Is Revenue Management on its way out?

Two start-ups, Hopper and FlyR, have just raised 60 million€ and 8 million$ respectively to predict the price of airline tickets.

Both work on broadly the same principle: by analysing historical prices on a selected route, prices observed at the time of the search and attractiveness, they predict the price of plane tickets. They then recommend that Internet users buy their tickets now or wait for the price to fall. They also offer other services such as « guaranteed price » insurance. For a few euros, Internet users can lock in the price of their plane ticket for a certain period (the difference being at the site’s expense if the price goes up).

These sites meet a real need. Today’s consumers no longer know how much a ticket costs (after being told « it depends »  when we tried to explain the virtues of Revenue Management). They will therefore spend a certain amount of time studying prices, comparing different airlines and different websites before booking their flight (nearly 6 hours according to these websites). Having already been in the situation of buying a ticket and then seeing the price drop afterwards, they don’t want to go through that bad experience again and don’t want to feel like they’re being « ripped off »  by paying too much.

In fact, consumers need to be reassured that they won’t be cheated by paying a lower price.

What factors lead to poor application of Revenue Management?

Poor application of MR by companies gives consumers the feeling that they are in danger of paying too much.

This demand is entirely legitimate, and we Revenue Managers in the broadest sense of the term have created this situation with :

  • Complex general sales conditions with barbarian names: APEX (purchase before such and such a date), FLEX NO FLEX (changeable tickets with or without penalty), ONE WAY (single ticket without return), SUNDAY RULE (which imposes a weekend night between the outward and return journey), negotiated prices (for companies), etc. These conditions are so complex that a new profession has emerged, Revenue Integrity: this ensures that customers and travel agencies comply with the rules.
  • Poor demand forecasts which, because the plane may not leave full, cause us to launch last-minute promotions to sell the last seats at knock-down prices.
  • Incorrect initial settings: due to a lack of time and/or analysis, some flights are opened with prices that are too high, and these are readjusted at some point in the marketing cycle, resulting in a price reduction.
  • Errors in setting prices in the systems: if the general terms and conditions of sale are complex for the customer, they are also complex for the teams responsible for setting them, which leads to errors and inconsistent prices.
  • Optimisation techniques that are mathematically correct but incomprehensible to the customer. A multi-leg ticket can be cheaper than a single leg. An example: Bordeaux-New York via Paris can be cheaper than a single flight from Paris to New York, same time, same date! From a Segmentation Pricing and Revenue Management optimisation point of view, this is understandable, but not from a customer point of view.
  • Revenue Management tools are so complex that they are « unchallengeable », difficult to configure and control by an ordinary analyst. This combination of tool and analyst makes mistakes and ends up raising prices only to lower them later.
  • Differentiated pricing by country: to support a country in crisis, in order to maintain market share, the same round trip may be cheaper depending on the place of purchase.
  • Differentiated pricing by point of sale: cheaper tickets on specialised sites than on its own site.
  • The use of IP Tracking to increase prices specifically for a web surfer once it has been established that he or she is interested in a particular flight.
  • The arrival of low-cost airlines, which has changed the way prices are perceived and led traditional airlines to lower their prices.

Of course, not all airlines accumulate all these points, but this creates anxiety in the mind of the consumer: « Am I going to pay too much? Who can guarantee that I’m paying the right price? ».

To answer this question, websites have sprung up to compare airprices, amplifying the phenomenon of price mistrust. By waving the red rag of price in front of consumers’ eyes, that’s all they focus on.

Backlash could cost airlines dearly

But now these sites are advertising that they can predict downward price fluctuations. This has unfortunate consequences for airlines:

  • It creates yet another intermediary between the airline and its customer, and therefore a loss of revenue (the site is or will be paid in one way or another, encroaching on the consumer’s travel budget).
  • This makes building customer loyalty more complex: before, Mr Dupond travelled regularly with company X, but now he checks on his favourite site to see if X is the cheapest and will travel with Y for price reasons.
  • This enables these sites to influence the consumer’s buying decision by suggesting that he wait. As the airline does not see the bookings coming, it will « panic » and lower its prices sharply at the last minute, thereby validating the website’s hypothesis and therefore the consumer’s decision to have listened to its advice; while the airlines lose valuable visibility of flight capacity.

Keep it simple to earn more

Whereas :

  • Upward pricing is always respected (no price cuts).
  • Simple general terms and conditions of sale that are easy to understand and apply.
  • Genuine fare parity (for a given flight at a given time, the same price on all sites), or if differentiated, in favour of the airline site and not the intermediary.
  • RM tools understood by analysts and perfectly parameterised.
  • The end of IP Tracking.
  • Analysis of flight capacity far in advance, rather than focusing on the short term, so that prices can be adjusted to demand as early as possible.

The simple message would be: « for this flight on our airline, you’ll never find it cheaper anywhere else. If you’re not sure about your travel dates, buy now. You won’t find it cheaper later ». In this way, we are re-bonding customers and limiting the influence of intermediaries.

I think it’s normal for the airline industry to support a multitude of players (digital distribution, subcontracting, etc.) and for airlines to share the revenue generated by consumers’ need to travel. On the other hand, I find it much more questionable that companies should flourish on the back of pricing strategy errors and thus have a negative financial impact on the airlines.

Keywords: Revenue Management, general conditions, forecasting, IP Tracking, Pricing