Pricing strategy is an airline"™s overall approach to maximize revenues. As well, it is a mechanism for bringing supply and demand into an equilibrium at a particular price and quantity while minimizing overbooking and unsold seat inventory.
In the past, revenue management systems focused mainly on fare rules, physical (age, service categories, etc.) vs. non-physical (penalties for changes, minimum stay requirements, etc.) price fencing strategies and other techniques to optimize revenue. But today, this is no longer the case as airlines are operating in a highly dynamic and competitive environment. Nowadays, airline continue focusing on optimizing demand forecasting and inventory control models but in addition airlines also need to consider new merchandising opportunities and further break down and sub-segment their markets among others to capture higher revenue per passenger. Looking forward, it is expected that more and more companies will focus on implementing dynamic pricing strategies and related initiatives especially as airline fares continue to show a modest downward trend in Q1 2018 when compared to last year.
At a high level and among others, airlines use a number of business analytics tools and techniques in order to build a sound dynamic pricing strategy to maximize revenue as follows:
1. Micro-market segmentation: It involves breaking down a market into several sub-groups or market segments. For example, a business segment could include a same day short-haul market, a long-stay short-haul market (targeting rotational staff at a facility), among others. Leisure market might include weekend passengers, weekday traffic among others. Therefore, micro segmenting a market can open the door for additional price differentiation as well as upselling potential merchandising opportunities as each new segment may value different products and services
2. Online data collection: Key areas to focus on include purchase and travel history, age, search pattern, booking engine used and customer behavior among others. Historical data collection can include what services/products were previously looked at and purchased. In addition, data collection will be critical for an airline as it can be extracted every time a passenger makes a new flight inquiry
3. Cluster analysis and databases: Data must be clustered based on similar customer behavior. Identifying patterns in the data, gaining valuable insights from it and building and connecting it to a comprehensive customer database are key
4. Potential merchandising opportunity evaluation: Today, we can observe more than 70 ancillary revenue options being offered by carriers at various touchpoints during a trip. It opens new opportunities to further personalize a passenger trip, compete head-to-head with low and ultra low-cost operators, increase traffic and maximize revenue
5. Product recommendation analytics. Using product suggestion engines, airlines can increase product/service up and cross selling opportunities and revenue from the existing customers on the basis of customer product/service buying behavior. This step includes product/service bundling opportunities in order to gain a revenue advantage
6. Forecasting. Demand needs to be forecasted for each product and fare as well as customer behavior. It is key to calculate demand levels to optimize the number of seats allocated to each group of fares per flight, O&D, route, etc.
7. Dynamic re-evaluation and optimization: Focus on constantly re-evaluating your offering, products, services, pricing, demand forecast vs. actual, optimization model and other processes in order to adjust required changes and competition response.
Considering those business analytics and implementing a sound dynamic pricing strategy should allow an airline to offer an optimized price at the right time to the right customer, one that is highly customized throughout a passenger travel journey. Moreover, a well-crafted offering will be one that closely matches a passenger willingness to pay and that allows an airline to reach one of its end goals: Revenue maximization.
Furthermore, today we can observe that many revenue management platforms have started to use Artificial Intelligence and machine learning technologies in order to be able to derive more revenue from customer behavior. Moreover, these technologies can predict what features, products, services and price point a passenger might be willing to buy not only a ticket but also other trip related and add-on services through a travel journey including at booking, pre-flight, in-flight and post-flight. Besides, other travel related services such as airline loyalty ones that can enhance a passenger travel experience while allowing airlines to optimize revenue.
To conclude, it is a must that airlines continue to focus on big data analysis and dynamic pricing optimization to drive revenue upward. As airline fares continue to show a modest downward trend and as Cost per Available Seat Mile or commonly known as CASM – a key performance metric for airlines – continue to increase mainly due to higher oil prices (on average 30% higher than last year), as well as labor & maintenance upward cost pressure persist, full service to ultra-low-cost carriers have recognized there is added value in crafting a sound dynamic pricing strategy. Not only, it can help airlines to optimize route and network revenue but also revenue per passenger, profitability and route/O&D margins. However, airlines with the lowest cost per unit of service, or the lowest CASM will always have an induced pricing strategy advantage over its competitors. Therefore, the need to contain and reduce costs are also key in order to maximize profits and returns.
About René Armas Maes
René is an International Consultant and manages a number of global consulting projects with key focus on revenue optimization, cost reduction, business restructuring, strategic planning, risk mitigation and process streamlining. He is an IATA instructor and a regular contributor for a number of air transportation magazines in Canada, USA, Europe and Latin America including AerolatinNews. He can be reached through his LinkedIn page.
