How leading retailers use price to drive more than just revenue

September 7, 2017

When looking at how leading retailers leverage price across many different verticals, it’s interesting to see the successful strategies that they employ and how these could equally be leveraged in an Airline context. What successful retailers understand is that price while important means nothing on its own, it’s all about the offer.

An offer is what ties the product, the price, the value proposition, the customer and the retail context together. Those retailers who are most effective at generating the optimal offer and who have the tools to do so will dominate in an increasingly digital marketplace.

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Price as a revenue driver:

We are all familiar with how retailers use price to drive revenue, increasing prices when demand is strong to maximise the opportunity, running a promotional sale when demand is weak to sacrifice margin over increased market share. This is a basic form of Dynamic Pricing strategy, used to achieve revenue targets in a tactical way.

 

Price as a lever to control supply and demand:

Price can also be used to manage demand for a product in times of product scarcity or operational bottlenecks. It can also be leveraged to manage supply of a product, ensuring that there is always supply in the market for those willing to pay the market price and in some cases bringing more product supply online at times of peak demand.

There are examples in the consumer Power Industry where Dynamic Pricing is used to dampen demand at peak times, relieving pressure on the grid. Similarly, toll road companies have leveraged Dynamic Pricing to manage traffic volumes on congested roads at peak times.

In a travel context Uber utilizes its Surge Pricing model to match Demand with Supply, ensuring that there is always Supply in the market when most needed, but also passing some of the increased revenue onto its network of drivers stimulating more supply by enticing more drivers into the market with the incentive of higher fares on offer.

All of these examples are relevant to airlines as they strive to manage the finite supply of Lounge Space, Airport Check-In Areas and Premium on-board Seating. All of these products could be managed through Dynamic Pricing strategies to guarantee supply for their most valuable customers.

 

Price as a driver of loyalty:

Many Airlines are familiar with using Subscription based offers to drive customer loyalty and secure future revenue. The typical scenario is that the airline sells a subscription, for example 2 checked bags for a year, with a discount based on a certain assumed usage of the subscription. This drives both revenue and loyalty as the customer is essentially locked in to using that airline and leveraging their investment in the subscription.

The problem is that Customers often over estimate their usage of such subscriptions and there is a lot of churn as Customers purchase a subscription once but fail to see the value in renewing it again.

One interesting insight from the world of Theatre Ticketing is that a similar churn and dis-satisfaction was seen with their Subscription products until they implemented Dynamic Pricing on the base ticket price. The resulting price uncertainty drove much higher customer satisfaction and renewal rates for their subscriptions, because the price certainty of purchasing a subscription became an additional value driver for the Subscription and its value Proposition.

For Airlines, if you want to drive higher renewals for your loyalty bag or lounge subscriptions, maybe consider implementing Dynamic Pricing on the a-la-carte product pricing to create further value in your subscription based offers.

 

Strategic Personalized Pricing:

In many contexts, the word Strategic often means – Doesn’t make any Money.

However, for leading retailers, optimizing the price for a given transaction to maximise margin is just the first rung on the ladder to profitability. These retailers play the long game with their most valuable Customers, measuring things such as Share of Wallet and Customer Lifetime Value to maximise long term customer revenue share.

In short, they pass up short term tactical gains in favour of extracting the optimal medium to long term strategic value from these customers. A truly Dynamic Pricing system will understand the customer and their value to your business and use this to influence the price point of each offer made.

 

Pricing based on Need or Want ?

Airlines have traditionally been in the enviable position of having a product, the air ticket, that is driven by necessity. In general, when a customer goes to one of the airlines channels to purchase a ticket, it is because they need to travel somewhere in a particular time frame and have limited alternate transport options.

This fact is why Airlines were the original trailblazers of Dynamic Pricing and are still used by many retailers as the first proof point of why Dynamic Pricing works. So why would an Airline look to other Retail Verticals for Dynamic Pricing inspiration ?

As Airlines continue their evolution into broader Travel Retailers, they have started to expand beyond the traditional Ancillary Products such as Checked Bags which are essentially needs driven just like the Air Ticket.

They are now selling more and more experience based products such as Airport Services (Lounge Access, Fast Track Security, Priority Boarding) or On-board Services (Extra Legroom Seats, Enhanced Meal Options, On-board Wi-Fi).

The nature of these products is different, they are not needs based like the Air Ticket, they are discretionary purchases that the customer doesn’t Need but the Travel Retailer must make them Want. It is in this area that Airlines should take note of what leading online Retailers are doing to promote their products and stimulate demand, and the part that price can play in delivering the most compelling offer at the perfect time.

There are many aspects involved in making a compelling offer for a discretionary product, the best retailers use data and systems to generate Personalized Offers, Dynamically Priced in the right context and presented using the principles of Behavioural Economics. These are the areas of expertise that we at Datalex are helping Airlines to exploit through our Digital Commerce Platform and Retailing Capabilities.

 

Alan Dunne

Chief Innovation Officer, Datalex 

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