Why Pricing and Revenue Management?
In recent years, companies have spent millions of dollars on software for scheduling, inventory management, production planning, etc. for improving the supply side of the supply-demand equation. On the supply side, the main focus is to meet a given demand at minimum cost. On the demand side, the main focus is to generate revenue and increase market share. Traditionally, there has been a disconnect between these functions. Sales/marketing engages in activities to generate demand, without necessarily considering the impact on the rest of the supply chain. Manufacturing, on the other hand, takes demand as given and does the best it can given the supply and capacity restrictions. The idea of revenue management is to eliminate the disconnect between the demand and the supply sides, therefore eliminating the inefficiencies and improving the overall profitability.

Optimizing Supply & Demand
The typical way for companies to deal with excess inventory is through markdowns. According to the National Retail Federation, marked-down goods, which accounted for just 8% of department-store sales three decades ago, now account for over 20% of sales. The main reasons for increase in the number of markdowns include increased variety of goods and shorter life cycles, long lead times, larger forecasting errors, and an inability to change inventory levels in response to demand. Production/inventory decisions have to be made before the selling actually begins with little information about demand. Given that the inventory levels and the length of the selling season are predetermined, pricing decisions become increasingly important in balancing demand and supply. Therefore, many companies are now willing to look at the demand side of the supply-demand equation and reexamine their pricing policies and explore dynamic pricing methodologies for better demand management. According to a 2003 BearingPoint/National Retail Federation Foundation study: while only 12% of respondents said that they use markdown optimization software, 53% plan to deploy it within two years. Besides increased awareness, what makes pricing and revenue management possible today is advances in information technology. New technologies allow companies to collect data, and better analyze the data to understand demand. New tools such as selling online or electronic shelf labeling systems make it easy to change prices, at low cost.

Advancing Dynamic Pricing
In manufacturing, as in retail and service industries, most companies implement dynamic pricing to differentiate products and segment the market according to factors such as time of purchase and service level. Segmenting customers according to customer lead-time may be important since it allows manufacturers to better allocate production and distribution resources. That is, customers who need products, e.g., vehicles or PCs, quickly would pay for that service just as airline passengers who need to travel on short notice pay for the privilege of doing so. On the other hand, those with greater flexibility would pay less for their order. By better matching demand to supply and available capacity throughout the supply chain, overall revenues would increase, with those requiring premium service paying for the benefits of such service.