Download scientific pricing for winning group sales

WHITE PAPER
SCIENTIFIC PRICING FOR
WINNING GROUP SALES
BY THOMAS GORIN, PH.D.
SENIOR DIRECTOR OF PRODUCT MANAGEMENT, PROS
Realize Your Potential
GROUPS ARE A TRICKY PROPOSITION IN THE AIRLINE
AND TRAVEL WORLD
It’s like the classic proverb that has seen many variations over time:
“neither with bad things nor without them.” On the one hand, they provide
significant incremental revenues – our airline customers typically estimate
group revenues to be between 5 and 10 percent of their total revenues (in
some regions of the world this number may be even higher). On the other
hand, they represent a fairly sizable challenge to all airline systems:
Groups are
booked manually
Airlines today do not typically have the ability
third party tools that are disconnected from their
inventory systems, while lifecycle management is
managed in reservation systems using antiquated
queuing systems.
to automate the group booking process. A
pricing automation for groups and are not able
Groups require
special pricing
to automatically distribute large groups among
Today’s processes require manual reviews of the
multiple flights while providing a single price to the
vast majority of group bookings in order to provide
entire group.
accurate pricing that is in line with the airline’s
combination of factors lead to this situation, chief
among them the fact that airlines do not have
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demand forecast and booking expectations.
Groups need
to be nurtured
Relationship management is of utmost importance
for groups, both in the negotiation phase and in
the lifecycle management of the booking. Today’s
airlines manage the upstream relationships through
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Group Sales Optimizer (GSO) solves all three
problems, allowing airlines to offer a robust,
effective and complete solution to group booking
quoting and management. This whitepaper will
discuss all three areas, with special focus
on pricing.
An Automated Process Powerful
Enough to Handle Group Bookings
Groups also have the ability to book series and
GSO provides airlines with an end-to-end booking
• Series are a repetition of the same trip on
solution that allows users (travel agents or internal
a regular basis (weekly, monthly, etc.). For
airline users) to connect to the GSO front-end
example, this type of booking is commonly
booking interface and enter their group booking
used by tour operators who may have a cruise
requests.
departure every week from a specific port. They
The front end behaves very similarly to existing
would need to book a group block on a weekly
online travel tools and is very familiar to all users.
However, this interface was designed specifically
multi-origin trips.
basis to connect to this weekly sailing.
• Multi-origin groups are groups heading to the
for group bookings and includes some major
same destination (for a conference or wedding,
differences from traditional online travel tools.
for example) from different origins.
Traditional features include the ability to enter
Once all these selections have been made on the
origin, destination, travel dates, party size, etc.
front end, GSO then calls the back end to build
In addition to these, GSO offers group-specific
itineraries that meet the group’s requirements
features, including the ability to choose the group
and prices these selections. While the front end
type, trip type or identify the travel agent booking
in itself is a significant improvement over existing
the group by IATA/ARC identifier.
approaches to group bookings, the complexity of
• Group type is a designation that the airlines
the backend technology should not be overlooked.
associate with a group type to potentially offer
GSO leverages PROS technology to build
special pricing incentives or classify the groups
itineraries based on the request and price
in specific categories.
itineraries in real-time (more on pricing in the
• Trip types define the nature of the group trip
beyond the traditional one-way, roundtrip and
multi-city options typically offered to individual
passengers.
next sections). Consider the simple example
of an airline with three hubs and three flights,
to and from each hub between the origin and
destination cities. That simple example leads to up
to 27 itineraries between the two cities, and that’s
without considering the connection rules, inter-hub
flight, multi-connection options, etc.
SCIENTIFIC PRICING FOR WINNING GROUP SALES
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GSO Booking Interface
Insight to Nurture Your Most
Important Relationships
GSO provides a number of critical tools and
interfaces to allow for effective relationship
management with travel agents and other
customers. Group Sales Policies (GSP) allows the
users to enter very detailed policies to adjust the
pricing offered to individual customers, on specific
routes, at specific times of the year, and more.
In addition, GSO also offers contract management
capabilities to track and manage different versions
of a contract. Specific agency level rules can also
be managed in the GSP engine.
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Last but not least, GSO tracks performance
metrics (materialization rate, conversion rate)
of specific travel agents and customers, which
can be leveraged to better understand the
relationship of specific customers with the airline.
For example, a high maintenance customer with
low materialization rate and relatively high volumes
may be less valuable to the airline than a similar
customer with a higher materialization rate and
fewer needs.
Getting Group Pricing Right
flight is in fact lower than the actual price paid
GSO leverages advanced pricing techniques to
by the customer, for a variety of reasons. One
automate the price generation process, thereby
typical reason for this difference is the notion of
removing the need for individual group review and
dilution that can occur when lower classes are
pricing activities. Our pricing algorithm determines
made available for booking. A classic example,
both the average marginal cost of providing the
in a price-oriented demand environment, is that
seats to the group and the marginal revenue curve
any passenger who would be willing to purchase
of the group. By comparing these two quantities,
a higher fare will buy down to the lower fare if
we can then determine the optimal price to charge
it becomes available. The airline may choose to
the group.
make a lower fare available to stimulate demand
volumes. However, in doing so, the airline also
Marginal cost
dilutes revenue from the higher fare class where
The average marginal cost of the seats is
some customers would have booked but are now
determined by a combination of factors, including,
choosing the lower fare product. The adjusted
but not limited to, the bid price of the seats to be
contribution of the lower fare class (after reflecting
used by the group, the potential denied boarding
this dilution) is the “true” contribution of the
costs that can be incurred by the group and any
class relative to the published price of the class.
additional variable costs incurred to transport
Consider the example below:
passengers. This average marginal cost can be
viewed as the threshold below which it does not
make economic sense to allow the group to book
the requested itinerary.
CLASS
FARE
DEMAND
REVENUE
HIGH
1000
1
$1,000
LOW
500
4
$2,000
Marginal revenue
In this example, if only the “High” class is available,
GSO uses a heuristic approach to estimate
we get 1 passenger at $1000, or $1000 in revenue.
the marginal contribution or revenue of group
However, if the “Low” class is open then we get
customers, discussed below. But first, it’s important
4 passengers, but all 4 of them now purchase the
to understand the notion of marginal contribution
lower $500 fare, leading to $2000 in revenues.
and why it is typically lower than the actual
Based on the information we have on demand,
published fare.
we can conclude that the incremental revenue
achieved by opening up the “Low” class is $1000,
Background
which brings in an additional 3 passengers.
The idea behind marginal revenue is that the
The marginal revenue of these 3 incremental
true contribution of a passenger on a specific
passengers is consequently $333 rather than the
SCIENTIFIC PRICING FOR WINNING GROUP SALES
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published fare of $500.
the published fares offered: (1) dilution due to buy-
It is this “dilution” effect that GSO accounts for in
down applies to groups (as it does to individual
its pricing algorithm.
However, beyond this adjustment, GSO also
recognizes that groups behave very differently than
individual passengers in the sense that they are
offered a continuous price point. By comparison,
individual passengers are only offered a selection
among a discrete set of prices. This continuity
in the pricing structure offers another means for
group passengers to receive a discount relative
to individual passengers. Consider the following
example: if the airline knows that its availability is
10 seats in the “High” class – as defined above
– and 10 seats in the “Low” class, then it can
estimate the price that it should offer the group,
as the simple weighted average fare between
passengers), thereby affecting the overall margin
contribution/revenue of the group, and (2) groups
get further discounts from negotiations with airlines
and added flexibility in the pricing terms,, once
again reducing their marginal contribution.
GSO Heuristic
The GSO pricing algorithm leverages the
information from PROS O&D Hybrid Forecasting
methodology which uses full origin and destination
network optimization to minimize revenue dilution
from buy-down behavior and to derive the buy
down component of the marginal revenue. A
methodology has been implemented to estimate
the additional margin revenue impact of groups
these two classes. Assuming a group size of 12,
related to the continuity of the pricing offering.
the airline would book the first 10 customers
This methodology is illustrated in the chart below.
in the lower class and the next 2 in the higher
The blue circular dots represent the original fare
class. The weighted average price would then be
by class of service. In the absence of buy down
(10×500+2×1000)/12=$583.33. However, group
behavior, the marginal revenue (labeled MR on
bookings involve a negotiation and customers
the Y axis of the chart) is equal to the fare. This
would typically receive a further discount on
case tends to be unusual but can happen when
that price.
demand is perfectly segmented and there is
By comparison, if these bookings were individual
no chance of diluting higher class revenue by
bookings, customers would not receive any
discount, and some would in fact possibly pay
even more because of the fact that passengers in
the same reservation must be booked in the same
class of service. In this example, and it is admittedly
extreme and unrealistic, a group of 12 individual
customers would have to be booked in the “High”
class which is the only one with the available seats
to book the full 12 customers.
To summarize, we have established so far that
groups have at least two avenues by which their
marginal revenue contribution is lowered relative to
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making a lower class available. The orange square
markers represent the buy down behavior of
individual passengers as described above. The
green triangular markers then further extrapolate
the expected marginal revenue that could be
accomplished by selling the seats to group
passengers. These triangular green markers are
then linked by linear interpolation to provide an
estimated marginal revenue curve for the group.
Please note that this curve represents the expected
contributions from group bookings at any particular
fare level. In this example, a $600 fare would bring
in about $450 in marginal revenue. In other words,
our heuristic expects that the value of a $600 fare
Building on our previous example, the chart now
if sold to a group translates in approximately $450
reflects the intersection of the marginal cost for the
in true airline revenue – because of buy down and
group and the continuous marginal revenue curve.
dilution incurred by accommodating a group in
In this example, with a marginal cost of $250, we
place of individual passengers.
read on the chart that the optimal price to charge
You may notice that the move from the square
the group is $475.
markers (marginal revenue due to buy down) to
Group Marginal Revenue and Marginal Cost
the triangular markers (marginal revenue due to
group continuous price) is a horizontal one instead
of a more intuitive vertical one. This is because
our heuristic reverses the algorithm and instead
of computing the marginal revenue at the original
fare value, computes the equivalent fare that would
lead to this marginal revenue.
Marginal Revenue Derivation
GSO offers many additional options and safeguards
to allow airlines to adjust the prices as they see fit,
add lower bounds, upper bounds, etc.
Conclusion
GSO is a powerful tool that helps airlines reach
their revenue and profit potential with group
sales. The solution offers intuitive user interfaces
and automated itinerary building and pricing
capabilities, thereby removing the need for manual
Pricing Groups: Putting it together
In the previous paragraphs we discussed how we
are able to calculate the group marginal costs and
the group marginal revenue at various price levels.
Economic theory then tells us that optimal profit
is achieved when marginal revenue is equal to
marginal cost. The derivation of the optimal group
price is then very straightforward and defined
as the fare value where marginal revenue equals
marginal cost.
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reviews of group bookings. The relationship
management capabilities of GSO enable significant
improvements in customer performance tracking
and associated adjustments. Finally, GSO’s
advanced pricing capabilities compute the true
marginal revenue of groups and allow for optimal
pricing capabilities.
About the author
Thomas Gorin, Ph.D., serves as PROS Senior Director of
Product Management on its travel team, where he focuses on
a mix of travel-related engagements, from revenue management to
group optimization and analytics. His industry experience includes
six years with Continental Airlines as a manager in both revenue
management and revenue decision support. Thomas earned a Ph.D.
in aerospace and astronautics from the Massachusetts Institute of
Technology (MIT), where he published numerous papers on airline
revenue management.
SCIENTIFIC PRICING FOR WINNING GROUP SALES
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About PROS
PROS Holdings, Inc. (NYSE: PRO) is a revenue and profit realization company
that helps B2B and B2C customers consistently realize their potential through
the perfect blend of simplicity and data science. PROS offers solutions to
accelerate sales, formulate winning pricing strategies and align product,
demand and availability. PROS customers experience meaningful revenue
growth, sustained profitability and modernized business processes because of
PROS revenue and profit realization solutions.
To learn more, visit pros.com.
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