the competition.

The car wash operated Monday through Saturday and charged $5 per wash. It had high demand on Saturdays, averaging 110 customers, and low demand on Tuesdays and Wednesdays, with only 20 washes. Variable costs were $2 per car, and monthly fixed costs totaled $3,000.

The owner considered expanding capacity but did not know whether the additional revenue would cover the new costs. Instead, she was advised to adjust prices based on weekly demand: keep prices at $5 on Mondays, Thursdays, and Fridays; reduce them to $4 on Tuesdays and Wednesdays; and raise them to $6 on Saturdays.

The results
After the first month, customers redistributed throughout the week. Low-traffic days attracted new customers—some coming from Saturdays seeking savings and others drawn from competitors by the lower price. Saturdays, though still the busiest day, saw an 18% drop in traffic, which enabled better service.

Overall, the number of washes increased by 9%, revenue grew proportionally, and since there was no increase in capacity or fixed costs, pre-tax profit rose by 31%.

The four key principles
This case highlights the basic principles of revenue management:

• Balancing supply and demand without increasing capacity: Instead of expanding operations, prices were adjusted based on daily demand levels.

• Applying price segmentation: Different prices were set to attract customers with varying sensitivities to price and convenience.

• Making data-driven decisions: Historical traffic information made it possible to identify clear behavioral patterns and adjust the strategy accordingly.

• Monitoring the market before adjusting prices: Rather than applying a general price increase due to cost pressure, the strategy was based on customer behavior and competitiveness.

Is it only for businesses with limited capacity?
Although this case shows how revenue management is useful for businesses with high fixed costs and limited capacity, its application is not restricted to such contexts. Future discussions may explore how to adapt it to different business environments, always grounded in its fundamental principles.