In the world of airline pricing and revenue management, just the phrase ‘dynamic pricing’ stirs up emotions, launches debates, and creates visions of a technologically advanced aviation industry. As travel demand increases and airlines are looking for new ways to accelerate revenue and recovery for their business, dynamic pricing has returned to the forefront of conversations.
At a basic level, many airlines are evaluating how to hit the reset button when it comes to the fundamentals of revenue management:
- How should airlines approach forecasting and how should it impact decisions around capacity, scheduling, and overall marketing strategy – especially when change is constant?
- What alternative data can I use to boost the quality of my forecasts and then in turn make better business decisions?
- If now is the time to experiment and reset my approach to revenue management, where should I start?
These questions can be incredibly important as airline leaders have a unique, but difficult opportunity, to create a sharper and stronger recovery by increasing productivity while evaluating long-term growth along with short-term stability. It is in this environment that many within revenue management are more willing to experiment and test new concepts, even in a few select markets, that are specific to driving revenue. Enter dynamic pricing.
What Exactly Does PROS Mean When It Talks About Dynamic Pricing?
Let’s back up a little bit and start at the basics to define what we mean by dynamic pricing. Many technology providers in the travel space talk to it without a solid foundation in how it impacts pricing, revenue management, and distribution teams. Many airline professionals themselves have different definitions of what it actually means to their business. When it comes to sorting through the many terms associated with dynamic pricing, the official IATA guidance is as follows:
At PROS, we define dynamic pricing as the ability for airlines to adjust a price in real-time, in response to a one-time request for a passenger based on segmentation or passenger attributes. There are many different types of dynamic pricing, all varying in complexity, but in the end, enables airlines to break away from rigid class-based pricing and create more relevant offers.
How Can Dynamic Pricing Help in The Context of Today?
Now, more than ever, airlines cannot afford to leave money on the table. In this context, the historical buy-down problem faced by revenue management teams is even more glaring. The buy-down problem is caused by the fact that two filed fares have very few differences in conditions between them, so passengers buy down to the lowest fare, even if they had a higher willingness-to-pay. For example, if a passenger has a willingness-to-pay of $150 for a flight, but the only price points an airline filed are $100 or $200, the airline only has those two options to charge the passenger. If the airline sets availability at the $200 fare, the passenger is turned away and the airline loses the opportunity to capture that demand, even though it may have been revenue beneficial. If the airline sets availability at the $100 fare, the passenger pays $100, which results in a $50 loss in revenue because there was more opportunity to upsell the passenger. By having the power to price beyond a static price point and in between two fares, revenue managers can capture that much-needed incremental revenue.
The PROS Approach to Dynamic Pricing
PROS brings dynamic pricing to life for airlines by providing a unified platform that helps airlines connect the critical pieces of revenue management, offer creation, and distribution – all key components of dynamic pricing. PROS offers a step-by-step approach to dynamic pricing that is grounded in science, so airlines can do more with less, drive immediate impact, and be comforted that PROS will work with the airline where they are and what they need in their unique context:
- Phase 1: Taking advantage of class-based willingness-to-pay estimation from revenue management and availability strategies for additional price flexibility.
- Phase 2: Expanding to continuous pricing while still deploying the class-based willingness-to-pay estimation from revenue management.
- Phase 3: Calculating a dynamic price based on a class-free willingness-to-pay estimation and real-time price adjustment based on real-time market conditions.
Lufthansa Group Taps into Continuous Pricing
Recently, Lufthansa Group shared details regarding their adoption and approach to continuous pricing, a key phase in the journey to dynamic pricing. PROS and Lufthansa Group have had a long-standing relationship, collaborating on many aspects of dynamic pricing. The joint research and implementation of dynamic pricing originally began with group sales and using dynamic pricing to price group passengers.
The science and learnings from group dynamic pricing were then applied to the implementation of dynamic pricing for individual passengers. In the end, Lufthansa Group was able to create multiple price points and in turn, be better positioned to accelerate recovery as passengers return. According to Simon Rimrod, Head of Commercial Offer and Pricing for Lufthansa Group:
What’s Next in Dynamic Pricing?
At PROS, we are continuing to push that ease of adoption of basic principles of dynamic pricing through our revenue management, availability, and shopping capabilities. Within revenue management, we are working hands-on with airlines on incorporating willingness-to-pay capabilities as well as experimenting with competitive fares to enhance forecasts.
For many in the airline space, now is a unique time to experiment and test out new strategies and approaches within the markets they operate in. Dynamic pricing could be that focal point for many revenue management teams. It does not have to necessarily be a large-scale project with months of implementation, but instead could be taken step-by-step in order to find the right approach for your particular airline.
About the AuthorMore Content by Genevieve Todd