Tuesday, August 13, 2013

Price Sensitive Revenue Management (Stretching the Benefits of Price Elasticity)

A couple of years ago I was asked what would be the most significant changes for our passenger product for Cruise Ferry clients over the next few years. With an ever more competitive market place, the need to better understand the customer’s willingness to pay, and a desire to simplify the pricing structure and booking process, I’d answered Price Sensitive Revenue Management (PSRM).

As usual there may be resistance to adopting such a change. So what are some of the additional benefits of Price Sensitive RM other than the potential revenue gains and a better understanding of the price elasticity of your customers?

The simplification of the fare class structure by moving to a more ‘transparent’ single fare should provide benefits in a range of areas and business processes.  It will reduce the number of brochure fares/tariffs significantly, immediately improving the workload for those responsible for their administration and maintenance in systems support. This in turn should improve the booking process and ideally provide a quicker website response for online purchases, which of course is an ever growing and seemingly unstoppable portion of the business.

With a single price point, the individual departure review and decision making times for Revenue Analysts should be reduced, increasing their productivity. It will be much easier for agents and customers to compare a single price offering on a range of sailings and make bookings at a price and time to meet their travel requirements. Comparison with competitors will be more straight-forward making commercial pricing decisions easier at the wider market level.  From a marketing perspective, this can now really be seen as ‘From Pricing’ without those hidden conditions, again improving the customer booking process and experience.

A common concern within management is that the removal of the discounted period fares is not seen as preventing the possibility of lower fares and that the price sensitive customers are still given an option.  This is of course a main objective of adopting PE, with, where price elasticity dictates, even greater protection for the most popular departures, whilst giving the price sensitive customer an increased number of viable alternative sailings to choose from. In addition the option to have a non-decreasing fare policy exists, so that for certain sailings, markets, or periods, a system setting will prevent the current price from ever going back down. A hybrid PSRM model can be used so that certain classes/products (such as tour operator allocations) or markets could be simultaneously managed by traditional demand and optimisation.

In addition to a successful launch of PSRM in our ProfitOpt solution at Brittany Ferries, RTS has been conducting a Price Elasticity simulation study for a client interested in understanding the potential revenue improvements associated with PE in a restriction free pricing structure, compared to the current traditional period return/length of stay restrictions. With these initial results looking positive I believe that Price Elasticity will continue to play an increasingly important role with our current and future client base.

Patrick Allen
Project Manager and Consultant

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