Continuous Pricing + Refined Segmentation + Competitive Landscape Understanding = Winning Revenue Optimization Mix

s we continue our coverage on continuous pricing, we sought out a vendor’s perspective, so we caught up with Benjamin Cany, Head of Offer Optimization, Airlines, Amadeus.

We got Cany's view on the emerging pricing solution, learned how Amadeus is deploying it for its airline customers and got Cany’s view on other offer and revenue optimization strategies.

For Cany and Amadeus, a winning revenue optimization formula consists of equal parts continuous pricing, customer segmentation and competitive landscape understanding.

If you’d like a continuous pricing refresher or to learn more check out our previous articles:

• What Lufthansa Group’s Continuous Pricing Solution Means for the Airline Industry
• Lufthansa Group Shares the Details of Its Continuous Pricing Solution

Kambr Media: In your words, can you describe continuous pricing? ‍

Benjamin Cany: Indeed, you have very different definitions. Some people also use the term dynamic pricing. For me continuous pricing is the capability for airlines to be able to return any price points without being constrained by pre-defined price points that we are traditionally accustom to.

On an origin and destination (O&D) level you have 26 RBDs (booking classes). Therefore, from a revenue optimization perspective, you have 26 price points to open or close.

"We realized that the current revenue optimization mix (including Revenue Management Systems, Availability controls for instance) could be improved by adding not only continuous pricing, but also by doing better customer segmentation, and by having a better understanding of the competitive landscape."

This could be much more if you do some specific fare filings, but the point is, this constraint exists. The aim is to get rid of this constraint.

When we started our journey around what we call dynamic pricing at Amadeus, we first looked at the value levers we could unlock for airlines.

We realized that the current revenue optimization mix (including Revenue Management Systems, Availability controls for instance) could be improved by adding not only continuous pricing, but also by doing better customer segmentation, and by having a better understanding of the competitive landscape.

That's the value we put behind the dynamic pricing concept. Continuous pricing is one of the elements, but we see this as probably one third of the total value we could get by doing smarter pricing decisioning in real time for every shopping transaction.

Sometimes people will describe continuous pricing with all the elements I'm referring to, so I think you are asking the right question by saying "what do you mean by this?"

Airlines for the past decades, have been doing in some way dynamic pricing with revenue management tools, so defining what the concepts are and where the incremental value can be unlocked for airlines really matters.

KM: You touched on it already, but how precisely is Amadeus helping airlines capture dynamic pricing/continuous pricing opportunities?‍

Cany: We first of all need to ensure that all the current tools used by airlines to optimize their revenues are relevant in the current environment, it's mostly the case for all the revenue management and network planning solutions.

They need to be more strongly intertwined and create a very strong foundation for revenue optimization, because that's where you will get the core of the revenue, at least for now.

What we realized with dynamic pricing/continuous pricing is there are still a lot of things that can be done. Today, when a pricing decision is taken, you make an assessment based on your revenue management strategy, and then you look in the pricing database, and you do some computations to determine the price.

But, the price is very generic. It's not very well segmented. The revenue management strategy is leveraging on a lot of historical data, not very much on the latest booking trends and does not take into account the real-time context and the competitive landscape.

It is an improvement area we are currently working on to enhance the quality of forecast data. This is what we call Active Forecast Adjustment.

We are piloting a dynamic pricing solution with two airlines (with more to come) that we are integrating directly with the airline shopping tool.

When there is a shopping request coming to the airline direct channels or via the NDC enabled channels, we are querying this Dynamic Pricing module, which has the latest picture of the competitive landscape.

With the data coming from the live shopping session, we do real-time segmentation based on anonymized criteria (e.g. number of passengers, travel characteristics). It's not based on if you are, Benjamin, but if you are, for example, a business traveler in France going to Southeast Asia.

Then we infer some information, make better pricing decisions and send the traveler an offer that is more relevant with a price that is closer to the traveler’s willingness to pay, creating a win-win proposition.

We are building solutions to optimize revenue, and airlines need that these days, even more than before.

To sum it up, with the introduction of Dynamic Pricing, we are injecting new data and models to allow airlines to make better decisions by having a more refined customer segmentation based on the context of the request and by taking into account the competitive landscape.

Then we add to this the capability to do continuous pricing, so we don't have to match a given pre-filed fare.

KM: You already alluded to this, but another important component is IATA's NDC protocol. Can you explain how Amadeus is working with NDC?

Cany: We've been supporting NDC since its inception. We have various IATA qualifications for NDC and our Travel Platform is connected to all the various NDC players.

You've probably seen some announcements about what we are doing with American Airlines, Air France-KLM and most recently IAG. NDC is really something that we have been investing in for a while.

All our new technology, like the one with dynamic pricing, is equally developed for the airline direct channels, as much as for the travel agencies and corporations we work with via our NDC-enabled solutions. So, the aim of Amadeus is to build, reinforce and develop the NDC capabilities for the benefit our industry.

This is really at the forefront of what we do. We have a tight collaboration with leading players across the industry.

Whatever we do to enrich the content and the ability to enrich the offer of airlines is made available for travel sellers in NDC-enabled solutions.

KM: When it comes to continuous pricing and helping airlines create the best offers possible, are there any technical hurdles that you must work around, especially because a lot of your customers are full-service carriers that have legacy systems?

‍Cany: There is complexity with continuous pricing and/or dynamic pricing at many places in the value chain. Amadeus is well positioned to understand the end-to-end value chain.

We are not only a revenue management science provider. What we are bringing is our understanding of the end-to-end value chain from the collection of the data, the modeling, the science — so all the optimization — down to the execution of the offer in all the sales channels.

We acknowledge the complexity. It's not because you have the best mathematical models that you will have the best outcome.

You need to ensure that there is efficiency from A to Z. You need to collect data from the real world.

That's tremendously important because otherwise your model will not work. Garbage in garbage out.

We then need to understand how airlines work. We are a provider dedicated to the travel business, and more specifically, people like me to the airline business. We need to work closely with the airline commercial teams.

We also need to understand the challenges of the downstream systems, the compliance with industry standards. You can think of the fare filling, you can think of the revenue accounting systems, etc. We've been working very closely with our colleagues from ticketing, reservation and CRM.

"We acknowledge the complexity. It's not because you have the best mathematical models that you will have the best outcome. You need to ensure that there is efficiency from A to Z. You need to collect data from the real world. That's tremendously important because otherwise your model will not work. Garbage in garbage out."

It's not easy getting everything to work properly from end to end, but that's what we're focused on. If you look at the booking classes (RBDs), some approaches to continuous pricing could aim at getting rid of them.

But given the current context for airlines, can't we sometimes leverage on what exists rather than just trying to kill it? Could not it be a smart way to repurpose the booking classes that are here?

What we do is use the booking classes to convey the product definition: its fare rules, fare conditions, etc. Let's continue to use RBDs for that. And on the other hand, let's have the capability to adjust the price of a given product up and down, and use RBDs to convey information in the legacy systems.

Sometimes we need to be a bit tactical. How can we accelerate the industry forward, but also leverage the current ecosystem to more quickly deploy new technology?

KM: And then when it comes to presenting the best offer and continuous pricing, how do you look at ancillaries?

‍Cany: We look at different components in the offer. As you mentioned, we are working mostly for full-service carriers, so up to 90% of their revenues are coming from airfare.

We need to do things right here. Just like I was saying, you need the revenue management foundation to be very strong to have the right pricing strategy and then you can incorporate some incremental steps to continue the optimization of the revenue.

Therefore, we have been very much focused on airfare. Still, we have also set up solutions to do ancillary dynamic pricing. That's part of our merchandising portfolio, where you can actually perform price adjustments.

You can also do some modeling with our data scientist or data scientist of the airline in order to define what should be the optimal price strategy for the ancillaries and adjust them in real time.

More or less the same concept as what we have on the airfare dynamic pricing. It's true that we focus first on the airfare dynamic pricing.

Talking on behalf of my colleagues from Navitaire, they started the development of what they call ancillary price optimization, even before they did airfare pricing dynamically because ancillary revenue is so important for their low-cost carrier customers.

We need to be focused on the value we can deliver. For a Navitaire customer demand is typically for ancillary optimization and for an Amadeus Altéa customer, it's likely on the airfare side.

In addition to the price dynamicity, we are also looking at the product dynamicity to see how we can best assemble in real time the product elements to make an offer even more appealing for the traveler.

Just like it is for the pricing optimization, it's really important to have strong foundations for the product construction.

Hence we believe airlines need to focus first on having a very solid network planning strategy because this is the core of the product. Then you can build on top of that and add dynamicity in the product build.

KM: When it comes to presenting the most relevant offer to a traveler, in your opinion, what are some of the most important data points to consider?

‍Cany: What we've been doing is building very strong customer choice models. The aim is to understand how people are making buying decisions when they are in front of the airline website, how they value the different product elements, how do they value a stopover connection compared to direct flight, etc.

"For instance, what is the price difference between the premium and basic products presented to a traveler not just for the one airline, but the entire competitive landscape. We know that people are shopping on many different channels trying to compare offer from different airlines for the same journey."

We are trying to get as much anonymized information as we can when a customer is making a purchase decision.

What was the context and the environment in which she/he was making this decision? What was the price difference between the premium product and the basic product?

We are recording all this information from sales channels and they are being fed to our customer choice models.

We then leverage this data in the network planning, in the revenue management, in the dynamic pricing of airfare and the dynamic pricing of ancillaries. Not only are we trying to understand an individual airline's data, but the entire competitive landscape.

For instance, what is the price difference between the premium and basic products presented to a traveler not just for the one airline, but the entire competitive landscape.

We know that people are shopping on many different channels trying to compare offer from different airlines for the same journey.

KM: A debate within the commercial aviation space is the idea of whether or not to optimize revenue on O&D (origin and destination). What is your stance?

‍Cany: We've had solutions based on O&D for quite some time. Even when we built the very first Altea module, in the early 2000s, the inventory was capable to make availability decisions based on the full journey of the passenger.

When we entered the revenue management space at the beginning of the 2010s, we focused on developing our revenue management solution for optimizing each leg independently.

In 2015, with our partnership with Scandinavian Airlines, we launched an O&D revenue management solution, which is now used by more than 10 airlines, including Singapore Airlines and Finnair, for instance.

"O&D is a component of it, but not the only one. It also depends how many connecting passengers you have in your hub. How relevant is it for a stakeholder? Is it worth having the extra complexity for the analysts to manage the complexity of O&D inventory controls?"

It's not the only place where airlines are getting revenue uplift. What is tremendously important for me in revenue management is to understand customer choice behavior, as I was alluding to before, how people are making decision between the different products. Customer choice modeling is at the core of our revenue management solution.

O&D is a component of it, but not the only one. It also depends how many connecting passengers you have in your hub. How relevant is it for a stakeholder?

Is it worth having the extra challenge for the analysts to manage the complexity of O&D inventory controls? For large hub and spoke airlines, they can put a 1 to 2% incremental revenue on this functionality.

It means hundreds of millions of dollars. Of course, it's worth adding extra complexity for the commercial analysts of the airline revenue management and pricing department.

KM: If you could look about 10 years down the road, what would continuous pricing and digital retailing look like for airlines?‍

Cany: My guess is that dynamic pricing will become the norm for major airlines. This will roll out slowly but surely because this is the way to go as it brings extra value.

And again, to me, it's not only about continuous pricing, it's really about better customer segmentation, better analysis in real time of the competitive landscape.

There are things that we are not yet doing in the current ecosystem when it comes to price and revenue optimization, we'll get there eventually. The pioneers such as Lufthansa have started demonstrating the value.

Look at O&D for example. It started in the 90s with American Airlines and SAS. In the last 15 years, it's become the norm for large hub and spoke airlines.

I strongly believe the adoption will happen faster this time because it's supported by the industry through notably IATA and technology enablers such as NDC or One Order. First movers will demonstrate the value and then things will accelerate.

KM: Zooming back in, what are your thoughts on the current commercial aviation landscape?

Cany: Despite the very challenging situation, airlines have a great opportunity to rebuild profitable networks.

Digital transformation was a focus for airlines even before the crisis, and it's still in the mind of airlines. But today, the key focus is on how do I restart my operation? Where can I fly profitably?

"Technology is an enabler not the driver of the decision. I really want to insist on that."

And we have solutions and the supporting technology which can help: continuous pricing, better segmentation, faster reactions to the competitive landscape.

Such tools are bringing automation to the analyst decision, which is essential nowadays given the reduced work force at airlines.

We must not lose the fact that we need to first of all focus on stimulating demand and rebuilding profitable networks.

Technology is an enabler not the driver of the decision. I really want to insist on that. How can we unlock the business value fast and what is the business value?

For me, the business value is not only coming from continuous pricing. It is a very important element, but we can inject more data, new models and as such create more value in the airline revenue optimization.

Since, unfortunately, airlines don't have so many passengers flying, 2021 could also be a good year to conduct some trials, do some piloting of new technology without disrupting too much airline operations and without taking big risks on the bottom line.