Dynamic Pricing Capabilities - ATPCO

DYNAMIC PRICING / 1DYNAMICPRICINGDYNAMIC PRICINGDefinition, Impact, and Current CapabilitiesDefinition, Impact, and Current Capabilities

DYNAMIC PRICING / 2There is a perception today thatNDC will replace filed fares and willintroduce dynamic and personalizedW H TpricingT P S : / /capabilitiesMEthat traditionalD I A .GdistributionE T T Y I M A G EmethodsS.are not currentlyC O M able/ P H OtoT Osupport.S/AER I A L-V I E W - O F -A U S -HOWEVER,there does not seem tobe a clear or a commonunderstanding on what ismeant by filed fares, or evendynamic and personalizedpricing. The purpose of thispaper is to define four dynamicpricing methods, their impact,and the capabilities thatcurrently exist.

DYNAMIC PRICING / 3METHODThese are the four methods: Dynamic Availability Using Fare Levels Bundling/Unbundling Personalization Dynamic Fare GenerationThe first three methods can be employed with filed fares and enable airlines to achieve their goals withminimal impact to current systems and life cycle. The fourth method, Dynamic Fare Generation, requiresextensive development for internal airline systems, substantial process changes, and new industry standardsdevelopment in order to maintain interoperability and current commercial capabilities and is not viable in theshort term. The ability for this solution to produce incremental revenue could also be affected by customerexpectations of rational price behavior and other practical considerations.1ShoppingRequestOffer ManagementPricing System231. Airline Fare Levels2. Airline InventorySystemServices andBrandsCRM

DYNAMIC PRICING / 41. Dynamic Availability Using Fare LevelsWhen referring to dynamic pricing, the techniqueused today to dynamically offer differing pricepoints is based on predetermined fares that arethen assigned to booking classes or inventorybuckets. The dynamic nature is then achieved bymanaging the number of seats available for eachbooking class or inventory bucket based on realtime demand data.This approach has been successful for the airlines,and its key to success is its ability to reflectmarket value by segmenting buyers into groupswith differing levels of willingness to pay based onthe characteristics or rules of the fare.Airlines have typically driven their pricing strategyand competitive responses by managing availabilityat this base fare level, and past operationalresearch has concluded that utilizing fare levelsand controlling available units is a nearly optimalapproach.1 In addition, recent research asserts that“practical considerations exist that constrain thestrategic pricing solution,” and that these practicalconsiderations reflect consumer expectationsof price boundaries and an understanding andrationalization of price differences betweenproducts,2 reinforcing the need to maintain predetermined fare levels.By utilizing predetermined fare levels, airlines areable to accomplish several key objectives: Facilitate the complete life cycle of thefare, from fare management and collectionthrough distribution and revenue accounting Provide interoperability for interlining andcodeshare relationships Enable efficient transitions from legacysystems and new ways of doing business Enable commerce through promotions,discounting, and corporate agreements

DYNAMIC PRICING / 52. Bundling/Unbundling3. PersonalizationIn the past, flights were sold as a bundled serviceincluding meals, baggage, and seat selection.Recently, bundling has been reinvented asairlines have unbundled flights from services andredefined bundles to appeal to different segmentsof customers. This presents further opportunityfor airlines to optimize revenue by customizing thecomponents in a bundle and the total price of thebundle, which requires personalization. This is anarea of revenue opportunity for airlines that would befurther enhanced by techniques similar to those usedin fare management, collection, and distribution.Customer Relationship Management (CRM)focuses on tracking customer behavior in orderto understand and market to customer long-termvalue. Rather than managing only very broadsegmentations, the application of CRM to RevenueManagement results in the ability to price at a moregranular level: the level of “who is asking.”Personalization was historically achieved by pointof-sale control and some customized benefits forfrequent flyers as a group; however, airlines arecontemplating and implementing even furtherpersonalization of pricing and product based oncustomer value and other characteristics. This canbe achieved today by leveraging data from CRMsystems to drive dynamic pricing by customizingthe components of a bundle, as well as the priceof a bundle, in a manner similar to how dynamicavailability using fare levels operates today.Research has also suggested that a revenuemanagement methodology that determinesavailability based on the additional criteria ofcustomer long-term value can result in bettercustomer loyalty and increased revenue.3

DYNAMIC PRICING / 6ATPCO has been building capabilities across fares, rules, and optional services to enabledynamic pricing that minimize the impact to current systems and processes.Dynamic Pricing1. Dynamic AvailabiltyUsing Fare Levels2. Bundling/UnbundlingDynamic Pricing GoalAbility to offer differentfare levels across a broadspectrum of demandAbility to include and priceoptional services eitherindependently or as abundle with the fareATPCO Product Functionality Fares(SpecifiedConstructed,Discounted,Fare By Rule) OptionalServices CarrierImposed Fees Negotiated FaresFare TypeRBDRulesTicketing FeesBranded Fares Ticketing Fees Branded FaresMETHOD 1METHOD 2METHOD 3Create moreinventory controlsImplement servicesand brandsReal-time interactionwith CRM Establish more inventorybuckets that can becommunicated and used(dual-designated RBD) Enhance the availabilitymessages (PAOREQ/PAORES) to include thefare information on whatamount was priced Implement a standard datasupply of airline servicesand brands Establish an industrygovernance andinfrastructure to enableinterline through prices tobe generated Create request-andresponse messagesto query the CRM todetermine which fares,services, and brands applyto the person requestingthe airline products

DYNAMIC PRICING / 7Airlines’ ability to dynamically price their products using these methods can still be improved. In orderto enable airlines to dynamically price services via NDC, as well as outside NDC, and provide them with aconsistent and accurate calculation of their pricing in all points of sale, we need to do the following thingsas an industry: Pure dynamic pricing (Dynamic Fare Generation) appears to be more theatrical than a practical orefficient way to achieve personalized pricing. Bundling/Unbundling and Personalization are processes that require internal airline revenuemanagement and CRM system investment, and once complete, can be utilized within and outsideNDC. Filed fares can be used with NDC and outside NDC and can be used to achieved Bundling/Unbundlingand Personalization. ATPCO has been building capabilities across fares, rules, and optional services to enable dynamicpricing that minimize impact to current systems and processes and can be used in DynamicAvailability Using Fare Levels, Bundling/Unbundling, and Personalization.To improve the capabilities of dynamic pricing we need to do three things: Create more inventory controls Implement services and brands Implement real-time interaction with CRM1G. Gallego and G. van Ryzin, “Optimal Dynamic Pricing of Inventories with Stochastic Demand over Finite Horizons,” Management Science, vol.40, no. 8, pp. 999-1020, 1994.2Joakim Kalvenes, Yingying Kang, Richard Ratliff, “Getting Your Prices Right,” Ascend, Issue No. 4, 2014.3Tobias von Martens, Andreas Hilbert, “Customer-value-based revenue management,” Journal of Revenue and Pricing Management (2011) 10,87–98. Published online 10 April 2009.

DYNAMIC PRICING / 8CREATE THE RIGHT OFFER AT THE RIGHT TIME—EVERY TIME. TALK TO US.NORTHAMERICALATINAMERICAEUROPE,MIDDLE EAST, AFRICAASIAPACIFICJay BrawleyMarcelo FreireMarcos Alsina de FreitasSam LauUS Tel: 1-703-661-7497US Tel: 1-305-200-8783UK Tel: 44-20-8572-1322Singapore Tel: sina@atpco.netslau@atpco.netatpco.net

DYNAMIC PRICING / 3 3 CRM 1 1. Airline Fare Levels 2. Airline Inventory System 2 Services and Brands Offer Management Pricing System Shopping Request These are the four methods: Dynamic Availability Using Fare Levels Bundling/Unbundling Personalization Dynamic Fare Genera