Finding revenue in unexpected places with dynamic pricing science

Airlines have transformed obstacles such as downward pressure on fare structures, fluctuating demand patterns and inventory non-utilization into opportunities to accelerate growth.

NB: This is a viewpoint by Alberto Carlos Hinke, director, strategic consulting at PROS.

A large part of the airlines’ success has been the ability to do what many industries have yet to figure out – maximize inventory through intelligent pricing.

Revenue optimization is becoming increasingly difficult, however, due to several factors, not the least of which is an uptick in entrants to the low-cost carrier segment and an expanding list of competitive in-flight amenities.

With fierce competition and market volatility, airlines must continue looking forward and evaluate new ways to maximize revenue and deliver superior customer service.

As ecommerce strategies and CRM systems adapt to changes in buying preferences, the inability for airlines to dynamically price at market speed will emerge as the biggest obstacle to realizing a modern commerce strategy.

Enter sophisticated dynamic pricing science powered by artificial intelligence, machine learning and cognitive algorithms.

These merchandising engines are providing far more than just a seat. In fact, dynamic pricing technology can help pinpoint buying patterns so precise and accurate that airlines can synchronize their pricing strategies in real-time and present the right price at the right time.

To stay ahead, airlines need an approach that provides fair pricing and a quick and easy buying experience:

  • Create the right offers
    Create the right offer for the right customer at the right time by treating each buyer as a “segment of one.” Personalized, customized offers based on the intelligence gained from algorithmic analyses create more impact in competitive market segments. Carriers that deploy dynamic pricing science are, for the first time, able to offer products that are specific to each individual customer. Gone are the days of random offers; today is the era of personalization.
  • Efficiently deliver pricing to the end customer
    One of the major sources of friction when buying airline tickets is that fares and seat availability generated from a GDS or OTA can often be stale, causing frustration among customers about flight availability and real-time pricing when they attempt to book. Optimized pricing can only be effective if both the sales teams and the channel are empowered to access and use price recommendations. Tools that allow airlines to deliver pricing to sales at the time they deliver a quote – extended across all direct and indirect sales channels with the same capabilities – are essential in creating a consistent sales experience, no matter where or how customers buy.
  • Track and analyse
    Airlines need systems to assess hundreds and thousands of internal and external factors. They also require data points to create the deepest segmentation, understand customer buying patterns and identify meaningful correlations. With visibility into customer buying behaviours, airlines can distinctly forecast for booking and cancellations, and then convert the right deals at the right price with greater speed, accuracy and scale.
  • Ensure speed
    Modern commerce moves at breakneck speed, which means airlines need to respond to customers with precision and consistency across all channels. According to Forrester Research, 50 percent of deals are won by the vendor that responds first. Static, outdated prices that were once designed to protect margins today represent lost revenue. Dynamic pricing science delivers what modern commerce requires: speedy, financially sound deals that are consistent across channels.

The lynchpin to making modern commerce work lies in the ability to price dynamically based on insights rooted in data science, creating experiences that can accelerate deals and improve customer satisfaction and loyalty.

By embracing dynamic pricing as a foundation for how they sell, airline carriers will be able to synchronize their pricing strategies across channels in real-time and present the right price to the right customer at the right time.

The cost of maintaining status-quo selling processes is too high to ignore, and many industries will be disrupted by the uneven pace by which they rise to this challenge.

Airlines that innovate their business toward science-driven commerce will be in the best position to capture opportunities previously lost without leaking revenue or sacrificing margin.

The science of the sale is here, and airlines must be “wheels up” on this approach if they wish to stay competitive.

NB1: This is a viewpoint by Alberto Carlos Hinke, director strategic consulting at PROS.
NB2: Image by BigStock

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Viewpoints

About the Writer :: Viewpoints

A founding principle of tnooz was a diversity of viewpoints from across the spectrum. Viewpoints are articles by guest contributors from around the travel and hospitality industries. The views expressed are those of the author. and do not necessarily reflect those of the author's employer, or tnooz and its partners.

 

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  1. Peter Topping

    The Airlines pricing system is broken and although there is a huge amount to talk about revenue optimisation, yield management, ancillary revenue, dynamic pricing models and personalisation, it is broken largely due to the airlines and no one else, it will be disrupted and that maybe painful.

    Just a few months ago I tried to pay full online price for two available sectors totaling 1000s of dollars, the airlines said “not combinable”. So I purchased an $800 sale fare and did a points upgrade business both ways. Two days before departure the same seats I wanted to combine on the same flight were still for sale, so the airline turned down 1000s of dollars and I used a combination of soon to expire points of mine and my partners.

     
  2. Glenn Wallace

    The problem with many of these ideas is that they exist in a vacuum, not accounting for two important factors: scaling price quotes over a large number of retail endpoints at enormous volumes is challenging, and that an airline is but a single supplier in a vast marketplace and existing system create price combinations with other inventory items, especially other airlines (via interlines). Right now the industry uses a distributed calculation and fare quote system. Fares and schedules are pushed out, availability exists as push (AVS), pull (seamless), and local calculators (controlled by the airline). This enables about 6 different systems to shoulder a large calculation load of billions of queries a day. The idea of an airline having total control and receiving every fare quote request sounds appealing to someone sitting at an airline pricing dept, but ignores the challenge of routing and servicing those queries in a timely fashion. Customers using metasearch, OTAs, travel agents are generating enormous amounts of queries. Should many retail channels each generate messages to 400 airlines simultaneously? (a “pull” system) If these host systems were already scalable, metasearch would not need to use systems like QPX or MasterPricer. But the problem remains that the ATPCO fare filing system delivers finite fixed price points, albeit controlled in real time by bid pricing calculations opening different availability buckets. There’s also a huge $ cost in CPU time to run these calculations. Even if bandwidth were cheap and fast, no matter how a system prices there is a cost in calculating a quote that airlines seem unaware of. Airline inventory isn’t a bunch of hats sitting at Amazon waiting to be sold. It is dynamic, differentiated and perishable! Conclusion: The prime design requirement should NOT be that airline systems receive and service every quote, but that airlines are in control of every price quote, and that the pricing is truly dynamic and not using fixed price points. (this can be achieved using local black box calculators)

    The second problem is that large percentages of itineraries offered to customers and sold are interlines. Most of the discussions about next generation airline systems seem to assume there is only one airline in a marketplace! How can a “pull system” make decisions about which peer inventory to include? Having a single airline make decisions about which other airlines to include in an itinerary quote could severely limit consumer choice, which history has shown more choice=more conversion. But how then can airline revenue management make decisions in real time about how a flight might be priced with a partner’s connecting flight rather than their own? Difficult problems…

    And a final thought, the most important point to pricing is competitive input — how should dynamic pricing systems account for it? Older airline systems have ignored real time availability changes from competitors and relied upon stale fare information. The critical factor here is not yielding down (which is easy) but yielding up at the right time (when competitor inventory is compressed) to capture more revenue. System design needs to account for competitiveness input as well, as a core requirement.

     
  3. Alexander v. Bernstorff

    We all know that price is only one out of a few decision making factors when buying an airline ticket. An IATA survey showed that price accounts for less than 50% of how consumers make their decision. Hence, estimating a spot price (or dynamic price) is one – important – piece of the puzzle. It does not only help the airline reduce fare filing complexity and also to gain back control, it will take away confusion over multiple price points for the consumer.

    But – the right offer at the right time and the right place does contain much more than price. The right mix of, among other pieces of the puzzle, added services, bundling strategies, sufficient distribution capabilities (beyond dotcom and GDS) and, first and foremost, access to one’s own data to be analysed is key to present something relevant to the consumer (as compared to today’s meta-search results).

    The whole puzzle will need human expert know-how, intuition and decision making for quite some time to come. The first step for an airline is to have technological capabilities that allow humans to design consumer oriented, fully flexible and super-fast speed-to-market products – fully controlled by the airline. A learning process is required of how modern retailing works, before robots can be instructed how to assemble comprehensive offers. Even if that’s being suggested almost every day, given the speed-of-change in the airline industry, AI is not going to take over for some time to come.

    But airlines should be prepared as next generation technology has entered the house already some days ago. New-entrant providers will not solve existing problems with legacy thinking and technology. Airlines willing to step out of the cave can build significant competitive advantage with considerably low effort.

     
 
 

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