It may be easier to take the path of least resistance, but columnist Tom Bacon believes there is nothing wrong with a bit of disruption

Airlines are not considered the most innovative of industries. They are slow to respond to change; they tend to imitate each other and seem to be overly risk averse.

Yet pricing and revenue management doesn’t exist in a static environment. Moreover, in a dynamic marketplace, innovation and constant experimentation are critical parts of the job. Disruption is part of the formula for success. Thus, all RM departments must allocate a portion of their resource to ‘disruption’ – or challenging the status quo. Here is a four-step plan for ‘disruption’ in RM:

1.  Consider spending 10% on Revenue Management R&D

The average R&D budget for manufacturing companies is 3.5% -- and manufacturing is generally also considered conservative and slow to change. 

                For pharmaceutical companies, R&D is 15% of revenue. Fifteen percent reflects a need to be innovative, to continually add to maturing products – and the high profit potential of finding the next big thing. 

                Like pharmaceutical companies, the margin on getting RM right can be very high (only passenger variable costs of 10-15% applies to incremental revenue). At Frontier Airlines, we deployed two employees – on a total departmental headcount of 18 – to developing new techniques and reports, and testing new forecast models.

2.  Make small tests a part of your culture.

                R&D should be applied to all elements of RM, including pricing, forecasting, optimisation, elasticity, sell-up and ancillary fees. There are opportunities for innovation in every arena. And, rather than developing large-scale tests, experimentation should be part of your culture, where every analyst is encouraged to continually try new ideas -- in an isolated ‘test’ mode. These small tests need to have clear measurable objectives.

3.  Be open to outside ideas.

Where to find the best new ideas? Certainly, good ideas can originate with your competitors. RyanAir’s revolution in ancillary fees has led the way for many airlines. But also ‘breakthrough’ ideas come from other industries or from entrepreneurs who are not experts in your space. OptionsAway, for example, is a new travel start-up where professionals experienced in financial options are bringing their expertise to travel – and exploiting RM type-technology to drive a new ancillary revenue stream. 

Interestingly, partnering with another company may be the least expensive way to experiment. A great idea from outside the industry has limited appeal without your customers, your distribution, your sales and marketing. Rather than use your Strengths to squash new ideas, consider using them to truly exploit new opportunities.

4.  Diversify your R&D efforts. Pursue a number of, potentially even conflicting, ventures. 

                The purpose of experimentation is to identify new opportunities that are not addressed in the current business/optimisation model. By definition, you are challenging current assumptions. Think broadly about new ways to apply airline pricing/RM and develop tests for a variety of opportunities.

                Some opportunities can provide a new competitive advantage for your firm – but some represent new opportunities for the whole industry.  SABRE, American’s technology initiative in the 1970’s, became an industry distribution solution that was spun off from American. Lufthansa's innovations in revenue management are sold to airlines across the globe via their Solutions arm.

5. Make a Resolution this year to be more Disruptive!

Airlines may not be the most innovative industry -- but RM must be itself disruptive to continue to add value in a dynamic marketplace. Invest in RM R&D this year to move your company forward.

Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation. 

Questions? Contact Tom at tom.bacon@yahoo.com or visit his website http://makeairlineprofitssoar.wordpress.com/