Dynamic pricing makes sense for the travel industry and its customers despite recent controversies – and is preferable to legacy systems that serve 'no-one well', writes Paul Sies, CEO and president of Journey Mentor.
_w=800_h=533.png?v=20230522122229)
Guest Post: What to price an air ticket?
It may not have been the start to their 2025 reunion Britpop legend Oasis hoped when they rocked straight into that row in September. The three official vendors and assorted re-sale sites stood accused by some furious fans of inflating ticket prices and sharp practice.
What proved particularly controversial was the deployment of dynamic or surge pricing.
The resulting song and dance - less Eyeball Tickler more eye-waterer. One disgruntled fan told Business Insider, they were "dumbfounded".
The British government felt moved to intervene with promises to “do something about it”. In vain (I’m guessing) the vendors muttered the defensive incantations ‘demand and supply’.
The row has serious applications to the travel as well as music industry. Dynamic pricing is increasingly used but is controversial especially during school holidays, with airlines regularly accused of inflating seat prices at peak periods, reported The Independent.
Differential pricing of holiday periods has always happened. Traditionally, airlines and tour operators used brochure pricing that was significantly higher in the holidays vs off-peak travel dates.
However, these prices where never factually linked to actual demand, just a way to increase prices. Dynamic pricing works differently - it actually links the price asked to the demand. This can work in two ways. First, as schools reconvene this month (September) and prices drop, winners as well as losers emerge – singletons, childless couples, those not tied to school hols.
Secondly, employing dynamic pricing in conjunction with modern technology and a more holistic approach to selling travel offers the hope of more winners and fewer losers. For the travel organiser/airline it ensures a year-round higher Load Factor, thus better margins and better prices overall.
Dynamic pricing vs legacy systems
Some airlines adopted dynamic pricing to resolve a host of complex pricing factors in real time. This means more accurate adjustments to ticket prices according to fluctuating demand and other events.
Many, however, remain wedded to legacy revenue management systems (RMS). These forecast and allocate inventory based on historic demand that has been more or less meaningless since the pandemic. Nor are their antiquated algorithms geared to respond to the unexpected.
Dynamic pricing offers an alternative more closely related to demand and supply mechanisms.
Society and airlines themselves have led people to believe flying is cheap. The unpalatable fact is, running an airline (or other travel business) is expensive. What is the true value of a seat? Many customers might be outraged to pay what a seat costs the airline (approx. €30-50 per flight hour, reflecting fuel, landing-fees etc). The number of smaller airlines that have folded in recent decades is testimony to that.
To cut costs, make more money, and keep afloat, airlines often resort to ‘sneak’ fees. As a former aviation CEO, I remember when food and baggage were included in the ticket price of all airlines.
With their growth, low-cost airlines began the trend of charging for food, baggage and seat allocation. What was standard became almost universally ‘extra’. Even most full-service airlines have started charging. BA, for example, scrapped free food, baggage and seat allocations for short-haul flights in 2017.
These complicated and opaque ancillary charges might help airlines keep the wolf from the door but are unpopular with customers, according to the BBC.
So what can be done?
Aviation is a world of finite supply limited by available planes or airport slots, that cannot easily be expanded. Dynamic pricing is realistic. It rewards people for travelling at non-peak times. It helps ensure airlines fill seats at the right price and don’t go bankrupt.
Smart airlines, hotels and travel organisers can use it to their advantage, steering people to low demand periods, achieving better occupation, overall margins and customer satisfaction. Yet as in the Oasis row, it can occasionally generate howls of complaint.
Better deals
One answer is for travel companies to pay more attention to informing the public about the true cost of flying and why prices might vary according to demand. And, also, how some customers might actually benefit, say, from less overcrowded or more luxurious flights.
Beyond education, dynamic pricing within a more unified travel ecosystem made possible by modern technology can create wider sales opportunities. Customers may find these ‘honest’ sales more acceptable than ‘stealth’ charges. This could provide better deals for travellers themselves.
Relating dynamic pricing and the prevailing market to all components of a particular trip can elicit overall savings for customers as well as being fairer in reflecting actual market conditions.
For example, a flight might be more expensive, but the accommodation may be cheaper. Knowing customers’ preferences and pain points through personalisation can help travel providers offer what customers want at a price all parties are content with.
Dynamic pricing within an eCommerce and revenue management ecosystem allows travel providers to respond to competitors’ prices in real-time and compete better, maximise revenues and offer the best prices.
Finally, the travel industry should consider ditching its hoary old paradigm, that a trip is cheaper if booked far in advance. Dynamic pricing and advanced modern tech mean better offers can be found almost up to departure, even after a traveller has booked and paid.
Nobody can pretend flying is for free. But dynamic pricing can help ensure customers get the best deals within a prevailing market, open new revenue streams and help travel companies remain profitable.
