April 12, 2021

Is Revenue Management only applicable to service industries?: The Ford Motor Company case

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While it is true that Revenue Management is usually applied to service industries, other sectors, such as the automotive industry, comprise a profitable field to employ this type of tactics. In this way, although very few models have been developed in this industry, this sector has the appropriate characteristics and a low profit margin to make it a promising application area for price-based Revenue Management. Furthermore, since pre-owned cars are individual and durable goods, a different approach is required with dynamic pricing as the main control strategy. It is worth mentioning that it is possible to identify a similar opportunity in the real estate sector.


Beyond that, it is relevant to mention the case of Ford Motor Company, which was the first automobile manufacturer to adopt Revenue Management in its industrial sector. In late 2001, pricing specialist Lloyd E. Hansen was promoted to VP of The Ford Motor Company, who at the time was the only industry professional heading a Revenue Management unit. He announced a Revenue Management strategy as a vital part of the company’s recovery plans after Ford hold $ 25 billion in unfunded pensions and health care liabilities and generated economic losses of US $ 6.4 billion in two years due to quality issues, productivity problems and an outdated model portfolio.


In this case, Hansen introduced a Revenue Management system that consists of three technological tools. First, he applied a marketing response tool that analyzed transaction prices per vehicle taking into account the range of different incentive programs offered. Because of this, the company and its retailers were able to project the effect of different incentive programs on sales, determining the best program in each market. Second, he introduced a package optimizer that was able to determine the car with the best selection of features and the most likely to appeal to consumers in a particular market. Finally, Ford adopted a new auto dealership ordering system that optimizes inventory based on profit margins, customer preferences and customer willingness to pay.


In conclusion, this complex Revenue Management system applied to the automotive industry represents a milestone for this discipline, as it shows that, although still incipient, it is possible to apply the principles of this discipline to companies that do not offer services.

About the author

Daniela León Cornejo

Daniela León is a founding partner of Rentabiliza, Peru’s first Revenue Management and Pricing in Perú. She has an MBA  by Chilean University Adolfo Ibañez and is an economist from Peru’s Universidad del Pacífico. During her successful career, she specialized in the Revenue Management, Strategy and Commercial Management fields in organizations dedicated to the provision of services in the hotel, tourism and commercial aviation sectors.

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