16 Nov Venturing beyond dynamic pricing to personalized pricing
While the airline industry was the first to introduce advanced revenue management techniques to the world, including the dynamic pricing concept, other industries are leading in this area. Part of the reason for this, in addition to others we will look at, is the sheer complexity of the airline industry. Even as airlines use advanced pricing techniques based on real-time demand and more granular segmentation, dynamic pricing is still being refined with advances in continuous pricing that offer more flexible price points. But the real game-changer for revenue growth is when you look beyond dynamic or continuous pricing and apply the concept of personalization to pricing
The creation of tailor-made offers must be based on value as viewed from the customer’s perspective and not the airline’s. And that value will differ from customer to customer and will even vary based on the context of the customer’s travel. The same customer will value services differently depending on whether travel is for leisure or business or flying alone versus with family. This requires a mindset shift from airlines as they typically adopt pricing strategies that solely look at revenue or profitability. Today, airline revenue managers open and close fare buckets and allocate even reallocate seats among these buckets, to control the demand and maximize yield, thus achieving pseudo-dynamic pricing.
Factors behind pricing
Demand curves are fundamental tools to explain the concepts behind pricing, where the area under the curve represents the total attainable revenue. Economists argue that two factors influence a shift in a demand curve to the right:
- An increase in income in target customer segments, or
- A change in the price of other goods, either due to an increase in the price of a substitute product (e.g., when taking a train is more expensive than flying) or when there is a price decrease for a complementary product (e.g., when a bundled flight and hotel package is cheaper than the two separately).
Yet, these macro-economic factors are difficult to predict with any degree of accuracy. However, a third factor could help increase demand – personalization
By creating personalized offers relevant to travelers, airlines can differentiate their value delivery from competitors, helping increase demand. Tailor-made offers improve look-to-book ratios (the percentage of purchases versus website visits) and help shift the demand curve to the right. Shifting the demand curve from D to D’ creates two revenue opportunities:
- The same quantity (Q1) can be sold at a higher price (P2 instead of P1) > P2*Q1 > P1*Q1
- The airline can sell more quantity (Q2 instead of Q1) at the same price (P1) > P1*Q2 > P1*Q1
While personalized pricing may sound lucrative, it also comes with a few challenges:
- IT complexity: Airlines aim to build richer customer profiles and segmentation maturity through continuous feedback loops across touchpoints. To do so, their IT landscapes and data engineering capabilities need to evolve to handle real-time transactions with increased data volumes and variety. To deliver truly personalized pricing of air and non-air products, the broader IT ecosystem must be considered, including the impact on downstream activities, such as revenue accounting and fulfillment.
- Data privacy and ethics: In addition to customer data usage authorization, ethical and legal debates around offering different prices based on personal attributes and choices are ongoing. Consumer groups argue that there cannot be price discrimination if the products and services provided are the same. However, airlines could begin by offering the same price to customers belonging to the same micro-segments. Furthermore, consumers need assurance that their data is secure and protected by airlines.
- Personalization strategy and communication: Transparency and differentiation are critical to ensure customers are receiving the right messages. These need to be structured around value, not price. The value of personalization needs to be clear to customers to increase their willingness to share their data. Airlines need to carefully decide what parameters they will use to personalize offers, striking the right balance between yield, added value delivery, and customer segment. You don´t want your frequent travelers finding out that they are paying more for the same service than the person sitting next to them that has never flown your airline before.
- Channel dynamics: While personalization on an airline´s direct channel has its challenges, these are compounded in the intermediated distribution landscape. In addition to data sharing regulations, travel sellers need to be willing to share customer data with airlines for the latter to be able to return a personalized price.
Unlocking greater customer value and airline revenues
While dynamic pricing innovation must continue, the potential opportunities to serve customers in a more personalized manner across the journey should not be overlooked. With customers willing to share more personal information in exchange for relevant offers, the scope for personalized pricing and the value it brings are still being explored. And while both dynamic pricing and offer personalization continue to evolve, the tipping points come down to trust and value. Customers need to trust that airlines will only use their data for their stated intention and feel rewarded for doing so, not penalized for it.