Why dynamic pricing will transform travel distribution
Smarter pricing structures will allow travel brands to create more relevant prices for their customers, boosting revenue and loyalty, finds a new report
Pricing within the travel industry is evolving to match consumers and what they are willing to pay far more accurately as a result of a better understanding of impacting variables and more ability to deploy granular prices across distribution networks. The upshot of this, according to a new report, is that travel brands can continuously adjust their pricing to suit their customers and thus maximize the revenue they get for each route or room.
Currently, most revenue management systems (and revenue managers) take into account things such as historical demand curves, events and conferences, seasonal factors and overall route capacity, etc. However, with the changing ability of systems to factor in a greater depth of information in very short timeframes and from an almost unlimited number of sources, the calculation of demand is starting to change.
Firstly, brands can bring in more information surrounding the destination and target market. For example, for a short leisure trip, a system could factor in the weather at different locations and use that as a component of the algorithm to calculate anticipated demand. Then there are customer personas that are growing increasingly detailed and only really limited by the amount of available data.
This is allowing micro-segmentation and fundamentally changing the way offers are created to the point where each individual could receive a different offer when considering all the possible combinations.
With micro-segmentation, the industry is moving away from the simplistic leisure versus business traveller divide and the other common segmentations that have been used to date. The idea is to apply a finer grained mesh – perhaps with dozens or even hundreds of micro-segments as opposed to five or ten. With this systematic approach, applying factors such as willingness to pay and demand-based factors to individual offers provides considerable price-point differentiation.
The fundamental processes can also be applied to ancillaries, in what is termed complete offer creation that creates the next level of differentiation. Complete offer creation involves bundling additional products that are probabilistically calculated to be desired by the consumer. In the case of the airlines, this could mean an offer in which the travel, wireless connectivity, a checked bag and a warm meal is included in the overall offer price. If the brand can add value to the customer’s request by addressing an additional need or desire, and the offer is within the consumer’s willingness to pay, an expanded offer can not only generate additional immediate revenue but also a higher level of customer satisfaction and potentially additional follow-on revenues.
This creates a huge range of possible combinations that means, effectively, pricing is coming down to the individual. The value created from this investment into more complex and granular pricing is leaps in revenue through maximizing the pricing level in each demand period and minimizing the amount of inventory left unused.