There appears to be confusion around the use of the term revenue. Dependent on your industry, revenue can have very different definitions. Revenue management has also become an industry-dependent term. Revenue to a hotel is different from that of a shareholder reviewing 10K’s. We ask, why can’t we all agree on what revenue and revenue management truly mean, regardless of industry?
What is revenue?
For many people, revenue equals sales. This is a simple definition for a complex word. Accounting and finance teams use the term revenue as actual income earned from the sale of goods and services. The term actual is key. The average person may not understand all that goes into that simple line item “revenue” and that is where we see the term revenue management system diverge from accounting terminology to ‘average person on the street’ terminology.
“My challenge to the industry is to take back the revenue management moniker to what it truly is, which is managing your fulfillment of revenue, to that of earned revenue.”
True revenue management systems
In discussing this conflict of terms, we talked with Mark Aubin, Chief Product and Operating Officer at Aptitude RevStream. Aubin believes that a revenue management system should be focused on managing revenue from the point of recording the booking of a contract with the customer to earning revenue from that contract. An advocate of taking back the term revenue management to imply revenue recognition, Aubin lays out a challenge, “My challenge to the industry is to take back the revenue management moniker to what it truly is, which is managing your fulfillment of revenue, to that of earned revenue. Anything other than that can lead to confusion. Forecasted revenue, booked revenue, deferred revenue, and more. There are many usages, but let’s redefine revenue as to what it really is. After all, when a company reports revenue to the public, it is earned revenue.”
Hotel and airline revenue management
In the hotel and airline industries, revenue management describes the acquisition and the management of potential revenue. Revenue management describes managing variable pricing, discounting, and forecasting. The focus is on ensuring that prices are managed to maximize profit – when to charge rack rate and when to reduce rates. Revenue management in these industries is not the same as revenue management in the software, gaming, media, or other industries and can lead to confusion.
The impact of ASC 606/IFRS 15 on sales teams
The new focus on performance obligations in contracts, as outlined in ASC 606/IFRS 15, may require an in-depth explanation to sales teams on the term revenue. Accountants, investors, and Wall Street, understand the difference between recognized revenue and sales revenue. Sales teams, on the other hand, may be confused by revenue figures not being what they expect because they are focused on quote price.
There is an increasing movement to pay sales commissions based on earned revenue, rather than the booking of sales to ensure actual fulfillment of the obligation sold. For this reason, it is imperative that sales organizations understand the impact of earned revenue over the general use term of revenue.
Public company revenue management
With FASB’s updates in revenue compliance upon us, it is time to take back the true meaning of revenue! Revenue management for non-hotel/airline industries, and across the board for all public companies, must involve the reporting of actual, recognized revenue, not sales or bookings. Revenue goes into the ledger as something you can report to your investors as true, earned revenue. That is an important distinction.
Different revenue management solution providers offer software that are sales focused, channel focused, and in hospitality you will get yield focused software. That is not revenue, that is reservations. Marketo and Ideas both offer “revenue management” solutions, but neither will actually recognize and report earned revenue.
Managing pricing, yield, and revenue
Aubin cautions that industries need both a system to manage pricing and yield, and one that recognizes revenue. For example, if Apple says they generate $4.3 billion in revenue per quarter, this refers to recognized revenue, not bookings or pure sales of product. When they make statements like that, they are using “revenue” correctly. That is true revenue recognition. They use the word revenue as a straight pronouncement and that is correct. Yet we have many companies advertising systems with the proclamation “This is a revenue management system”, when they are really only managing price or yield. Using that approach would mean that Apple did not generate $4.3 billion in revenue, but a much higher number. This is inaccurate and misleading. Public companies, by law, need to report recognized revenue and they understand the need for both systems. All companies must report recognized revenue if they want to be US GAAP/IFRS compliant.
In the true sense of revenue management, you need revenue recognition reporting. There are only a few companies that offer this type of software. Companies should choose a system that fits with your existing ERP/CRM system so that you are adding on to what you already have. Specialized revenue recognition software will give you greater functionality, analytics, and reporting than a yield or pricing management software. RevStream is a good example of a revenue recognition management software that focuses on how we should be defining revenue by identifying, recognizing, and reporting revenue. It complements the other ‘revenue’ systems that are really just focused on booking sales, etc.
Let’s join Mark Aubin and help educate your organization’s departments and teams to all be on the same page about the true meaning of revenue.
See RevStream’s revenue management software in action: