Willingness-to-Pay Solution Recaptures Revenue with Leading Science

 
Seeking improved profitability, a top-tier, Middle East-based airline needed a pricing solution that would counter “buydown” – a revenue-dilution problem in which low-cost competition, restriction-free fares and pricing transparency induced higher-fare passengers to buy  at lower-cost fares.
 
Adopting the unique Willingness-to-Pay (WTP) feature within PROS O&D Revenue Management, the airline focused on testing revenue performance of six routes in three key markets. By enabling the airline to forecast and optimize demand, the WTP capability helped increase revenue for these markets by 4.7%, with the six routes generating an additional US$1.5 million in fare revenue.
 

Challenge


This airline faced significant threats to revenue performance from low-cost competitors disrupting the industry with reduced fares and restriction-free purchase options. High-yield business travelers have virtually disappeared – and those that remain are increasingly “buying down.” Customers have been trained to wait for deals. And, easy access to fare information allows pricesensitive fliers to buy when seats are cheapest.
 
Adding to these threats to revenue performance are labor-intensive, unscientific methods for managing demand. These traditional solutions do not counter “buydown” behavior effectively and can cause over-allocation of low-fare seats and under-allocation of high-fare seats.
Breaking this cycle requires a sophisticated WTP forecast model that utilizes both product-sensitive and price-sensitive demand to optimize seat availability and revenue.

Solution

 
As a PROS customer since 2008, this airline chose PROS to extend its RM Advantage edition to include WTP forecasting. The WTP module encompasses both yieldable demand (late-booking, schedule-sensitive, brand-loyal) and airline-priceable demand (pricesensitive). Up-to-the-minute availability data, rich historical data, comprehensive competitive information, sophisticated customer segmentation, seasonality variations, and other factors are incorporated as well. This helps ensure accurate forecasting, provides a detailed understanding of passenger willingness-to-pay, and enables the airline to utilize dynamic, real-time pricing.
 
Seeking improved profitability, a top-tier, Middle East-based airline needed a pricing solution that would counter “buydown” – a revenue-dilution problem in which low-cost competition, restriction-free fares and pricing transparency induced higher-fare passengers to buy  at lower-cost fares.
Adopting the unique Willingness-to-Pay (WTP) feature within PROS O&D Revenue Management, the airline focused on testing revenue performance of six routes in three key markets. By enabling the airline to forecast and optimize demand, the WTP capability helped increase revenue for these markets by 4.7%, with the six routes generating an additional US$1.5 million in fare revenue.

Results

 
PROS Revenue Management with WTP capabilities improves revenue by enabling the airline to accept more high-yield bookings and move lower-yield bookings to more profitable options.  Plus, when demand exceeds supply, revenue optimization enables the carrier to close low-yield classes and reserve space for higher-yield bookings.
 
Within months of its implementation, analysis shows that this major airline increased revenue by 4.7% in three initial test markets (which serve predominantly business travelers), and generated an additional US$1.5 million in revenue on six targeted routes to/from those markets.
 
These numbers exceeded – and were validated by – results generated by PROS WTP revenue management simulations using data from other carriers. These comprehensive studies have shown that a WTP solution can be expected to produce a 1% to 4% revenue increase in predominantly business travel markets, and a 7% to 10% lift in predominantly leisure travel markets.

Conclusion

 
Carriers have tried various methods to combat increasing demand uncertainty and buy-down behavior – methods that include seat-parking, forced class closure and artificial demand influences. Unfortunately, these methods often harm, rather than improve, revenue performance.
With the PROS WTP capabilities, this airline is now able to accurately forecast demand, anticipate buy-down, determine willingness-to-pay, employ real-time dynamic pricing and, as a result, maximize its revenue. What’s more, the evolution of PROS Revenue Management with WTP optimization and dynamic pricing will enable the airline to break the traditional pricing paradigm by removing the barriers of class codes and fixed price points, creating a continuous range of possible prices, and using customer segmentation to price fares exactly at the passenger’s willingness-to-pay point.

 

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