One of the most talked about topics within commercial aviation has been continuous pricing. We continue our series on the topic by consulting with leading industry experts to gauge both the promise and the obstacles in route to airlines truly pricing their products dynamically.
Check out our previous content on continuous pricing:
- What Lufthansa Group’s Continuous Pricing Solution Means for the Airline Industry
- Lufthansa Group Shares the Details of Its Continuous Pricing Solution
- Continuous Pricing + Refined Segmentation + Competitive Landscape Understanding = Winning Revenue Optimization Mix
Dynamic Pricing vs. Continuous Pricing
Before diving too far into the discussion, it’s important to establish a baseline understanding of continuous pricing, especially within the context of dynamic pricing since the two terms can sometimes be mistakenly used interchangeably.
Fortunately, there seems to be a near-consensus that continuous pricing is a subset of dynamic pricing, whereas dynamic pricing is more of an umbrella term.
“From an industry perspective, continuous pricing is one technique to implement dynamic pricing designed to overcome the limitations of traditional pricing, namely the 26-fare limit,” said Jerome Perez, Chief Product Officer, Infare.
"Continuous pricing is a form of dynamic pricing, which effectively gives an airline an infinite amount of pricing possibilities to serve the most relevant offers to travelers while satisfying the entire demand curve."
“We like to say that dynamic pricing is a broad specification; the parent category from which everything comes down from,” said Justin Jander, Director of Product Management, PROS.
“Dynamic pricing is the ability to change the fare class based on customer or other data. Then there's continuous pricing which allows airlines to be able to actually price between the traditional fare classes.”
To round things out, let's use the following baseline definition for the context of our discussion:
Continuous pricing is a form of dynamic pricing, which effectively gives an airline an infinite amount of pricing possibilities to serve the most relevant offers to travelers while satisfying the entire demand curve.
Working Within the Context of Multiple Components
One of the more challenging elements of continuous pricing comes in its implementation and getting it to work within the sometimes very rigid architecture of airline commercial systems.
“It's a little simpler when you're, for example, Ryanair and 98% of your traffic is to your website, but then how do you go about that when you need to start navigating different things like GDSs and all the different systems you're using and all the different places you're distributing your fares,” said Jander.
“What we see is that the current systems used by airlines struggle with digesting the incremental volume of data, the higher data depth and the higher frequency of delivery that airlines are asking for.”
Another crucial component to continuous pricing is having the right data, which is also made more difficult with the number of systems and sources from which it is aggregated from.
“What we see is that the current systems used by airlines struggle with digesting the incremental volume of data, the higher data depth and the higher frequency of delivery that airlines are asking for,” said Perez.
It very quickly becomes a complex puzzle for airlines to solve, as they experiment and tinker to not only find, but also correctly place the right pieces.
“A lot of the complexity is around integrations. It's a lot of integration pieces and there's so many systems that airlines are using that are baked in the from a technical side. It's making sure all your downstream reporting is cleaned up and working,” said Jander.
Protocols & NDC
One way in which the airline industry is aiming to reduce the complexity of continuous pricing, and digital retailing as a whole is by implemented standardization.
This is precisely why IATA rolled out its New Distribution Capability (NDC) protocol. It's an XML-based data transmission standard created to enhance the capability of communications between airlines and travel agents.
"We believe that NDC helps continuous pricing in two significant ways, said Perez.
First of all, by using NDC, airlines regain ownership and control over their costs and customers in indirect channels, which would not necessarily be possible otherwise. Secondly, NDC enables airlines to apply continuous pricing in indirect channels."
“With NDC, you can have consistent offers via different channels, whether it be metasearch, OTAs or dotcoms. However, you still run into issues where certain channels don’t use NDC or certain channels can’t connect to certain places.”
NDC offers a lot of promise and has made great strides towards industry-wide standardization, but still lacks complete coverage.
“With NDC, you can have consistent offers via different channels, whether it be metasearch, OTAs or dotcoms. However, you still run into issues where certain channels don’t use NDC or certain channels can’t connect to certain places,” said Jander.
While airlines might not be able to have complete control over every channel their offers appear, they can steer consumers to preferred storefronts with special offers.
“Lufthansa's worked around this by giving favorable availability or favorable pricing on certain places. That could be a trend in the industry to drive people to the right channels,” said Jander
Can Ancillaries Be Dynamically Priced?
Of course, when we talk about pricing, the fare price is just one component of the overall price, so it’s important to understand where ancillaries fit in with continuous pricing.
As Perez puts it, “anciillaries are important for customers when evaluating competing airline offers. Therefore, data on ancillaries is beneficial for creating dynamic offers as well as continuous pricing.”
While the technology is undergoing its evolution and most ancillary prices remain static, continuous pricing can function beyond the fare price.
"The true vision of continuous pricing can materialize where you've dynamically priced the ancillary, you dynamically priced the seat and then you merge those together."
“We created a model that’s based on anonymized customer data that produces different ancillary prices for different segments, said Jander.
Because demand is down, airlines are focusing on filling seats rather than on ancillaries. Once there is more interest in ancillary pricing, the true vision of continuous pricing can materialize where you've dynamically priced the ancillary, you dynamically priced the seat and then you merge those together into a full decision based off the total purchase of the passenger.”
Could Continuous Pricing Be a Race to the Bottom?
For all of the promise and potential that comes along with dynamic offers and continuous pricing, it doesn’t come without its own red flags. Alaska Airlines’ Senior Manager of Data Science Alex Matson offers up another perspective to consider.
"You're going to get into game theory here, if your competitors are expecting you're going to discount, they might discount and then you need to, said Matson.
I think there's a real possibility that dynamic pricing and implementation does a lot of harm to industry revenue. The thing that all the modeling misses are the information costs. It's going to be next to impossible to observe and orient yourself in a world where prices are changing in real time."
"You're going to get into game theory here, if your competitors are expecting you're going to discount, they might discount and then you need to."
The fierce competition within commercial aviation could be the driving force behind pricing strategies rather than actual customer demand.
"I don't really buy the argument that having more price points along the demand curves necessarily means better revenue because I don't think any airline is actually selling the demand curve. I think airlines are competing against each other and passengers are making choices, said Matson.
The result of that is the competitive dynamics of setting fares becomes way more important than just having the right points along the line at a given point."
What Does the Future Hold?
While a lot is still unknown or untapped when it comes to continuous pricing, one thing is for certain. As more data and more solutions become available, airlines have begun to shift their pricing strategies towards more dynamic strategies.
“The adoption of continuous pricing by airlines will certainly grow further in the next years. While we cannot predict which path airlines will choose nor the pace of change, we think that airlines will ultimately all move away from traditional pricing to embrace continuous pricing fully, said Perez.
We also foresee that the frequency of price selection and the number of data points used for dynamic pricing will grow substantially.”
By taking the necessary technological and strategic steps, airlines could be moving into a whole new level of transparency and pricing understanding.
"We think that airlines will ultimately all move away from traditional pricing to embrace continuous pricing fully."
“We believe that it is time for airlines to get the same insight as their customers do. By that, we mean that airlines should see all fares available on all distribution channels, all the time, as consumers can today,” said Perez.
Could continuous pricing be a major step towards digital retailing and the airline industry maturing to catchup to other industries?
“I think where we're headed is pricing more like other industries, so nobody is stuck to the traditional class codes, said Jander.
I think that where we're headed is a very data rich environment. There's just so much information that's flowing through all the systems at an airline.”