Airline Retail Transformation Roadmap: Moving from RM to Airline Offer Optimization
In a previous blog post we explored the concept of “How airlines can achieve offer optimization” – read it here. Now, we’ll focus on the steps and benefits involved in transitioning from airline revenue management to offer optimization.
What is Airline Offer Optimization?
Airline offer optimization is the ability to dynamically create, price, manage and distribute offers across the seat and ancillaries in real-time. It aims to provide the right product mix to every customer at a revenue optimal price, regardless of the interaction time and channel.
In the airline industry, offer optimization is often perceived as a difficult undertaking due to legacy systems, the complexity around selling and fulfillment (you know - RBDs, EMDs, PNRs), and the recurring buzzwords related to digital retail transformation: NDC, AI, dynamic pricing, Offer and Order management. But, with the right partner, offer optimization isn’t a pipe dream – it's an achievable roadmap of milestones towards a reality where airlines sell and service their customers in a simplified and more meaningful manner through offers and orders.
Watch this 4-min video with Justin Jander, Director, Product Management at PROS as he summarizes the concept of airline offer optimization.
What are the benefits of steering an offer optimization strategy?
Despite the complexity perception, the benefits of adopting offer optimization are becoming increasingly evident. There is more beyond traditional class-based pricing strategies. And airlines can bundle products and services based on customer preferences and create real-time offers to better capture demand, increase revenue per passenger and optimize business processes.
Moreover, modern airline retailing enables more meaningful customer interactions, helping airlines build their brands and add value to the entire value chain, estimated at $7 per passenger by McKinsey and IATA.
Explore the path from airline revenue management to offer optimization with Justin Jander in the video presentation from PROS Outperform conference below or keep reading for the 5-minute summary below.
To achieve offer optimization, airlines can gradually transition by addressing the core 4 components of the process:
The Right Airline Product:
Moving away from traditional airline revenue management, which focuses on flight seat capacity, airlines need to consider the entire offer: the right to fly, as well as the ancillaries that suit individual customer preferences. This shift allows airlines to optimize the revenue potential of optional services like baggage or seat selection (which, by the way, today accounts for $4.2 Billion only for 8 key US airlines), hotels and car rentals, leading to improved profitability and better travel experiences.
The Right Customer:
While traditional revenue management employs basic customer segmentation based on standard dimensions like O&D/POS, time of day, and day of week to deploy competitive availability strategies, offer optimization allows for a more granular approach. Leveraging customer and shopping data, airlines can perform advanced segmentation, enabling them to define more relevant and revenue-optimal offers for different customer segments and put a more robust channel strategy in place.
Looking to learn more about airline offer optimization? Take a look at this guide to airline digital transformation and retail freedom through offer optimization.
The Right Price:
In traditional revenue management, pricing is based on fare class codes and class availability. It represents fixed price points and buckets of static demand, limiting the flexibility to capture market trends and customer willingness-to-pay. Offer optimization helps airlines gradually move away from RBDs to adopt customer-centric pricing logic:
- continuous pricing helps your airline break free from the limitations of fare class codes;
- request or context-specific pricing helps you add more data into the pricing decision like the number of passengers traveling;
- dynamic ancillary pricing helps you consider and present the optional services with the highest likelihood to purchase;
- and lastly, pairing the price for the flight with the price for the ancillaries helps you determine a bundled offer price that considers everything you know about your customer.
The Right Time:
While traditional revenue management segments passengers mainly based on the days prior to booking, offer optimization allows airlines to understand customers' willingness-to-pay at multiple stages. This helps airlines foster more meaningful interactions to present the most relevant offers.
Offer marketing plays a crucial role in tapping into customers' willingness-to-pay through various touchpoints, such as email, social media, and non-airline web outlets, to increase revenue at different stages of the travel journey.
What are the key pillars of airline offer optimization?
Working with 130+ airlines, at PROS we’ve identified three key pillars of airline offer optimization to help airlines transition from RM to offer optimization.
- Core revenue management: helps airlines understand the capacity constraint vs. existing demand. Through the latest RM innovations like willingness-to-pay (WTP) forecasting and optimization airlines can capture price sensitivity to generate bid prices and transformed fares and prevent revenue dilution.
- Dynamic pricing of the right to fly:
- Continuous pricing: helps airlines price an optimal price between filed fares. Based on the capacity constraint and the customer’s WTP airlines can produce a revenue-optimal price and prevent leaving money on the table due to class-based fare limitations.
- Shopping context or request-specific pricing: helps airlines extend their continuous pricing capabilities to consider trip and customer attributes, as well as events and weather data when pricing. This results in a more sophisticated segmentation of customers that captures consumption trends undetected before, modeling them in real-time.
- Dynamic ancillary pricing: helps airlines rank, bundle and price ancillaries, so they can present ancillaries and price them in a way that is most likely to impact conversion.
Transitioning from revenue management to offer optimization will look different for every airline based on each airline's business strategy. But embarking on this journey is the first step toward commercial autonomy and the ability to retail how, when and where you want.
If you are an airline executive, read the blog post The Commercial Imperative for Airline CCOs to learn more.
On this retail transformation journey, to unlock the full value potential from offer optimization airlines also need to consider four offer tenants to full retail freedom:
- Offer inventory ownership across the entire product catalog
- Offer creation and distribution control for any sales channel
- Offer marketing to acquire customers across airline-owned channels
- Offer tracking and science to provide continuous feedback loop to fuel the learning AI models
Moving toward offer optimization may seem like a big undertaking but taking it one step at a time will lead to significant benefits for airlines in terms of revenue growth, customer-centricity, and enhanced travel experiences.
So, start your journey today and embrace the power of airline offer optimization: contact PROS at airlines@pros.com.