Application of

Revenue Management
in the Electricity
Industry
Elena Ng - 221027
Faisal Khan-220939
G2 BBA2

Revenue Management
2010-1

Statement of authorship

I certify that this dissertation is my own work and contains no material which has been accepted for the award of any
degree or diploma in any institute, college or university. Moreover, to the best of my knowledge and belief, it contains
no material previously published or written by another person, except where due reference is made in the text of the
dissertation.

Signed _________________________________________________

Signed _________________________________________________

Date ___________________________________________________

Contents
1. Introduction ................................................................................................................. Error! Bookmark not defined.
1.1 Overview of themes ................................................................................................................................................ 5
1.2 Objectives ............................................................................................................................................................... 1
2. Revenue Management ................................................................................................................................................... 1
2.1 Effect of adopting RM techniques .......................................................................................................................... 2
2.2 Pre-requisites for RM .............................................................................................................................................. 2
2.2.1 Demand ............................................................................................................................................................ 2
2.2.1.1 Market Segmentation................................................................................................................................2
2.2.1.2 Forecasting................................................................................................................................................3
2.2.1.3 Flunctuation..............................................................................................................................................3
2.2.2 Supply .............................................................................................................................................................. 3
2.2.2.1 Fixed Capacity..........................................................................................................................................3
2.2.2.2 Perishability..............................................................................................................................................3
2.2.2.3 Reservation...............................................................................................................................................3
2.2.2.4 Overbooking.............................................................................................................................................4
2.2.2.5 Low marginal sales costs..........................................................................................................................4
2.2.2.6 High marginal production costs................................................................................................................4
2.2.3 Link with electricity utility industry ................................................................................................................ 4
3. Nature and scope of the industry................................................................................................................................... 5
4. A Conceptual Framework for RM ................................................................................................................................ 6
4.1 Strategic Levers .................................................................................................................................................... 11
4.2 Multi-dimensional Nature of Demand .................................................................................................................. 12
4.3 The Pricing and Revenue Optimisation (PRO) Cube ............................................................................................. 8
4.4 Conceptualisation model for Electricity.................................................................................................................. 9
4.4.1 Three Dimensions to Revenue Optimisation ................................................................................................... 9
4.4.1.1 Conceptual view of RM model dimensions...............................................................................10
4.4.2 Conceptual operation of the model.................................................................................................................10
4.4.2.1 Capacity Management................................................................................................................10
4.4.2.1.1 Forecasting.................................................................................................................11
4.4.2.1.2 Distribution Channels................................................................................................11

4.4.2.2 Customer Segmentation.............................................................................................................11

4.2.2.2.1 Price Sensitive ...........................................................................................................11
4.2.2.2.2 Industries....................................................................................................................11

4.4.2.3 Time.............................................................................................................................12
4.4.2.3.1 Season........................................................................................................................12
4.4.2.3.2 Weather.....................................................................................................................12
5. Revenue Measurements .............................................................................................................................................. 16
6. Analysis....................................................................................................................................................................... 17
6.1 Internal Factors ..................................................................................................................................................... 17
6.2 External Factors .................................................................................................................................................... 18
7. Conclusion .................................................................................................................................................................. 18
8. References..................................................................................................................................................................15

Application of Revenue Management in the Electricity Industry

1. Introduction
With the de-regulation of the electricity markets since 1990s, there have been considerable changes in the
structure of the industry. Moving to a de-centralised free-market system will help make companies more
efficient with freedom of entry and thus more competition (Cross, 2000, p. 35). As witnessed in other
industries, de-regulation resulted in drastic alteration in the economic models. Companies became more
aggressive in terms of market growth and generating revenues. Adopting revenue management, which has
been successfully implemented in various deregulated industries, is one possible approach (Talluri et al.,
2004, p. 551).
1.1 Overview of themes

Firms practising Revenue Management have moved from the conventional paradigm that determines cost as
a primary driver of profitability to revenue because of the concept that driving down cost has a limit whereas
there is no limit as to how much a firm can grow in revenues (Cross, 2000, p. 36). The electricity retail
market has characteristics of industries that currently apply revenue management.
The application of revenue management entails some pre-requisites or certain characteristics. These prerequisites will be evaluated and their relevance to the electricity industry will be correlated. Based on that a
theoretical model would be formulated and its feasibility analysed.
1.2 Objectives

The objective of this study is to determine the applicability of revenue management in the electricity
industry by preparation of a conceptual model based on the formerly determined pre-requisites.
Furthermore, the feasibility of the model will be examined whilst also including the opportunities and
limitations in relation to the operation of revenue management supported by views from different authors on
the subject. Foremost, the paper will undertake the task to define revenue management and its effect in other
industries; and such in constructed in the following sections.

2. Revenue Management
Ingold et al. (2000, p. 3) identify the inception of revenue management (RM henceforth) with the
deregulation of the airline industry in the 1980s. RM (also referred to as yield management) could be
defined in many terms as witnessed by the explanation of various authors but the one that is in compliance
with the scope of this study has been colluded by Siguaw et al. (2003, p. 539) who state that RM is the
method that involves the application of information systems and pricing tactics to ensure the allocation of
the right capacity to the right customer at the right place and the right time.

Thus RM requires a comprehensive system which requires compiling information that is usually historical in
nature, accurate forecasting, and categorising customers based on price sensitivities and determining when
to price differently based on the demand. This system was adopted in the airline industry and its effect will
be addressed below.
2.1 Effect of adopting RM techniques

Airline industry was the first to adopt RM upon deregulation, which led to loosened control over prices
(Talluri & Van Ryzin, 2005, p. 7). This led to the emergence of variable pricing to undercut the competitors
and determine the minimum fare that should be available for a specific flight (Kimes & Chase, 1998, p.
158).With incrementing revenues due to a surge in price-sensitive customers choosing low-cost carriers,
many airlines adopted the RM model (Talluri & Van Ryzin, 2005, p. 7-10). Envied by the profits enjoyed by
airlines adopting RM, many other industries made a concentrated effort to adopt RM according to their
requirements. However, for RM to be effectively applied, certain criteria were set and these shall be
explored subsequently.
2.2 Pre-requisites for RM

The implementation of revenue management strategies in diverse commercial sectors is subject to various
combinations of duration control and variable pricing that is present in each industry. Also, revenue
management is more effective on businesses that have the following characteristics: perishable inventory,
relatively fixed capacity, segmented customer markets, flexible cost and pricing structure, certainty of
demand and readily available data. (Siguaw et al., 2003, p. 542)
The pre-requisites compatible with electricity market are as follows:
2.2.1 Demand
Economists define demand as the amount of a good or service that a purchaser is willing and able to buy for
any given price at any given time (Tranter et al., 2009, p. 9).
2.2.1.1 Market Segmentation

According to the report The Basics of Yield Management (2005, p. 10), one of the foremost step in RM is to
define the various segments of the service market, so as to price differently based on practice called price
discrimination. The objective being to determine and categorise price sensitive and non-price sensitive
customers. Furthermore, in some cases price-sensitive customers may still pay higher prices during high
demand time periods and thus the second classification can be termed as time sensitive and non-time
sensitive (Barth, 2002, p. 138). A constructed example could be that customers who are usually price
sensitive may still decide to use electricity on a hot sunny day during the peak hours, thus paying premium
prices.; whereas, industries which are traditionally non-price sensitive may be able to shift production to off
peak hours for a discounted rate.
6

2.2.1.2 Forecasting

Forecasting is necessary in revenue management systems in order to predict demand, price sensitivity, and
possible cancellations in order for the system to perform well. For instance, forecasts can be about the
demand of energy on a specific day or time in the future (Talluri et al., 2004, p. 407). Forecasting assists in
minimising uncertainty, making decisions about pricing and scheduling (The Basics of Revenue
Management, 2005, p. 12). Kimes (1989, p. 18) states that forecasting often relies on historical data, which
in the case of electricity industry, is readily available, quite detailed and accurate (Talluri et al., 2004, p.
552-555).
2.2.1.3 Fluctuation

The demand patterns could be identified as being cyclical in nature (such as time-of-day/week/season) or
based on trends (growth in demand due to economic growth) (The Basics of Revenue Management, 2005, p.
11). RM system is used in stabilizing the fluctuations in demand by raising prices during periods of peak
demand and reducing the prices during periods of low demand (Kimes, 2007, p. 17; The Basics of Revenue
Management, 2005, p. 11).
2.2.2 Supply
Economists define supply as the amount of a good or service that a seller is willing and able to sell for any
given price at any given time (Tranter et al., 2009, p. 9).
2.2.2.1 Fixed Capacity

In the electricity industry, there is high variability in the demand of energy that changes by time, day,
temperature and season. However, the generation and transmission capacity is quite inflexible (Talluri &
Van Ryzin, 2004, p. 552).
2.2.2.2 Perishability

Bitran & Caldentey (2003, p. 4) state that perishability of a product or a service should be treated as a timedependent quantity. This indicates that the value of the product becomes worthless and can no longer be sold
on after a certain amount of time, and therefore cannot be held as inventory for future use; i.e. if an electric
generator generates 300 Kilowatt (KW) of electricity and only 200 KW is transmitted to demand centre,
then 100 KW represents a lost opportunity to generate revenue as it cannot be stored for future sale.
2.2.2.3 Reservation

Talluri & Van Ryzin (2004, p. 554) proposes that transmission or supply of electricity can be reserved in
certain places. In the case of electricity, firms or household buys options (similar to reservation without
purchase), also known as pre-emption (Talluri & Van Ryzin, 2005, p. 583).

2.2.2.4 Overbooking

According to Talluri & Van Ryzin (2004, p. 129), overbooking is used to maximise capacity utilisation in
the reservation system taking into consideration cancellations. It serves as a protection for companies
wishing to utilise their available capacity to its potential (Ingold et al., 2000, pp 10). However, Rehkopf
(2006, p. 52 as cited in Blumenthal et al., 2009, p. 24-25) argues that overbooking may not be applicable in
manufacturing industry as a customers order of a good may be considered as purchase rather than mere
reservation.
2.2.2.5 Low marginal sales costs

As observed in a study by Kimes (1989, p. 17), this theory can be termed as with additional increase in
revenue derived from a sale of a unit, the cost incurred to earn the revenue diminishes up to the limit of
available resources or units. In other words, once an amount of energy is being delivered to a household, the
cost incurred to supply extra energy reduces. As long as the transmission and generation capacity is not
fully used, it does not make much difference to deliver extra energy demanded from the customer.
2.2.2.6 High marginal production costs

Conversely, Kimess (1989, p. 17) study indicate that, upon reaching the maximum capacity, the cost
incurred to produced an additional unit is exponential to the cost of establishing an additional production
unit and often not feasible in the short run. In a simpler term, if the electricity generation capacity is fully
used and customers demand extra energy, this extra energy cannot be easily added onto the transmission
capacity because of the high fixed cost involved in establishing additional generators.
2.2.3 Link with electricity utility industry
Below is a table adopted from The Basics of Revenue Management (2005, p. 8-9) showing how electricity
utility industry meets the criteria for application of RM.
Revenue Management Criterion

Market Segmentation

Electric Power Utilities

Pricing peak vs non-peak hours/seasons

Residential vs Commercial vs Industrial

customers

Unit of fixed capacity

Central plant

Distributed generation

Lost energy

Pricing based on demand & supply

Load and distribution management

Energy storage (more like quota)

Forecasting cycles:

Yes

Seasonal

Yes

Day-of-week

Yes

Time-of-day

Yes

Other

Balancing of demand and supply

Unit of perishable inventory

Low marginal costs for incremental sales

Booking taken in advance

Demand

Having determined that the characteristics of electricity industry are in accordance with the criteria for RM,
the next section will explore the market structure and scope of the industry and attempt to create a
conceptual framework for academic purpose.

3. Nature and scope of the industry

Until the de-regulation of the electricity industry, the market was often dominated by state-owned
monopolies that were engaged in all the functions such as generation, transport and retail and the prices were
also standard (Domanico, 2007, p. 2). Due to the economic importance of electricity for overall
development, security of supply and complexity of commodity, the state justified its intervention, which led
to lack of economic incentives for efficiency, subsidies by the state and led to a state of lack of innovation
and completive environment (Domanico, 2007, p. 2). This vertical structure (monopoly) often lead to underinvestment, inefficiency, standard prices and no freedom of choice for consumers to choose from electricity
supplier (Zubaviit, 2010, p. 6).
The demand for free movement of goods, services, capital and labour resulted in deregulation of many
industries, thus affecting electricity sector as well (Zubaviit, 2010, p. 5). The deregulation focussed on
separating the generation and transmission (distribution) functions, which lead to competitive market for
9

generators, distributors of electricity and a diverse retail market (Talluri & Van Ryzin, 2004, p. 552). These
structural breakdowns lead to efficiency in generation of electricity because of perceived competition,
investment in transmission of infrastructure to gain market share and more revenues, and competitive prices
by retailers (Zubaviit, 2010, p. 8-9).

Below is an illustration of the market structure of the industry in a competitive environment:

*IPP stands for Independent power producer

*Source: (Hunt & Shuttleworth as cited in Talluri, 2004, p. 553)
The market structure, scope along with the characteristics of the industry mentioned afore, gives it a base to
create a conceptual framework for application of RM in the industry and such shall be attempted
subsequently.

4. A Conceptual Framework for RM

The groundwork laid afore pertaining to the characteristics of RM and the electricity industry will help to
define a clear scope for implementation of RM tactics. This section will focus on existing RM models before
pursuing to formulate one that would seek to correspond to the electricity industry. Two models studied are
presented below:
10

4.1 Strategic Levers

RM requires managing four Cs which are calendar (reservation in advance), clock (time), capacity
(inventory), cost (price) to manage a fifth C, customer demand, in such a way as to maximise profit (Kimes
& Chase, 1998, p. 156). A successful RM strategy according to Kimes & Chase (1998, p. 157) depends on
effective control of customer demand which can be accomplished through pricing and duration of customer
use. Variable pricing could be adopted to control demand while duration control represents controlling
demand over the long run through various techniques such as reducing uncertainty of arrival and duration
amongst others (Kimes & Chase, 1998, p. 157).
A model adopted by Kimes & Chase (1998, p. 157) is presented below followed by a brief explanation:

The authors classify industries into different quadrants based on their combination of pricing and duration
control.
Quadrant 1 Industry uses fixed price for a predictable duration
Quadrant 2 Industries traditionally associated with RM, use variable pricing and predictable duration
Quadrant 3 Fixed price with unpredictable duration
Quadrant 4 variable pricing with unpredictable duration
The purpose of this model is to identify in which quadrant do the industries lie and what needs to be done to
move to Quadrant 2 as successful RM applications are found in this quadrant. (Kimes & Chase, 1998, p.
157).
11

4.2 Multi-dimensional Nature of Demand

Talluri & Van Ryzin (2005, p. 11) mentions that demand has multiple dimensions of which the three most
important ones are (i) product, (ii) customers and (iii) time. The dimensions indicate a customers valuation
for a particular product at a particular point in time. Talluri & Van Ryzin (2005, p. 11), however do identify
other dimensions such as location or channel, but believe that the dimensions provided is more cordial to the
scope of study and suffice to illustrate the idea. The model is illustrated below:

The concept aims to exploit the heterogeneity in consumers perception of a product at a given point in time.
This leads to many possible practices like price discrimination, Expected Marginal Revenue, auctions and
many others. In this model, any one or two dimensions can be fixed and the firm then focuses on optimising
the other one(s). For example, some of the RM problems look at dynamically pricing a single product to
heterogeneous customers over time: they fix the product dimension and optimise over the customer and time
dimensions (Talluri & Van Ryzin, 2005, p. 12).
4.3 The Pricing and Revenue Optimisation (PRO) Cube
Differingly, the goal of RM according to Phillips (2005, p. 26) is to provide the right price for every (i)
product, (ii) customer segment and (iii) through every channel. The model is replicated below (Phillips,
2005, p. 27):

12

As seen in the figure, each element within the cube represents a combination of product, channel and
customer segment (Phillips, 2005, p. 26). The theory is similar to the model fabricated by Talluri & Chase,
as can be observed above. Taking these two models, and into consideration the characteristics of the
electricity industry, a model best suitable for the electricity industry is presented in the following section.
section
4.4 Conceptualisation model for Electricity
After extensive research to retrieve a RM model based on the electricity utility industry, three general
models were adopted and referring to those models, a modest attempt is made to formulate a theoretical
model
del of RM conducive to the peculiar characteristics of the electricity industry.
4.4.1Three
Three Dimensions to Revenue Optimisation
In the electricity industry, the product supplied is ubiquitously singular and hence the product dimension is
not incorporated, while the channel dimension has been modified to include a broader scope, i.e., Capacity.
The model is presented below, followed by justification of the conceptual model.

13

Prices should be well defined so as to that the goal of RM can be achieved that is to allocate the right
capacity to the right customer at the right place and time (Siguaw et al., 2003, p. 539). However, the
dimension of place (location) has been delineated, but the essence of the definition is not diminished. To
elaborate further on the dimensions, a chart is presented to as to ease the understanding of the reader
pertaining to what constitutes the three dimensions.
4.4.1.1 Conceptual view of RM model dimensions
Forecasting
Capacity
Distribution
Channels
Industrial

RM

Customer

Commercial

Residential

Season
Time
Weather

4.4.2 Conceptual operation of the model

The three dimensions are inter-related and each affects the other or has an influence in determining the
overall price. The operational aspect of the model is hypothetically examined and the three dimensions are
elaborated below:
4.4.2.1 Capacity Management
Capacity Management (CM hereafter) requires maintaining an intricate balance between supply vs demand
vs resources vs costs (Grummit, 2009, p. 5). Tranter et al. (2009, p. 140) state that CM also known as
Inventory Management is the process of organizing the amount of units, services and products available to
sell through various distribution channels. In other words, Capacity Management is the ability to balance
demand from customers and the capability of the service delivery systems to satisfy the demand. This
emphasizes on two objectives; forecasting demand and handling capacity to meet the forecasted demand by
using various distribution channel (Armistead & Clark, 1994, p. 6). These two objectives are provided
below:
14

4.4.2.1.1 Forecasting
Forecasting according to Huyton & Thomas (2000, p. 260) is the key to effective RM and helps to reduce
uncertainty (Forecasting, 2010 as cited in Rodriguez & Steinort, 2010, p. 12). One of the approaches for
scheduling of load production is use of historical data (Aghazadeh, 2007, pp 33-34; Shahidehpour et al.,
2002, p. 111-113). Electricity industry has a background for utilisation of scientific software for demand
management and sophisticated trading technologies, which makes access to historical data readily available
and are often quite detailed and accurate (Talluri & Van Ryzin, 2004, pp. 551-555).
4.4.2.1.2 Distribution Channels
For achieving an optimal business mix of customers for RM, it is imperative to allocate the appropriate
amount of inventory in the suitable channel (Tranter et al., 2009, p. 213). Buhalis & Laws (2004) mention
that an effective distribution channel influences the decision making process of the consumers. In
conjunction, Rodriguez & Steinort (2010, p. 4) consider the suppliers perspective by stating that a
distribution channel is the path to entice the consumers with innovative product, personalise service, and
promotions.
In the electricity industry, de-regulation has resulted in a competitive market for generators, distributors and
retailers of electricity (Talluri & Van Ryzin, 2004, pp. 552). The competition has resulted in open access for
transmission and generation and distribution of electricity (Jamison, 2000, p. 64). This led to the emergence
of purchasing agencies, wholesale distributors, retailers, aggregators (customers as a buying group) and even
brokers (Shahidehpour et al., 2002, p.6-8; Talluri & Van Ryzin, 2004, pp. 552-553).
4.4.2.2 Customer Segmentation
There are many ways to segment the customers. Some are provided below:
4.2.2.2.1 Price Sensitive
Consumer demand is often price sensitive, meaning increasing or decreasing prices will influence how much
a customer will buy the product. For example, if the price of electricity increases, schools that need to use
energy during the day will still pay for the energy fee. In other words, schools can be considered non-price
sensitive customers. However, there are also customers who are very price sensitive. For instance, household
may refrain from utilising too much energy if the price of electricity rises (Marion, 2006, p. 1). Thus, the
objective of RM is to determine those customers that are not price sensitive and charge them a higher price
level (The Basics of Revenue Management, 2005, p. 10).
4.2.2.2.2 Industries
Different industries have different levels of price elasticity. It rather depends on urgent, non-discretionary or
non-urgent, interruptible nature of service (The Basics of Revenue Management, 2005, p. 10). The table
below highlights how different industries have different peak periods:
15

Characteristics

Residential

Commercial

Peak Usage

Evenings, weekends

Weekdays office hours

Sensitivity

Limited

Limited

Industrial
Nights, mornings,
afternoons
Yes

Since different industries have different peak periods and have varying degree of sensitivity, this could be
helpful for the suppliers or generators of electricity to determine the prices for each industry based on these
characteristics.
4.4.2.3 Time
Phillip (2005, p. 33) mentions that much of the growing interest in RM can be attributed to velocity of
pricing decisions. In the past, prices were constant over a short duration, but now in some industries it is
constantly fluctuating on a daily or even hourly basis. Phillip (2005, p. 33) also emphasises that companies
that change prices rapidly in response to changing conditions gain an advantage. Such vagary in prices can
be seen in the electricity industry for the following reasons:
4.4.2.3.1 Season
Seasonal effect like number of daylight hours affects load pattern (Shahidehpour et al., 2002, p. 22). In
addition, certain seasons are traditionally associated with high usage, and thus, this can help the electricity
companies to forecast on the load patterns based on this.
4.4.2.3.2 Weather
Shahidehpour et al. (2002, p. 22) consider temperature to be the most influential factor in load forecasting.
The temperature change could influence the energy usage. Other factors that can affect the energy usage are
humidity, wind and any abrupt or un-occasional weather conditions (Shahidehpour et al. 2002, p. 22).
Now that the model has been paraphrased, its feasibility and factors affecting applicability of RM in general
shall be propsed at a later stage. The next step is to identify the performance or revenue measurements of
the industry:

5. Revenue Measurements
Kimes & Thompson (2004, p. 3) present Revenue per available time-based inventory unit (RevPATI) as the
most commonly used performance measurement in RM. The time-based inventory varies amongst the
industries, from room-night in hotels, seat-mile in airlines to seat-hour in restaurants (Kimes & Thompson
2004, p. 3).

16

RevPATI is calculated by multiplying the utilisation percentage by the average rate paid per customer
(Kimes & Thompson 2004, p. 3). In the case of electricity industry, the inventory or the product could be
classified as being the supply of electricity and hence can be termed as output sales. The time factor of the
inventory unit can be complex but the assumption is made to consider hour as a time factor as electricity
consumption can change by the hour or time of the day. A example is fabricated for ease of understanding.
Suppose that an electricity generator plants generates on a given day 1000 KW but has an output sales
percentage of 90% and the price of 1 KW is set at 2$ on average, then in any given day, there are 24 hours.
Thus, the problem could be calculated as follows:
1000 KW x90% = 900KW x 2$ = 1800 / 24H = 75$
Kimes & Thompson (2004, p. 4) illustrate that RevPATI can be increase by either achieving higher capacity
utilisation or by raising the average rate.
Having examined the essential characteristics of RM in relation to the electricity industry, the paper will
propose some factors that are affecting the implementation of RM in the industry.

6. Analysis
The application of RM demands certain pre-requisites, which become the core competencies to evaluate
against. The study conducted in the paper found that the electricity closely adheres to the criteria set for
application of RM. However, RM has not been effectively utilised in the industry to such an extent as would
warrant a research or case study (Talluri & Van Ryzin, 2004, pp. 552). This penultimate section will
evaluate as to which factors are restricting the implementation of RM in the industry. Factors could be
internal as much as external and such will be sorted accordingly.
6.1 Internal Factors

Upon de-regulation, the prices were not set by the state and hence the were no distinct rates.
Electricity rates are to some extent ambiguous. Kimes (1989, p. 19) encourages the industry to set
distinct rates to get more benefits out of RM systems

Traditionally forecasting was focused on load, but with de-regulation has moved to price, which can
pose a large error because price volatility (Shahidehpour et al., 2002, p. 57)

Reservation system is distinctively different when compared to industries traditionally applying RM.
This inhibits the decision makers or the RM system to implement overbooking or price
discrimination. This affects the duration control lever.

Applying differential pricing based on time may require technological investment to tract time-of
usage, requires constant monitoring and accurate billing (Talluri & Van Ryzin, 2004, pp. 554-555).

To put RM into practice would require determining value of futures and long term contract for
generators, evaluate complex contract conditions (such as pre-emption) and handle new forecasting
17

requirements such as weather, economic condition, price sensitivity, and market-price predictions
(Talluri & Van Ryzin, 2004, pp. 554-555).
6.2 External Factors

Although the electricity market has been liberalised, the industry still has to adapt to the competitive
free market in an extensive scale and as a result still suffers from price inflexibility.

Generally, price discrimination is applied to identify price sensitive and non-price sensitive
consumers (Withiam, n.d.) so as to charge premiums or reduced rates. However, in the case of
electricity, there is no perceived benefits for paying premium as the product by itself is intangible
and perhaps undistinguishable, although debatable.

Dynamic pricing may not adhere well with households and may only be restricted to larger industrial
clients (Talluri & Van Ryzin, 2004, pp. 554-555) .

The concluding section will channelize the studies conducted hitherto and present some feasibility prospects
for the application of RM.
7. Conclusion
The Strategic Levers Model by Kimes & Chase (1998, p. 157) presented previously indicates that the
industries that have successfully applied RM lay in Quadrant 2. Industries present in Quadrant 2 tend to use
variable pricing and a specific or predictable duration (Kimes & Chase, 1998, p. 157). The electricity
industry looks posed to be categorised in Quadrant 2 and hence there is huge potential for application of RM
tactics.
Electricity industry has traditionally applied forecasting measures and the approach in practice currently is
quite scientific and hence accurate. The challenge that lies ahead is utilising these data along with historical
prices and demand, to formulate a diverse set of rates.
It is possible to apply the principle of price discrimination, as the consumers can be easily segmented and
their characteristics are often attributable to their respective segments.

To summarise, the electricity industry has tremendous potential to successfully apply RM albeit some
limitations or complications. However, the inertia of the industry to transform itself since de-regulation has
to some extent resulted in the limited implementation of RM tactics in the Industry.

18

8. References

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Journal of Business Forecasting , 26 (3), 33-37.
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Bitran, G., & Caldentey, R. (2003). An Overview of Pricing Models for Revenue Management.
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