Question

"Selling the correct inventory unit to the right sort of customer, at the right time and for the right price" is how revenue management is defined. When contemplating dynamic pricing techniques, explain the key principles and strategies involved in this concept.

Answer 1

Revenue management uses dynamic pricing strategies based on price elasticity of demand, where pricing is adjusted based on whether demand is elastic, inelastic, or has unitary elasticity in order to maximize total revenue, which is the product of price and quantity sold.

Step-by-step explanation:

The principles of revenue management involve the use of dynamic pricing strategies to maximize income by selling inventory to the right customer at the right time for the right price. A critical aspect of this is understanding the price elasticity of demand. Total revenue is calculated as the product of the price and the quantity of units sold (Total Revenue = Price x Quantity).

When demand for a product is elastic, lowering the price should increase the quantity sold by a larger percentage, thereby increasing total revenue. Conversely, if demand is inelastic, an increase in price will lead to a smaller percentage decrease in quantity sold, which also raises total revenue. If demand has unitary elasticity, then changes in price are offset by proportional changes in quantity, and total revenue remains unchanged.