The Imperative for Continuous Pricing and NDC
In an era where the airline industry's profitability hinges on the precision of pricing strategies, the adoption of continuous pricing has emerged as a game-changer. This piece delves into how continuous pricing not only optimises revenue through enhanced yield management but also serves as a critical competitive tool in an industry where every penny counts. We explore the evolution from traditional fare structures to continuous pricing models, highlighting the technological and strategic shifts necessary to remain at the forefront of market demand.
Continuous Pricing is Imperative for Pricing Optimisation
Continuous pricing has become the gold standard for airlines intent on refining their pricing optimisation strategies. This approach improves upon the traditional fare structure, where fares are confined to fewer discrete levels, by introducing pricing options that fill in the gaps between these levels, thereby aligning prices more closely with real-time demand and consumer willingness to pay.
In the traditional model, airlines organise their seating inventory into various fare classes, each with a fixed price. For instance, fare class A might be priced at $200 while the next step, class B, might leap to $300 without offering any intermediate prices. This structure presents several challenges: there may be revenue loss if demand exists at price points between these steps, consumers might feel frustrated by the significant price jumps, and the system often lacks flexibility to respond to rapid changes in market conditions.
Continuous pricing addresses these issues by allowing airlines to set prices at any point within a range, not just at the predefined steps. This means if there is demand for a fare between $200 and $300, airlines can offer a price at say $250, capturing revenue that would otherwise have been lost. Moreover, the pricing can be adjusted dynamically based on current demand, competitor actions, or other market indicators, making the pricing strategy more responsive.
The benefits of continuous pricing are reflected in airline revenue performance. Although exact statistics vary, the industry has recognised that implementing continuous pricing can lead to significant revenue uplifts. For example, in markets where these strategies are adopted, airlines have reported increases in unit revenue of nearly 5 percent.[1] This enhancement in revenue comes from the ability to match price to demand more accurately, reduce unnecessary discounting, and capture additional revenue from passengers willing to pay for flexibility or convenience.
Continuous Pricing is Imperative for Remaining Competitive
Airlines commonly benchmark traditional fare structures by closely monitoring automated feeds of their competitors’ fare data from ATPCO and fare class availability from another source. They have systems which crunch massive amounts of data to detect pricing changes and competitive gaps versus their own traditional fare structure. Any gaps detected can then be closed in the next fare submission to ATPCO and/or by adjusting fare class inventory. In a historical world in which airlines solely distributed their fares and inventory to GDSs and travel agencies via EDIFACT, these fare changes were disseminated ubiquitously across all distribution channels. This uniform distribution was critical for maintaining market equilibrium.
The introduction of continuous pricing by one or more competitors disrupts this established process. When an airline adopts continuous pricing, it might file fewer fares with ATPCO, as the traditional fare class structure becomes less relevant. Data sources that airlines traditionally relied upon to understand competitor inventory might falsely indicate that a competitor is not selling a particular fare class when they are offering dynamic price points within that range. Since continuous pricing allows for prices to be offered outside of the traditional, industry-standard fare structures, these price points do not reside in the same systems used for benchmarking, leading to a lack of transparency in competitor pricing strategies.
This opacity can grant the first movers in continuous pricing a temporary pricing advantage. Not only do they benefit from the yield optimisation inherent to dynamic pricing, but they also gain a strategic edge by obscuring their pricing from competitors who have not yet adopted similar practices. This advantage stems from the difficulty competitors face in matching prices when they lack full visibility into the new pricing model's intricacies.
The concern over falling behind in pricing capabilities has been a significant motivator for airlines to invest in and accelerate the adoption of continuous pricing systems. The drive to maintain or regain competitive parity has led airlines to push for the rollout of these systems across both direct channels and indirect channels leveraging New Distribution Capability (NDC).
NDC is Imperative to Driving Both Price Optimisation and Competitive Positioning
Continuous pricing is not supported by EDIFACT. The implementation of continuous pricing relies heavily on closed loop systems, which are integral to the machine learning algorithms within offer management systems. A closed loop system in this context means that data on customer behaviour, booking patterns, and pricing effectiveness can be fed back into the system to continually refine and optimise pricing strategies. This feedback loop enables machine learning models to learn from real-time market responses, adjusting pricing dynamically to maximise revenue while aligning with consumer demand.
New Distribution Capability (NDC) supports this closed loop system by allowing for direct, two-way communication between airlines and the point of sale. NDC enables the collection of detailed data, including which offers were made or led to a sale, providing the rich data sets needed for machine learning to predict and adjust pricing effectively. This capability to gather, analyse, and react to data in real-time is crucial for the nuanced adjustments required in continuous pricing.
EDIFACT, on the other hand, only notifies an airline when a sale is made. The airline is not told when a customer makes a shopping request or what offers were made. The closed loop is therefore broken and there is not sufficient data to support machine learning.
Many airlines begin their continuous pricing journey by making the new, lower price points available in their own direct channels and any NDC channels, while continuing to offer their higher traditional fare structure through EDIFACT channels. Returning to our prior example, once these airlines start to close out the lowest fare class A in response to demand, passengers in EDIFACT channels only have access to the fixed fares in classes B and above, which are priced significantly above the continuous options available in direct or NDC channels at levels below class B. This is an uncomfortable position for these airlines to endure, as their pricing in EDIFACT channels exceeds their internal systems’ view of the market clearing price, costing them either lost bookings or opportunities to convert more sales at the market price. Thus, once an airline commits to continuous pricing and NDC, they are often highly motivated to sunset EDIFACT as soon as they can.
Conclusion
The transition to continuous pricing, supported by technologies like New Distribution Capability (NDC), is not merely an enhancement of existing systems but a fundamental shift in how airlines approach pricing and distribution. This evolution from rigid, stepwise fare structures to a fluid, demand-responsive model allows airlines to capture revenue more effectively, provide better value to consumers, and maintain a competitive edge in a fast-paced industry. As airlines continue to invest in and expand these capabilities, the path forward is clear: those who embrace continuous pricing and the data-driven insights it offers through closed loop systems will not only optimise their pricing strategies but also redefine their market position. The imperative for airlines is not just to adapt but to lead in this new era of airline retailing, where every price point is an opportunity for growth and customer satisfaction.
[1] “What Exactly is Dynamic Pricing in the Airline Industry?” by Justin Jander. Retrieved from https://pros.com/learn/blog/what-exactly-is-dynamic-pricing-airline-industry