Reckon you know about dynamic pricing in travel? Think again

Last week, Delta had a “computer malfunction” which resulted in fares being offered at some ridiculous prices. In some case tickets were available …

Last week, Delta had a “computer malfunction” which resulted in fares being offered at some ridiculous prices. In some case tickets were available 10-15% of the normal price.

This should remind us all that airline pricing is very complex and fragile. As we end a rather boring year for innovation, it is time to look to the future and face some of the hard questions that are impacting the retailing of air tickets.

Background

The internet is a wondrous thing – it enables us to have an eye on something that was (and in many cases still) is hidden, namely pricing.

Modern retailing has evolved rapidly and continues to change as the ping pong battle between the buy side and the supply side of the purchase line moves to real time.

The consumer has so many more tools to see what a price is today, yesterday, here and now, down the street or even being sold somewhere else around the world.

Mobile, too, is having a significant impact – it has changed search whilst transaction volumes are still relatively small, yet uses of devices is changing shopping behaviour.

Conventional wisdom has traditional pricing set in smoky rooms and fixed in a way that defied logic and required various levels of understanding to even attempt to being close to crystal clear.

Today’s retailing has changed air shopping for ever; advances such as just-in-time warehousing and complex supply chain logistics from the likes of Amazon, Fedex and UPS have transformed the way we get our products and services.

But does this matter to travel – the ultimate, dynamic product? Yes, it does, and we had better get, well, better with this new religion.

Dynamism

Dynamic pricing is a relatively new term that has entered the existing lexicon of retailing. As travel selling and conventional retailing move closer and closer together, both have a lot to learn from each other.

Allow me to focus on the travel side of this story.

I will drill into air product sales but this applies to hotels and other travel products equally. If you believe that airline products are truly dynamic at present, I have to disavow you all of that notion. They are currently largely not.

Airline prices are complex things. Legacy carriers have to go through a large number of internal and external processes to file new fares and make these products available for sale.

At the heart of this seemingly mind numbing conundrum is the conventional wisdom that has airline availability and fares managed in different ways.

And this is the fundamental difference between travel retailing and conventional product retailing. While a seat is a seat and its value can change at a whim, the reality has been that setting the pricing of an air product required a lot of fixed processes that take significant time to roll out.

Reality

Dynamic pricing doesn’t really lend itself to things like cached availability.

As the state changes frequently (not, constantly, as some people believe), the latency time to get such a change into the marketplace means that different people will have different states of the price at any single time.

Indeed, the price can be affected by so many factors that it is a small wonder that the prices are ever really alike.

With caching now rampant throughout the travel distribution system the result is there is an overall expectation that the price is dynamic when in reality it is these external factors that cause the price to be, well, different.

And the consumer is both confused and in many cases rather annoyed when he or she gets a result that is different. Travellers have no reliable place to go. So-called pricing guarantees are really quite laughable in their lack of truthfulness.

Airlines are however learning that the consumer is getting smarter. The non-travel retailing world has spawned a savvy consumer who knows how to shop and how to walk away.

The traveller is more than aware that pricing can change and they are quite prepared to accept it.

For those false prophets who claim to be consumer advocates take note: putting all fares in the GDS is NOT the answer for transparent consumer access (here is a great eMarketer article from September 2013 on retailing that brings this into focus).

So what lessons can we learn from this?

Here are my five takeaways:

1. Empowerment

The consumer is smarter and better equipped to make decisions – he or she is also able to know when there is a lower price out there.

2. Caching

This is still a very limited technology and should not be overused. It is an INDICATOR of price, not the final version. Trust at your own peril.

3. Contracts

The current full content and restricted access agreements between GDSs and airlines are useless and should be swept away.

4. Nu-wave

New technologies should be adopted for real time price displays to differing channels – this applies across the board to airlines internal systems, distribution and retailing systems.

5. Plus ça change

Yes, pricing really should be free to move and any restraint should be treated with disdain.

Who has the early best practice in this area? Here are some companies which I list here as examples of those doing a great job:

The biggest lesson is that the industry cannot rest on its laurels here.

Whether you are a supply owner or intermediary, fundamental changes in capability and maturity in the market demands that you take an independent view of how you will address the consumer and how you relate to the consumer.

For 2014, I recommend that you take a long hard look at your capability and functionality. Determine if it is adequate. I would say that you need to have a top to bottom review now while you have time.

Real dynamic pricing is going to be the order of the day. Get used to it.

And a final word to airlines: a consumer’s discretionary spending can be diverted away from the travel category completely, so don’t think that your pricing policies are not going to ultimately have an impact on total travel use.

NB: Disclaimer – author is currently a non-executive board director at OpenJaw Technologies in Ireland. He is also an advisor (past and present) to other companies involved in this space some of whom are mentioned in this article.

NB2: Dynamic pricing image via Shutterstock.