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3 Breaking Down Willingness-to-Pay in RM www.pros.com In the early days of revenue management practices, the class codes (RBDs, classes, Fare Class, etc.) were the primary indicator of segmentation of a passenger's willingness-to-pay, or price sensitivity. The class represented the "product" that the passenger wanted to purchase and the price associated with the product. The airline filed fares for each of the classes based on the passenger's price sensitivity and for the conditions associated with the fare. Those conditions made up the particular product that the passenger wanted to buy. These were tangible conditions like flexibility to cancel or refundability of the ticket. They were also conditions like the number of days before departure that the ticket was purchased. These conditions, and others, were designed to create segmentation amongst the passengers. In some cases, these practices are still being used. The passenger's choice of a particular product could be a passive or active decision. In some cases, the passenger is actively choosing the conditions of the fare, while in other cases, the number of days before departure a passenger was buying made them unaware they were choosing the product and thus a passive decision. The traditional revenue management system forecasts the passenger demand at each of these classes and then optimizes under the assumption that the demand is purely interested in buying that class code due to the restrictions and conditions of the fare. The resulting optimization produces controls, typically bid prices, that set the lowest available class that should be sold based Overview of Willingness-to-Pay Based Revenue Management Practice on the constraints to capacity imposed by the expected demand and value of that demand. This is done by comparing the fare for the class to the bid price, which serves as a hurdle rate. However, with airlines moving to digital distribution of prices and low-cost carriers (LCCs) entering more markets, there has been a more targeted effort to remove the fare fences that were traditionally visible to the airlines. Removing this segmentation is resulting in class codes having the same product association, but at different price points. Thus, the buy-down effect is observed as the passenger will only choose the lowest available class. As this problem has become more prevalent, airlines have begun using different phrases like price elasticity, price sensitivity, buy-up, buy-down, trade-up, yield-up, spiral down, class dependence problem, etc. All of these terms represent the situation that is being faced and highlight the need to address it. To combat this situation, airlines have employed different approaches. In most cases, airlines choose to use a rules-based approach in combination with the traditional forecasting and optimization. Using this combined approach, the bid price sets the lowest available class based purely on the capacity constraints, and then the analyst creates an action or rule that closes the lower classes as the departure date nears, forcing the demand to buy-up to those classes, preventing dilution.

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