Now is the time for a pricing spring clean
Regular EyeforTravel columnist Tom Bacon tells us why
Does your pricing strategy have cobwebs? Was it developed at a different time in a different market context? Could it use some ‘spring cleaning’, disposing of practices that don’t make sense anymore? Or replacing obsolete policies with more updated ones? Perhaps, now is the time for a thorough review of your pricing and revenue management practices.
There is a lot that is new in the travel marketplace. Perhaps you should be rethinking your pricing in the context of the following:
1. Pricing rules
Many rules become obsolete over time – Saturday night stay is the best example of an industry practice that no longer exists. On the other hand, the convention today is for some fully refundable fares, some fares subject to change fees, and some non-refundable fares. Many fares have advanced purchase or length-of-stay requirements. Are these industry stratifications working for you? Or, in your markets, do these conventions leave money on the table – offering too many customers a way to purchase low fares or, alternatively, too restrictive for you to get your share of more price sensitive passengers?
2. Ancillary service fees
For many airlines, ancillary was a tactical reaction to competitor moves and not a well-integrated corporate strategy. Ancillary continues to grow across the industry and there have emerged a few distinct approaches. Most airlines, nevertheless, seem satisfied with 7-10% ancillary, awaiting competitive moves before taking unilateral action. Are you just matching your competitors or have you designed your ancillary offerings around your unique customer needs? Is ancillary a ‘me-too’ offering or a means of differentiation?
3. Channel-specific opportunities
Lufthansa has led the industry with a customer fee for booking through third-party channels. Although still controversial, they have declared some success in moving customers to direct channels. How much do you rely on third party channels? Do you have a strategy for moving more customers to lower-cost channels? Should you be taking advantage of Lufthansa’s lead and implement a similar fee.
4. Customer engagement/personalisation
Does your pricing strategy incorporate new capabilities in customer-specific merchandising and pricing? Many airlines are exploring this new application of Big Data/Analytics – using customer-specific purchase behavior to design incredibly targeted promotions or offers, “the right product at the right price at the right time” on an individual customer basis. Even if this isn’t done at the extreme, your competitors are contemplating ways of segmenting the market in much more discrete categories. Perhaps you should be experimenting with this too.
5. Growth in ULCC’s
So-called ULCC’s (‘ultra low cost carriers’) typically have a strategy to offer super-low fares and then charge a plethora of additional fees – a $79 base fare can fairly easily end up costing the passenger more than $150. Last winter, in the US American announced it would be matching the low fares even without the same fees. American expressed concern that many of their highly price-sensitive passengers could be attracted to the ULCC by its low published base fare and they sought to retain their share of these passengers. Do you match ULCC fares or do you seek a premium given your lower ancillary fees? Do your customers understand the different approaches? What is the optimum strategy for you?
6. Fuel price volatility
Average fares have come down with the dramatic drop in fuel prices but there remains considerable uncertainty and volatility in future fuel prices. Given the lower prices, many airlines have reduced or eliminated fuel hedges; most airlines would now face significant profit declines if fuel returned to even $50 per barrel. Do your fares – three to six months out or more – incorporate some cushion for higher fuel prices?
7. Need for speed
Business practices in all industries are moving more quickly. Does your pricing respond quickly enough to market changes, competitive initiatives, schedule changes and other factors? Often now, responding to a market change in 24 hours is just not fast enough – a lot can be lost by a misguided fare (either too high or too low) in the marketplace for a whole day. Are you exploiting new technologies for managing change dynamically?
We can all benefit periodically from some fresh thinking. More often, we’re so busy responding to a highly dynamic marketplace or to the latest corporate commercial initiative that we fail to properly review current policies and practices. More often, we tweak pricing or settle on a quick fix and move on to the next emergency. Perhaps now is a good time for you to take a fresh look at your pricing, to do some ‘spring cleaning’.
Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation.