IN-DEPTH: In times of economic uncertainty where demand drops and becomes more unpredictable, the travel industry sees much more pressure on prices. Revenue Managers seem to still follow too easily the principle of dropping price to generate more demand, says Sebastian Kuritke, director of Revenue Management, Avis Europe.

Published: 04 Oct 2011

IN-DEPTH: In times of economic uncertainty where demand drops and becomes more unpredictable, the travel industry sees much more pressure on prices. Revenue Managers seem to still follow too easily the principle of dropping price to generate more demand, says Sebastian Kuritke, director of Revenue Management, Avis Europe.

By Ritesh Gupta

One of the critical developments for revenue management (RM) is that the customer is armed with better information. The customer can compare prices quickly across the consideration set.

RM has responded with the “rate of the day” approach, but that only partially captures the revenue opportunity. Some kind of rate optimisation is also needed to prevent that rates gradually slide towards the lowest rate in the set.

“In times of economic uncertainty where demand drops and becomes more unpredictable, we see much more pressure on prices,” says Sebastian Kuritke, director of Revenue Management, Avis Europe.

“Revenue Managers seem to still follow too easily the principle of dropping price to generate more demand. Otherwise it is hard to explain why discounts of more than 30% are launched even in traditional peak periods. Most people seem to forget, especially when revenue plans are at risk, that this eventually would require an additional volume uplift of more than 100% to recoup price loss and maintain profitability,” added Kuritke, who is scheduled to speak at the forthcoming Revenue, Yield & Pricing for Travel Europe 2011 Conference, to be held in Prague (29-30 November) this year.

“We should accept that there are times where we simply cannot drive any further volumes, especially when competition seems to be ready to follow down to any given price point. The industry needs to treat the easy-to-pull price lever very carefully whilst car rental companies also mitigate by adjusting fleet levels which can be a crucial success factor,” Kuritke told EyeforTravel’s Ritesh Gupta.

Kuritke spoke in detail about existing pricing and segmentation practices, setting prices that capture value and other pertinent issues. Excerpts:

How do you think car rental companies need to look at their existing pricing and segmentation practices in order to gain optimal results?

Car rental Revenue Management in Europe is still in its early days but is facing the same challenges as other industries. Whilst capacity to some extent is more flexible, the levers we pull are similar (i.e. pricing, length of rental controls, shuttling and fleet size adjustments). In car rental, segment optimisation is at least as important as pricing, especially when specific segments with contracted rates (and potentially guaranteed availability) might contribute much less than “price flexible” segments. It is essential to first understand each segment and customer’s profitability, if possible define a general customer lifetime value. Retain the most valuable ones and continue to improve the portfolio (e.g. via a suitable loyalty program) as in the end your overall business mix will determine your profitability.

Whilst systems theoretically already provide solutions to the problem, the bigger challenge lies within proper change management. The right people, processes and systems need to form part of the business culture that triggers optimal business decisions and also innovate the market. In the end it is still the human being who owns the decisions that hopefully aim for higher profitability under the umbrella of excellent customer satisfaction.

It is mentioned that the right way to set prices involves capturing the value that customers place on a product by “thinking like a customer”. What do you think is the key to setting prices that capture value?

The customer should always be the centre of our thinking in terms of new products, services etc. Generally a lot of customers always seek best value for money but some are prepared to pay extra for suitable value propositions (e.g. car choice, diesel option, speed and convenience during car rental process).

Ideally different product options with differential pricing based on customer’s characteristic should be offered to capture the real amount that consumers are willing to pay. However this is only possible as long as the overall market does not offer new products/innovations “for free”. Unless the customer feels being “ripped off” by the marketplace there is a clear win-win opportunity. Key for any seller’s success is a value statement that clearly articulates why customers should make this purchase.

It is highlighted that the key to developing a comprehensive pricing strategy involves embracing (and profiting from) the fact that customers’ pricing needs differ in three primary ways: pricing plans, product preferences, and product valuations. What’s your opinion about the same?

The success of a pricing strategy and tactics depend on one’s ability to understand customers’ needs, behaviour, location, and individual price sensitivity. It goes without saying that current market and competitor situation needs to be taken into account. It is not easy to find the right balance between a speedy and straightforward booking process versus an overwhelming offer of too many choices which however do provide valuable up-sell options. This becomes even tougher when the product is perceived a commodity. Inflexible systems can still be the limiting factor as they potentially are not able to handle complex product offerings in the end to end reservation to billing process.

It seems there is an appetite from consumers to always lap up special deals, discounts and special offers. But do you think companies are in danger of falling into a trap of working with everybody and having discounts all over the place? What do you recommend considering that so many options for flash sale initiatives are now available?

Besides the discount information overload that a customer is exposed to, I do not believe in strong discounting as the customer is clever enough to find out how the final price relates to the overall market price. The more dynamic and sophisticated the market players get, the more likely the same offer will be matched immediately with no real benefit to any of the market players. However communicating to the customer with an attractive product or service proposition is important but price deals are not the only option. Today’s comparison websites will tell customers anyways whether the alleged offer is a bargain or not. Moreover depending on the travel value chain there might be other offers triggering customer’s decisions. In car rental, I might not be able to generate any more demand as underlying flight and hotel costs are not supporting any cheap car deal offer. There are even some products for which I possibly are not able to generate any extra short term demand due to the nature of the product. (e.g. 7/9 seaters).

Whilst RM systems go a long way in identifying opportunities and maximising revenues they are not capable of business forecasting and this still remains an area where Revenue Mangers have to improve. What’s your viewpoint regarding the same?

First of all Revenue Managers should generally work towards maximising profits rather than revenue and at the same time prevent loss of market share (at least in the long term). If everyone would follow that approach we would minimise market pricing pressure and pricing spirals which we have seen over the last few months. A system is only as good as the human being providing a best effort input. “Talking to the system” requires excellent business knowledge and experience embedded into a cross functional decision process which is the key success factor. Do not rely on a system itself. To make this happen there is a obviously a trade-off between anticipated benefits and the involved costs and efforts which can highly depend on the size of the business but in the end there is no doubt that systems definitely will calculate more efficiently and do the maths right.