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Dale Furtwengler
Dale Furtwengler
Dale Furtwengler helps businesses get higher prices regardless of what their competitors or the economy are doing. His book, Pricing for Profit, was recently translated into Chinese. To discover how you can get significantly higher prices for your offerings call Dale.
 

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Dynamic Pricing: Lessons Learned from the Airline Industry

Nov. 15, 2011 3:05 pm
I was just introduced as a pricing guy to an airline consultant when he said “Our dynamic pricing model is working very well.” What is dynamic pricing?

It’s constantly changing pricing that factors in limited seating capacity, the number of reservations made, time to departure, typical number of cancellations and other factors that influence how full the plane is upon departure. The goal is to fill the planes so that revenue is maximized on each flight. While that might seem like a worthy goal, here are some overlooked realities associated with this strategy.

In their white paper, Dynamic Pricing in the Airline Industry http://tinyurl.com/38x95kq, R. Preston McAfee and Vera te Velde of the California Institute of Technology cite one estimate that American Airlines “changes half a million prices per day.” Even if that number is off by a factor of 10, that’s 50,000 prices changes a day. Let’s take a look at what that means for us as consumers.

First, it makes our lives more difficult. We can’t simply go out to our favorite airline’s website, purchase a ticket and feel comfortable that we’ve gotten a fair deal. Instead we’ve got to go to multiple sites, discover what the best price is, jockey our schedules accordingly and hope that, once we hit the reservation button, we’re not going to find a better price later.

Second, the price to which we agreed isn’t necessarily the full price. There are a myriad of other fees that may be added later as we are asked to pay for extra bags and other services we might desire. None of this is clear at the time we purchase the tickets.

Third, it places the company’s interests ahead of its customers’ interests. Any time that a company, in any industry, places its needs above those of its customers it encourages buyers to seek alternatives. Indeed, how many of you have made a conscious decision to drive instead of fly to another city if it was less than 5 hours away?

That decision was based on several factors:

  • The time involved in searching for the best deal.
  • Uncertainty about whether or not you got a good deal.
  • Travel time to the airport.
  • The wait time at the airport.
  • Uncertainty about unforeseen charges.
  • Airlines overbooking strategies

Is it any wonder that the flying public is so vocal about its displeasure with the airline industry? Let’s contrast that with a pricing strategy that simplifies rather than complicates flyers lives.

What if the airlines establish a price that factors, as most businesses do, their limited capacity? In essence they’re pricing so that on any given flight they can make money if the airplane is 80% full at departure. The price factors in the length of travel, the destination and how much luggage a passenger typically takes on this flight as well as other services (pillows, blankets, meals, internet access) that they typically use during these flights.

The airlines could still offer different levels of comfort and service in the form of first class, business class and coach. Their pricing would reflect the service and comfort provided. The flyers to whom these are important will pay the premiums to get these services.

Wouldn’t that make your life a lot easier and the experience of airline travel a lot more pleasant? Then why don’t more airlines adopt this policy?

My guess is that they’re afraid that if they raise prices they’ll lose business to their ‘competitors.’ They’re also afraid that people will opt to drive rather than fly.

Yet the reality is that these fears are being realized every day. Flyers who are searching for the best deal, at the the airlines’ behest, are going with the airline with the lowest price which means that every other airline lost that customer’s business. If you're going to lose business anyway, why not get higher prices and margins on the business you retain.

People are already choosing to drive rather than fly because the airlines make using their services so difficult and so uncertain. Why not pull these potential buyers back into the fold through more customer centric pricing strategies?

It’s apparently more counter-intuitive than I’d have imagined, but focusing on your needs instead of your customers’ desires is not the way to win and retain loyal customers. Create the customer experience your customers desire and they’ll reward you with higher prices and repeat business. That’s how you build solid customer relationships profitably.

 
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