Recently, I attended the PROS Outperform 2016 conference in Orlando, billed as one of the largest gatherings of seasoned pricing, sales and revenue management practitioners, technology analysts and industry thought leaders. Speakers from the airline industry identified major trends that will shape pricing and revenue management in the industry for years to come, and two trends rose to the top of my list.
First, there will be a shift from inventory optimization to pricing optimization. Increasingly, the revenue management function is shifting away from merely reserving capacity for the highest-paying customers to determining the optimal price for the inventory in a variety of conditions. Revenue management and pricing organizations will increasingly become one.
Second, more airlines will offer individualized pricing. The New Distribution Capability (NDC) standard from the International Airline Transport Association, with its ability to enhance communications between the airlines and the travel agents, opens the door to pricing differentiation. The benefits of individualized pricing will be highly dependent on airlines’ ability to precisely segment customers based on their willingness to pay.
With these trends in mind, where do we go from here? I believe that the focus will be on maximizing the value extracted from the increasingly complex airline product. Specifically:
- Optimization based on total customer value: With continued growth of ancillary revenue reaching 10 to 20% of ticket revenue for most airlines, there’s a need to adopt a more holistic view of customer profitability. Moreover, airlines need to be able to segment based on which customers purchase ancillary services, and which don’t. Those who do often spend an additional 30 to 60% of the ticket price on ancillary services.
- Personalized recommendations and value-added bundles: Ancillary products have increased the number of potential product configurations one hundredfold. However, today most airlines have adopted a static packaging of ancillaries. With the advent of individualization, offer creation and packaging need to become critical elements of airlines’ pricing and revenue management capabilities, allowing for the dynamic and customizable packaging of ancillary offerings.
- Innovative pricing models: Checking in for my flight to Florida, I was offered an upgrade to first class for $75. I declined. As I boarded the plane, I was upgraded for free. As it turns out, there were no other takers at $75. Should the airline have adopted a Dutch auction model, which begins with a high asking price that’s lowered until a participant is willing to accept the auctioneer's price, the results would have been different.
As airlines are building their next-generation pricing and revenue management capabilities, they should consider learning from the success of other industries. Take casinos, for example: Accurately measuring, forecasting and taking into consideration total customer value has long been a core competency. Dynamic pricing and personalized recommendations? Look at Amazon.
Considering Amazon’s model, pricing individualization requires an intimate knowledge of each customer. Oftentimes, that data already resides within the company, but it’s not readily available to the pricing and revenue management function. Democratizing data availability within the company will enable better decisions.
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