From Revenue Management to Full Offer Optimization
Core revenue management capabilities and functionality are the linchpin to offer optimization, enabling airlines to deliver AI-fueled, revenue-optimal offers to customers worldwide, regardless of channel. But questions remain. As the industry transitions to offer and order management, what happens to revenue management? What does the future of revenue management look like? What capabilities are airlines prioritizing and deprioritizing? What's next on the journey to offer optimization? View this session to learn more from PROS Senior Director of Product Management Justin Jander, Avianca Chief Revenue Officer Claudio Velez, SriLankan Airlines Group Head of IT Chamara Perara, and MIT Principal Research Scientist (retired) Peter Belobaba.
Full Transcript
Justin Jander: Alright, so we're going to get started. This is a panel discussion that we have for, moving from revenue management to offer optimization. You've already heard, about, the term offer optimization being used quite a bit in the earlier sessions. And so what we wanted to do is bring some great experts from the industry to talk about, what their opinion on what offer optimization is, but in particular how we make that transition from RM to, offer optimization. So to get us started, I'm going to have each of our panelists, introduce themselves. So we'll start with, Chamara, how are you?
Chamara Perera: Hi, thanks, Justin. So my name is Chamara. So I'm the Group Head of Information Technology for SriLankan Airlines, covering the airline, SriLankan Cargo, SriLankan Catering. So I'm responsible for induction of systems together with my business colleagues, who are actually driving the revenue side of it. So we've been working with PROS for almost 20 years now. So we adapted their initial RM functions in 2004. So we are looking forward to extend our portfolio with PROS with much advanced AI capabilities.
Justin Jander: Okay.
...
Claudio Velez: Hi there. I'm Claudio Velez, I'm the CRO for Avianca. Our group takes care of our revenue management optimization network and all the intelligence behind that. We've been 20 years in the industry. The past five years I was out of the airline industry. So a lot has changed or a lot hasn't at all, but it's been a very interesting, journey. And well, I was super user of PROS actually back when I was an analyst a long, long time ago. And well, a lot has changed in there. Very, very happy to be here.
Justin Jander: Great, thanks. And Peter?
Peter Belobaba: Hey, I'm Peter Belobaba. I retired from MIT last year, spent, 35 years there doing research, and teaching, but research on revenue management, running the PODS Revenue Management Consortium. You might've heard the, our Passenger Origin-Destination Simulator, supervising thesis, doing conference papers, et cetera. I've been a consultant over the years to over 50 airlines on revenue management issues and my links to PROS go back now that everybody talks about it, to probably 1987 or '88, just after I finished my dissertation. So I was involved in the development of PROS 1 or 2, or whatever that was back then.
Justin Jander: Great. Well, thank you all, and again, thank you for joining. Just as a note, if we have some time at the end, we're going to have some opportunity for some questions as well from you. So start thinking of those as you go. So I guess to just get us started, we really believe that, revenue management sits at the forefront of innovation and has been part of offer optimization from the beginning. So as we're changing the name, and thinking about offer optimization as a transformation, how has your airline started to evolve? And so Claudio, we'll start with you on that one. How do you think the airlines evolved over the past few years? As you said, it's, a lot's changed, but a lot's the same. So how do you see that happening?
Claudio Velez: Well, definitely the change to offer and order, represents a change in the way we work with the commercial activities, with the marketing activities, with technology. And we have seen, during those years, for example, the branded fares, activities that have emerge emerged and changed the dynamics. We believe, I particularly believe, that the revenue management function is definitely crucial for offer an order, being the narrow element, making the decisions on price and the definition of the characteristics of the pricing elements of the product that needs to be charged. So basically I believe there's a change that needs to happen. And it's how we organize and how we make the decisions around offer and order. Definitely revenue management needs to be crucial for that in at the center and forefront.
Peter Belobaba: I think it, it's important to point out every, over these three days here, you hear a lot of reference to the current and future offer optimization, dynamic pricing, continuous pricing, bundling, all these words, and we're ready to go there. But the question that it needs to be answered is, who's going to make those decisions? Who's going to calculate those prices, those dynamic prices. And the answer is, I think, most of us are here, are in agreement, it's got to come back to their revenue management system. You can't, humans cannot do that. You need the automation, you need the science to do the calculations, the forecasting, the willingness-to-pay estimation, the optimization for any of those things that we've talked about, right? Especially and moving towards full offer optimization. So revenue management is got to be the backbone. Yeah.
Justin Jander: I think that's a great point because we heard Jost in the, in the previous session talk about like, and his title is head of, order transformation, something like that. And so it's very clear on the order side how that's working, but I think on the offer side, there's less clarity and to your point Peter, that that's starting to enforce that as an important part. So Chamara, anything to add on the, those.
Chamara Perera: So I, echo the same things that the other colleagues, mentioned here. Here now revenue management evolved over the period. It's quite extensively, and I do agree with Peter, it's completely, it should be driven through science. And the humans can't basically do that optimization along the complexities that we have in particular, in our context in India subcontinent we've been forced to a highly competitive price-sensitive market where you need to optimize the offers in a very dynamic way. So this class-free, revenue management concepts and then offer creation of optimization, AI driven capabilities in dynamic ancillaries. Finally you get that sort of a unique sort of a personalized offer to a given passenger. So I think we are getting ready to embark on this journey with PROS and we are excited to get those benefits in time to come.
Justin Jander: Oh, makes sense. So if, I think that's a good segue into the next question perfectly numbered on my card as well. [laughter] If I think there's a talk, we kind of agree on the kind of ideas of offer optimization. What's the perspective of the airline today? Your colleagues at the airline, the other departments? What are they talking about? Or are they talking about offer optimization today?
Claudio Velez: To be honest, the main point we are discussing right now is about the servicing and the challenges as industry we're going to face about servicing those orders, those offers, apologies. And the thing is, the systems and the technology and infrastructure we have nowadays is very good for working in things that are inside the airline, right? Their own flights, their own services, their own characteristics that we can provide to the customer. But when you go outside that bubble, everything breaks. So you're thinking about interlining, we don't really know how to service, that kind of product when we try to transform that into a proper offer. Third parties, hotels, it's very difficult. And the, this the process that goes out of the happy path, that's horrible. We don't know what to do when we have a third party that didn't provide the service. That is going to be a nightmare. And we don't really have designed the technology as industry to cope for that. So maybe the happy path sort of worked out the, not the unhappy path. That's the challenge we are talking about.
Justin Jander: I feel like you bring an interesting perspective as a CRO because, and I'm not implicating your CEO in any of my comments, but just generally there is something to be said for, CEOs often have these really grand ideas of what they want, to happen. And as a CRO, you're kind of responsible for, taking that in. And I think the answer you gave there really illustrates how, yeah, it sounds like a good idea, but there's a lot of challenges along the way. So, Peter, anything to add there from kind of the other side?
Peter Belobaba: So I forget which order we're doing this in, but the question of, you ask what are people talking about? What are their perspectives? The thing that scares me about that question is it's good to have multiple departments, multiple parties talking about offer optimization in the airline. But in the end, what scares me the most is, inconsistencies, lack of coordination, lack of, what really we're after here is joint optimization, right? That, many some airlines have, I think made the mistake of separating out, merchandising and ancillary, retailing from revenue management. And they both now have different objectives, both different goals. And we know for a fact that maximizing ancillary sales is not the same thing as maximizing total revenue.
Justin Jander: I think that's a great point. When you think about the fact that, ancillaries have almost become an e-commerce decision in a lot of ways because they own the product that's being presented to the passenger. So there is an idea that that could be an e-commerce problem to solve, but revenue should flow through the revenue management department, I think is the concept there. Chamara, anything to add from your organizational side?
Chamara Perera: Yes. Now this whole concept is embraced from the top to down, but as you, as other colleagues mentioned, it has to be, a strategy driven from the boardroom. Seen the very top level of it, but the main challenge that we experience is the mindset change. So how, the e-commerce, as you said, how the merchandising, the ancillary departments, how everyone could work together with the same ambition of getting more revenue into this. So managing the revenue and optimizing the revenue you need to have quite a lot of changes in the structures. So I would definitely suggest all of you to even get HR also into these concepts, because sometimes even chief officer of HR may not identify the real fact of all these things because you need their expertise. And one key challenges that we face right now with the lack of knowledge, lack of, shareable insights within the organizations, within the airlines to see how we could leverage on these things because it's trial and error, concept may not work for airlines, like in our nature because we need to speed up the market. And we need to basically embrace this technology with the first run itself.
Chamara Perera: So I would rather reckon that, we need to basically, remove all the silos that we have in the organizational structures where you have this revenue management department, e-commerce department, IT, or whatever the distribution shows, we'll have to consolidate everyone towards this one vision of, optimizing the final outcome of it.
Justin Jander: I think that's a great point on the fact that like, these ideas can start high just like we talked about at the top level, but if you don't have the right expertise in the organization, then things can stall and they won't make it as far. So I think it's a really good point there. So when we talk about this, there's a lot of ways that you can approach this, right? So we offer optimization. Great. We kind of all understand it in concept, but what sort of projects are you kind of approaching inside of the revenue management side or offer optimization, to enable the next phase of that? So, Claudio, I'll just start with you again on that one.
Claudio Velez: Okay. So there are many things that definitely we can do about that. In, Avianca particularly, we have branded first and we have started that with, the kind of, static offer. We are launching willingness-to-pay in a couple of months from now. It's definitely part of the fundamental elements to have the working. And, Peter said a little bit ago, we are still working about talking about that, right?
Peter Belobaba: That's right. Yeah.
Claudio Velez: And the solution is really old, but, it's back to the basics and in making sure that we have the basics well, we cannot optimize. So something very granular when we don't have the basics well established. Now, our focus from innovation inside revenue management are about organization. And as we were discussing, maybe the way we organized is not the proper way to managing these new paradigm.
Claudio Velez: What do I mean? Nowadays we have like demand analyst, capacity analyst, pricing analyst. Maybe that's not the way we should be organized. And maybe we need some function that are inside other verticals of the organization, as you would say, the silos, that will need to work in a different fashion. We are, exploring agile methodologies to see if we can have squads rather than that kind of groups, deciding how to manage the health process of offering and optimizing. And probably we need someone from e-commerce in there making sure that the product that we are building, it's doable.
Justin Jander: So Peter, why don't you elaborate on what you mentioned earlier with Claudio.
Peter Belobaba: So the, if you think about, you hear a lot of people say airlines lead the way in revenue management and throughout the history of revenue management, the science and the algorithms have far outpaced the rate of implementation, adoption, acceptance, and effective use of those tools, right? There are still many airlines in the world that are struggling with going to O&D many more that are still thinking about or implementing willingness-to-pay forecasting. There's a session after this on willingness-to-pay forecasting, and my first response was, wait a minute, we solved that 15 years ago. Why are we still talking about it? But it's critical. The algorithms are there, and as we move to offer optimization and, total revenue optimization, I have no doubt that PROS and others and researchers will have the algorithms. But it all comes down to implementation and training is key. Training not just how to use it, but education, how to understanding what those tools are actually trying to do.
Justin Jander: And, Chamara, I would say the other side of that too is great, you come up with the technology, but then you're from the IT side of the business, right?
Chamara Perera: Yes.
Justin Jander: So actually getting that answer from the revenue management side can be a challenge as well. So what are you looking at in terms of like, how does that fit into the picture of the actual technology piece?
Chamara Perera: Well, so from IT sides, we are the key enabler of this whole, concept into practice. So we have to be very much, focused in getting the right technology to drive this whole, the concepts. So we started, quite a lot of the very ambitious projects like say even migrating some of these legacy platforms into cloud. And also to give a platform where they can do a, something like a playbook exercises, which we discussed today, even in the morning. So then the revenue management team could exercise, they can run simulations, they can also get themselves, around how the concepts can be put into practice. And then they will be more, ready and, they will get more confidence on the platform itself. So since you ask about some of these strategic innovation projects, one of the strategic information projects is, as he mentioned, it's about the branded fares.
Chamara Perera: So be talking with, our service provider how soon we could go into that level. And apart from that, the other challenge or other key contribution that IT can do is the system integration. So we will be integrating our [undetermined] system with the PROS. So, it's been already scheduled for next couple of, three to four months time. And with that engagement, we are also driving this change management procedures as Peter Belobaba say it's about the training, how we could, how we could basically, leverage on this platform so that we will start kicking off all the benefits with the go live date. So those are the lineup projects from SriLankan side.
Justin Jander: That makes sense. So both of you guys have mentioned branded fares, and so I think that's an interesting place to go because to some extent that is an offer optimization concept in that like you are bundling things together, you're put presenting offers to the passenger. Now whether there's much optimization going on in that is a question, but I'll start with Peter on this one. So, because you've obviously done a lot of research on this, while at MIT but then also experience with the airlines. Where do you see branded fares as kind of the entry point in, offer optimization?
Peter Belobaba: Well, it is very much the entry point in offer optimization because once you define those branded fares, those are now bundled offers. So you start with the basic flight and then various more elaborate and expensive, ancillaries or, amenities added on to that. And it is the first step far and away, the vast majority of airlines today that use branded fares are doing as you say, as a static bundle. And it's, I think a lot of consumers appreciate that they know, they come to know what that bundle is. They, it's a static bundle with generally fixed markups, right? $50 more, $100 more, $150 more. So I think the next logical step to me is to perhaps keep those static bundles. Because you don't want to be confusing consumers, but you can apply much more dynamic optimization to and differentiation across markets, across flights, across days of the week for those markups, between the branded fares.
Justin Jander: Claudio, how do you feel like from an airline side of things, what's the perspective on, perhaps introducing more dynamic nature to the branded fare side of things?
Claudio Velez: There's a balance in here, right? Because as an airline we make a very big effort to make sure people understand what those bundles are. And that part of teaching the consumer to know what is in it, what they are buying, takes a lot of our time and resources. So for me, it's very important that we keep the ability to provide the known benefit for the customer. That for us, from the customer benefit, I think it's a lot of value. But then after you provide the service, they buy whatever the naked fare or the first fare family, whatever it is, they can manage the booking and start adding up. They say, "Listen, I didn't buy these, but now that I think of I will buy it." I think there's a lot of space in there for re-optimizing and providing more tailored a la carte products and putting some intelligence behind that.
Justin Jander: I think that's a great point because the... In a lot of ways RM is sort of not to undersell it, but is more focused on that first interaction with the passenger where they make the booking. And that's sometimes why the merchandising side turns into an e-commerce problem or a marketing problem of sending out emails and getting them more touch points to sell them the other ancillaries that you have in mind. But to the earlier points, we want to keep that momentum of keeping the passenger engaged. And that's still a revenue problem. Even when it's five days before departure and you haven't had a touch point with the customer since a hundred days before departure when they bought it, that's still a revenue problem.
Peter Belobaba: And just because you have branded fares, even if they're static bundles, doesn't mean you can't then try to sell additional ancillaries on top of that. A lot of airlines do that, and one of the demos in the main session there showed a good example of that. Someone who declines to buy a bundle, but then you keep trying to sell that person a la carte items.
Claudio Velez: There's a point in there, if I may, and is maybe, and that happens a lot after you do the first sale, you get much, much more information about the customer and you are able to gather more insights about the persona who's buying, and that definitely is more powerful in terms of personalization. But just an idea about that.
Chamara Perera: Yeah, so now this gone are the days that we use in these fare families and structures like that, I think it is a high time for us to change of the way that we think. Now, particularly with the new-gen consumers or the passengers, they need the liberty or they need the control of their own travel. So if the airline is going to have their own offering, I think that's going to be a meaningless. So we need to be more flexible to understand their consumer requirements and it'll depend with the time that they travel. So I mean probably you may have seen the opportunity for them to create their own bundle. So what will I get with my travel? Maybe the day changes at free of charges, or maybe whether I can get excess baggage fees or something like that. That's a unique requirement for the set passenger segment. So this is where the customer segments can be clearly identified with the branded fares that you could offer from the airline side. So I think it's high time for us to completely change the way that we think and then give more liberty to the consumer or the passenger to select their own bundle. So I think that's the way forward.
Justin Jander: So one thing in bundling, and when you think of offer, and this goes back to maybe some of these CEO type of comments, is they want to shift the focus of the airline to being a retailer rather than an airline. So one thing that introduces the idea of is third party ancillary. So things that you don't sell. I imagine there's a lofty goal versus reality. So I'd like to hear kind of the feedback on where you guys stand on third party ancillaries.
Claudio Velez: Definitely there is money in there. We do believe there is money in there, but as an industry, we are far, far from having that included in the offer and dynamically pricing it. And my reasoning is how we deliver, right. You are adding a lot of pieces that are outside of your control. Vendors, providers, the climate and those unhappy paths that I mentioned earlier are the things that make it more challenging for us as industry. And I'm talking at least from my company, we do believe we need to start from the very basics from the own of the company in a start expanding that as we gain knowledge and have the technology to do so.
Peter Belobaba: The challenge of doing full up offer optimization and making it dynamic and dynamic bundling, et cetera. That's a big, a big opportunity. But it's a big challenge, there's a lot of pieces that need to fit together there. And so yeah, I would agree. You probably want to get some of that, right. Get the basics there right before you go to do things you can't deliver, right?
Justin Jander: Think about the change management problem of that, right? Generally it's a change management problem within your organization, but if suddenly you're selling sunglasses whenever you're going on a beach destination and then there's IROPs [irregular operations] that happen, you already have issues and no offence to the airlines in the room, but when there's IROPs, it gets very challenging for a passenger to deal with the customer support. But now imagine your customer support also has to handle figuring out how to refund sunglasses because you never made it to the beach that time. So I think that's an interesting kind of...
Claudio Velez: That's an ugly post in any social media.
Justin Jander: Yeah, exactly. Exactly. It's already challenging with the situation of flying people and now adding that extra retailer part, it's challenging.
Chamara Perera: Yeah. I do completely agree with you because it's completely all right to set the expectations with the third party ancillaries, but it's a challenge as Claudio means. How do you deliver that and how do you keep that expectation maybe to exceed the satisfaction of the passenger? It's completely a challenging things, but it's a very good concept, but the implementation would be really complicated.