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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 $ 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 2 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 3 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. 4 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 5 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 6 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. 7 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 8 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. Copyright © 2016, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of merchantability 9 or fitness for a particular purpose. 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