Software development – generally and specifically in travel – is undergoing a radical change. Pricing models are under threat – so are you ready?
Every so often software development goes through some changes. Most recently we have seen the explosion of app type development which has resulted in a different set of design principles.
However, it has also resulted in a democratization of software development with a significant explosion of new players emerging in software development. This is good in general as it opens up the industry to newcomers.
But it also comes with a darker side. You have players which have no understanding of the infrastructure necessary to support a basic service such as search. Thus they search and hit such systems with impunity and without any cost to themselves.
To compound matters, the way the travel industry has worked for many years has been on the basis that information was provided for free and that the transaction process resulted in a charge.
This took place both to the vendor in the form of a cost of the product sold but also for the cost of the transaction to the provider of the marketplace.
Is this justified? Is the model right?
Today the physical and direct cost of transaction processing is highest for the search process and lowest for the actual booking transaction.
True, this is a simplistic statement, but in general it is true. Examining the current web-based model has the consumer searching at no charge.
There really is no difference to walking past a shop window and seeing your wares offered versus browsing a website. That is a part of the COGS (cost of goods sold) – one can search at no charge on Google, for example.
The cost is only that the consumer pays for access to the Google system. That can be zero â€“ borrowing someone elseâ€™s machine – or very expensive. Using a satellite telephone from the middle of the desert to dial access to a network. Now THAT can be expensive.
The generalist model for search is consistent with other products. However the infrastructure to support this model basically is not there. And the main players – the GDSs – which currently provide the neutral information are doing their best to ensure that this model doesnâ€™t change. That is a tough nut to crack.
At last weekâ€™s Open Travel Advisor Forum in Las Vegas, Forresterâ€™s Henry Harteveldt suggested the GDS model is broken.
However, he didnâ€™t just throw rocks at it â€“ he offered an alternative, promoting the concept that a margin-based model would be more appropriate.
The industry does face a dilemma from both the technical and the commercial sides of distribution. These challenges are hard to overcome without radical overhaul of the infrastructure, once again both technically and commercially.
Commercially it is clear that the model of where you look is where you must buy is tired and needs to be replaced.
The growth of search-based models without transactions has demonstrated the alternative viability. How viable of course in the face of Googleâ€™s entrance remains to be seen.
Commercially, a completely open model would be the preference, but are we ready for it technically? A resounding “No” is the answer to that question. And to be clear here: this is not the exclusive fault of the GDS.
In basic terms, the technical constraints of the current model is the block for adoption of an open model. If we were dealing with a finite universe of information then we could conceivably come with a range of answers to the search question. This would be the case for, say, a book on Amazon.
But we are dealing with a model of distributed pricing where airline products are priced using algorithms and rules that often are inconsistent and decidedly complex to support an airline’s desire for pricing that is as opaque as possible.
It allows for a wide range of right answers. This complexity may no longer be sustainable in the face of ancillary services, and split carrier types (eg. low cost carriers versus hybrid versus full service carriers).
However, the alternative with an approved pricing certifiable by a particular body for the MSRP (Manufacturer’s Suggested Retail Price) is also not a good thing to do either. There are those out there who have advocated that the only path to open distribution is the abolition of ATPCO and its stranglehold on fare distribution.
Indeed, in many places fixed pricing or price fixing is by definition illegal. A factor that has reared its ugly head in the UK with the OFT investigation and subsequent revelations of price integrity challenges and pressures by vendors on intermediaries.
Taking all this into consideration makes Harteveldtâ€™s model at the very least worth examining. Today the intermediaries, both on and offline, are actually doing hard work in presenting options to users.
Therefore there should be some consideration paid for the service rendered. The extent of that would seem to be a market-based decision rather than a fixed pre-determined solution. The argument that has been made by the LCCs is that their product costs less and is simpler than a legacy product, so why should they pay the same price.
there are a number of competing forces looking at the cost of doing business. Which one works the best?
The answer is clear – None of them do. Freeing the market to make its own decisions will be painful.
The loss of a holistic and safe marketplace is no longer a logical basis for retention. With Forrester and others predicting a drop of GDS-based distribution to below 40% over the next three to five years we are (Forrester predicts only 38% of US distribution will go via the GDS by 2016) facing a new and open marketplace.
Such a model exists in just about every industry vertical in the world. Yes, even the diamond trade has open markets now.
As we face this next generation of development methodologies, we need to adopt a more open attitude to the wider user community.
The days of sponsored distribution are likely coming to an end. It was a nice run. But now the need to provide full service models of direct or neutral indirect distribution has to be re-examined.
HP has estimated that by 2020 there will be 25 million consumer-accessible apps. A significant number of these will be travel related.
Are you ready?