Unlocking the Power of Dynamic Pricing for Groups
While the dynamic pricing algorithm across group and individuals is the same, there are additional levers in Group Sales Optimizer that airlines can leverage to truly shape their group revenue. In this session, our experts will cover an overview of group dynamic pricing and how best to define dynamic pricing policies such as margin squeezer, market segment discount, group max bandwidth, and rock bottom price.
About the Speakers
Jana Jumper is an experienced Trainer and Content Specialist with a demonstrated history of working in the Revenue Management software and utilities industries. Jumper is a strong media and communication professional with a Master of Letters focused in Creative Writing from The University of Glasgow.
Brenden Young is a Revenue Management professional with over 17 years of experience. Young is experienced in both commercial and operational aspects of Revenue Management, which has been developed through various roles in both aviation (commercial airlines) and the hotel industry. The combination of a strong work ethic, ability to think outside the box, a thirst for knowledge, and attention to detail have allowed Young to constantly challenge himself and make a difference in everything he does.
Brenden Young: Good morning and welcome to Unlocking The Power of Dynamic Pricing. My name is Brenden Young and I'm the product manager in the travel team here at PROS. I specifically work on the GSO product and today I'm joined by my colleague Jana Jumper from the learning and knowledge team....
Today, we're going to cover a range of topics starting with the reasons for dynamic pricing, an overview of GSO dynamic pricing and finally, how to unlock the power of dynamic pricing with GSO.
Airlines have historically been restricted by the fares filed in ATPCO, limiting the process to fix values. As you can see, in our example here, if I wanted to price a request, a great request of 98 seats, I would have to calculate a weighted average: 21 seats from Q, 22 seats from B and so on. This process can be time-consuming and suboptimal from a revenue perspective. Dynamic pricing challenges this model, giving airlines control over how they process seats for groups.
In GSO, we calculate our group price efficiently and scientifically. We start with a fare letter that is retrieved from our one-search pricing engine. Then we calculate adjustments, starting group price and then we check policies to apply them before returning an offer to the user to book.
Adjustment one is our discrete marginal revenue curve. We have two different methods for calculating this adjustment for carriers depending on the RM Solution they use. For carriers using RTDP, we use the reference fares and adjusted reference fares to calculate an adjustment, which is then applied to the filed fare letter in each class. For our RM customers, we use our Heuristic Algorithm to calculate this adjustment, which is then also applied to the filed fare letter in each class. These adjustments are performed to account for the probability of buydown. On this graph, you can see the result of the discrete marginal revenue curve. Our second adjustment is performed in the event that we have a closed class in between two other classes. We smoothed the curves to account for the class closures and this adjustment primarily applies to our RTDP customers. On this graph, you can see the smooth discreet marginal revenue curve. Final adjustment is also accounting for buydown probability, but it is also performed to ensure we can price anywhere between the highest fare all the way down to zero. This essentially allows us to remove the restrictive nature of selling in a filed fare.
On this pricing graph, you can see the extended continuous marginal revenue curve.
The final step is to calculate starting group price, and we do this by checking the intersection of the marginal fare and extended continuous marginal revenue curve. You can see this highlighted in red on this pricing graph. This is our starting point for all future adjustments that you'll see in this presentation Before we can continue to adjust our starting group price, we have to understand the margin as this plays a pivotal role going forward. The margin is the difference between our starting group price and marginal cost. So if we take our group price at $150, we subtract our marginal cost of $100, we are left with a margin of $50. Now I will turn it over to my colleague, Jana, who will introduce our group sales policies.
Jana Jumper: Thank you, Brenden. Let's talk about the policies within GSP that can be used to adjust your pricing strategy. Group sales policy, or GSP, is used to create and manage the rules used by GSO when evaluating requests. Our group dynamic pricing engine uses some of these rules to adjust the final offer price before it is sent to the customer as a group offer. We have a range of methods available to GSO customers to further adjust the final group offer. These are the margin squeezer discount, the market segment discount, the group maximum bandwidth and the rock bottom discount.
The margin squeezer is a tool for group pricing that defines how much to squeeze the margin in percentage. If the margin squeezer is set to 0%, then the group price is not discounted. If the margin squeezer is set to 100%, the group price is equal to the marginal costs or marginal fare. The margin squeezer is a discount for revenue managers to keep pricing competitive. As I said on the previous slide, it defines how much to squeeze the margin and percentage. It will never be lower than the marginal revenue and it makes your pricing more competitive.
The market segment discount is a percentage discount applied to the previously calculated margin squeeze price for specific markets or time periods. This policy is often set by the airline sales team, if they have permissions to do so within GSP, as they are the ones that have a direct relationship with the travel agency.
On the previous slide, we talked about the market segment discount and how it is intended to be set by sales users. Well, what is to keep a sales user from setting the market segment discount to a 50% discount or even a 75% discount? Well, that's where the group max bandwidth comes in. It is a policing policy that sets the maximum allowed discount that can be taken of the margin squeezer. For example, here we have a market segment discount of 10%, which results in $401.50. However, we set our group max bandwidth to 8%, which results in a $410.42 price, therefore the maximum discount that can be taken off of the margin squeeze price is only 8%.
The rock bottom price comes from taking the lowest filed fare and applying the percentage that you assign in this policy. No fare will fall below this amount. It is most effective when the marginal fare is lower than the lowest filed fare in the market being requested. This policy ensures that group fares never get too low by setting the lowest allowable discount for your fares.
Now, let's see how your airline can use these policies to outperform the competition. We all know that travel agencies are not created equal. Some are good, some are bad, and some are somewhere in between. For the remainder of this presentation, we want to walk you through the tale of two agencies and the different adjustments that can be made using GSO to give a different result in price to each agency. Agency 1 is our Surfside Travel Agency. They book a relatively small number of seats each year, and they sometimes cancel very last minute. Agency 2 is Mountainside Travel Agency. They book many seats each year and they rarely ever cancel at the last minute. Here we have applied the four policy discounts to both travel agencies, giving Mountainside Travel Agency higher discounts than Surfside. As you can see, these discounts really add up giving outperforming travel agencies better prices.
This graphical representation presents another view of the discounts given to Surfside and Mountainside Travel Agencies. Now, I'll hand it over to Brenden who will explain the final steps to arrive at our final offer price.
Brenden Young: Thanks, Jana. GSO then performs a number of internal calculations to arrive at our final offer price. We then calculate what the effective discount will be before returning the offer to the user. So in summary, dynamic pricing challenges fare restrictions that airlines face today, giving back pricing control. Our group-price policies allow airlines to adjust their pricing strategy in real time. PROS GSO allows airlines to price script requests quickly, allowing them to win the business more often.
Thank you. If you have any further questions, please feel free to reach out to the team.