Episode #0059 - Can an airline really sell a ticket for $1?

In this episode of Pricing College - we continue to look at revenue management.

You may have heard that airlines can sometimes sell tickets at very low prices - and that it makes sense.

We look into this practise here.

 

In today's episode, we want to dig into a very common question about revenue management is the classic idea is, can you really sell the last seat on an aeroplane for $1 and be profitable? This is the concept where you come running up to the flights about to leave the gear. You come running up to the desk and say, Can I buy a ticket? The question is, what price could it sell a ticket out and be justified and be profitable?

It's a good scenario to think about. Actually, we've asked a lot of pricing analysts and revenue analysts this very same question. A lot of them have said, No, it wouldn't be profitable. But, is that the case?

I think fundamentally the question we're asking here is, how much money can you make? What's the most profitable price you can sell that ticket for? If somebody comes running up and they're willing to pay $1,000 for it. Yeah, sell for $1,000. But if they're not, there is a price that you could charge them that would be much lower than the standard price. Potentially, if you would just sell it or just make a few extra dollars. You know the other thing to bear in mind here is that you would probably bother with additional costs. I suppose the two things I look at are the additional costs in selling that ticket to that person. Are they bringing a lot of luggage with them? Is it gonna be extra heavy? Or, are they're gonna consume food and drinks that would have a real cost that wouldn't have been consumed on the plane otherwise? Would it take extra fuel to fly this person? All these things, let's assume a few dollars here and there. But broadly speaking, not a huge amount. So you’d want the amount of the dollar price to cover that amount. The other thing I'd think about it in any way shape or form is if people know that they can buy tickets at rock bottom prices at the last minute, would it cannibalise your actual normal sales? would people not book tickets and just chance and run around buying a $1,000 ticket? Would they chance run and turn up gate 10 minutes before take-off and go I’ve got 10 bucks in my pocket?

I suppose those are all the key risks you'd have to factor in especially if you're offering last-minute flights for $1 that does kind of high risk for future sales. But thinking about that actual scenario in terms of, what it is? The plane is about to leave, it's already scheduled to go. The companies made a commitment to fly their plane. People are on the plane and you just happen to turn up last minute. Yeah, for sure if there's no one else ready to book, and you're selling it to $1. It's still at a profit. Because they wouldn't have got that $1 if you not have gone to the airline at that point in time. It's all about timing, it's about customer segmentation and it's about, Where you are at that point in time? What the strategy is of the airline? the price parameters of their strategy? What are their price bands? Are they willing to go over or under those price bands to get that sale? And this is all involved in strategic price-setting and what a pricing manager should contemplate. As Aidan identified those key risks, you've got to cover your costs, you've got to ensure that any price point isn't going to cannibalise future sales. But are you thinking now, in terms of making immediate revenue? Or, are you thinking sustainably about safely making profitable revenue growth in a safe way over a 3-6-9 month period, and further.

I think there are two other things I probably add about it. If you think about it, it's almost like a time expiring product. So it's almost like once the door on that plane is closed and it pulled away from the gate it's expired. You cannot sell that product or that seat, you can't sell it again. In theory, it's a bit like food that's expiring, or any item. Once you go into a supermarket in the evening, often you may get a great discount on some of the food. But you have to consume it that day for its passing it’s the expiry date. In reality, that's the way to think about the seat. The other thing I say that might make it more clear to people that it would be profitable to discount. Think about a business class seat. Let’s say a business class seat generally sold for $5,000. And somebody turns up with a minute to go when they're willing to pay $3,000. It is a huge discount. But it's still obviously very profitable for the company and to the airline. Clearly, it’s just money that they wouldn't have had. And it would easily cover the costs, the additional weight etc of that person. It makes a lot of sense that the big thing to watch out for, would it lower the quality if people knew in business class that other people were coming in and getting a much-reduced price than there were? would it annoy them?  would it stop them or would it almost think oh they're being penalised for booking early? They're being penalised for being loyal customers versus this last-minute person who just turns up? Those aspects you have to consider but ignore all those can make perfect sense.

I suppose that's what you've got to think of your brand. Your brand equity when you're setting prices and changing prices as part of a dynamic pricing strategy. Obviously, on top of that, there are going to be regulations and certain things that you can and cannot do. Maybe that isn't impossible to do that low in the airline's industry. But it's a scenario to think about. And I think there's a lot of businesses like last minute.com that have taken that idea of selling perishable goods. Sort of a later date last minute to make the most of inventory at a profitable price point. So obviously it's a concept that has done extremely well for businesses.

It is the bread and butter of revenue management. They're trying to maximise revenue for capacity-constrained services, this is a classic example. The other thing you’d be saying, a business or an airline should hopefully be selling all their seats. Otherwise, maybe their prices are too high or because of some other problems. In reality, they should not be every day. There should be, you know you're hoping to aim for 100% capacity on that flight. And if people knew that there was a very high chance they would get that ticket. Then it would start causing problems. The person is willing to turn up and pay $3,000. They've got that cash in their pocket. But at the same time, they also have to be willing to accept a lot of volatility. There's a high chance they could be stuck at the airport that night. In some way would you rather spend $5,000, you're a business person and know you'd make a meeting on a Monday morning? or spend $3,000 and be stuck in an airport over the weekend? There's a certain type of person that would in theory buy that ticket. It probably isn't as common as you might imagine.

So I suppose to know if a dynamic pricing strategy is correct for your business. Because a lot of other businesses outside the Airline industry are thinking about dynamic pricing revenue management. I think a key recommendation would be to diagnose your business, your commercial situation right now. Think about your customer segments, think about your brand and price positioning in the market. Then really test the pricing parameters of your current pricing model. Are they updated? Can you move the price ceiling or the price floors correct? Then start to test different price points, just to see what levels, you're getting more volume at more profitable price points and vice versa. All of this requires a good firm understanding of your pricing system and that requires some diagnostics.

I think that's it for me I think we're going to leave it with a call out. Whereby we're asking people if they would like to get analytics on their business or career. Reach out to us at taylorwells.com.au and sign up and you take advantage of that offer.

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