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Chapter 4.2 Differential PricingGreg Koch

ObjectivesDifferential pricingWillingness to PayMarket SegmentsGoals of Differential PricingTraditional/ Restrictive StructureSimplified StructureImpacts of Pricing

Differential PricingPresent a range of fare product optionsAllows consumers to trade off price and restrictionsProducts geared towards different market segmentsBusiness travels willing to pay higher prices with no restrictionsLeisure travels willing to deal with restrictions for a cheaper ticket

Willingness To Pay (WTP)The Maximum Price any number of customers will all pay for a specified product or service.PriceQuantityQ1 Q2P1

P2

Market SegmentationRevenue is maximized by charging every customer a different amount exactly equal to their WTP Identify Different Demand GroupsNot practical to know the WTP for every customerInstead Customers are split into SegmentsSegments have similar characteristicsTrip purposePrice SensitivityTime Sensitivity

Goals of Differential PricingMaximize Revenue:Sufficient market segments Customers pay WTP amount Airlines get maximum amount from customersCheaper products allow people to fly who otherwise would notAvoid DiversionUse Service Amenities to attract Segments to paying a higher priceUse Change Fees, Advanced booking, Saturday night Stay to keep customers with a higher WTP from buying cheaper tickets

Traditional/ Restrictive Airline StructureTo Avoid Diversion:Service AmenitiesSeats: First, Business, Economy Class ticketsSeparation: Special Check in, Lounges, assigned seatsRestrictionsAdvanced PurchaseSaturday night StayCancellation/Change Fees

Simplified Structure2001 Dot Com Bust and Economic Recession reduced the willingness of Business Travelers to pay a premium for ticketsOnline Ticket Outlets made it easier to comparison shop for cheaper flightsIn Response the Airlines moved to Simplified FaresFewer Fare levelsOften the Saturday night stay restriction is removed

Impacts of PricingDifferential Pricing led to great profits in the 90s due Differential pricing theory remains valid and in use todayThe Simplified Fare Structure was originally adopted by low cost carriers increasingly legacy carriers have adopted it to reduce their losses in market share