White Papers

2 Breaking Down Willingness-to-Pay in RM By the classical definition, the goal of revenue management is to sell the right product to the right passenger at the right price. Over the 35+ years since the formalization of revenue management, there have been many different approaches to solving this problem. The key focus areas to successfully solving this problem have always been forecasting the passenger demand, valuing the passenger demand, and then performing an optimization to determine the right controls for an airline's remaining inventory of seats. Those fundamentals have persisted with different approaches to all three areas since revenue management has been practiced. One important evolution of the forecasting and optimization step has been to counter the effect of buy-down. Buy-down is the concept where passengers have a certain willingness-to-pay for a product, but will buy down to the lowest available class. This effect dilutes the airline's revenue, unless protections are in place to prevent the buy- down. In an environment with few competitors or fenced fare structures, the buy-down is automatically controlled through the implicit segmentation in the filed fares. However, as the airline industry has moved away from the traditional fencing, more input is required to control the availability to prevent buy-down. Taking this approach allows for a more scientific approach to something that was previously handled through manual intervention. In 2007, PROS pioneered the science to combat buy-down by introducing Hybrid Forecasting and Optimization. PROS has continued the evolution of this approach by implementing the PROS Willingness-to-pay (WTP) Forecasting and Optimization methodology. This whitepaper will outline the key steps to the methodology. These are to forecast the price sensitivity of the demand and then adjust the value of the passenger to account for the dilution through an optimization procedure. www.pros.com Introduction

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