The past is less and less a faithful mirror of the future
Revenue management & Pricing - today and tomorrow: interview with Laurent Lebard, Expert in Revenue Management, Co-founder & CEO at YieldIn
by XXL Solutions (XXL), 24th May 2018
In the digital world RM has become even more important than before in terms of revenue creation and optimisation. Roles of sales, distribution and requirements for revenue management and pricing are changing as a result. The innovators will be the ones to succeed in terms of revenue optimisation in the future, and others will fall behind.
In this interview, we discuss a number of prevalent questions for revenue management and how they can be addressed on the systems side - relevance of historic data, forecasting demand in the current dynamic environment, changing customer loyalty, the role of innovation and why top management needs to get involved to get their macro vision translated into the RM micro vision.
“Whilst direct distribution increases, the role of RM has become even more important than before in terms of revenue creation and optimisation. It is important that this is realised by top management and other departments. Ideally, there should be joint meetings discussing the strategy. And RM would become more active and a driver in terms of commercial strategy whilst it often has been left alone focusing on their analytics. This led to silo thinking and diverging objectives for sales and other areas. The common entity is the customer, and the customer cannot be dealt with in silos.”
XXL: Could you remind us about the goals of Revenue Management?
LL: RM is all about proposing the right price for a customer at the righ1t time and the right place in order to optimize the company revenue.
XXL: How does it work?
LL: The traditional method is to use the past historical data in order to forecast the future and decide the optimal price for any flight at any time.
XXL: Is it easy to forecast the demand?
LL: Less and less. Low Cost Carriers, online agencies and and Internet facilities have disrupted the markets and give more control and transparency to the customer. Today customers compare all the airlines, all the prices, all the routing options. Start ups such as hopper try to predict price developments to help customers take better decisions when to fly and buy. And they try to take away customers from airlines in that way.
XXL: Customers are less faithful nowadays, less captive. Does it have an impact on RM techniques and solutions?
LL: Yes indeed. The past is less and less a faithful mirror of the future. Customers are volatile, at least leisure ones, but even increasingly business travellers, and in case of strong competition, prices can be hysteric, going down so fast and deep, with lots of promotions creating uncertainty of how to get the best deal. In addition, customers get more experienced in terms of what is included and what isn’t, and are happy to create their own personal flight experience, buying the service they like or just going for the basic experience.
XXL: How can RM systems adapt to that uncertainty?
LL: RM solutions should be more reactive and flexible, by adding some more pinches of tactic and strategy. And they should include more current data sources, as well as look at the total investment rather than just looking at flights and ignoring optional services in the total calculation. XXL: What do you mean? Can you explain?
LL: RM is a science which uses mathematics and microeconomics in order to optimize the revenue of any single flight. However it is not transparent. Most of the time the top management is not aware about how it works or why the prices are so high or so low. And current data, one2one pricing as well as revenue from optional services and priorities in terms of profitability have been ignored.
XXL: Is that really an issue?
LL: Yes it is. The vision of the top management is a macro vision and the optimization of flight date revenue depends on a micro vision. It can lead to misunderstandings. I remember I received the same day a call from one shareholder to complain the prices for Geneva London were too high while the CEO called me to ask me to increase the prices on the same route same period.
XXL: How can that be possible?
LL: RM is complex, with algorithms behind which require a mathematical background and are often difficult to understand. In addition, it does not work like a recipe, ie you do X and the outcome will by Y. There are too many external influences, competitive activities, ease of booking, economic environment etc. Often revenue, market share and profitability targets are blurred, and the impact is difficult to estimate.
The RM department may not be transparent enough. Our systems are complex. On the other hand, Top Management is not always clear about what it really needs, asking one day to increase Yield, and three days later complaining that we are too expensive.
XXL: What do you recommend in order that RM becomes less intricate and closer to top management objectives?
LL: The RM team should clearly define their strategy and explain and discuss with its management each market strategic situation, customer mix and scenarios for action. With Top Management and the commercial department, they should agree on some sound and achievable objectives for each market and periods in terms of Load Factor, Yield and Market Shares. RM should then demonstrate clearly what tactics it will use in order to achieve the objectives for each type of flight. -
Whilst direct distribution increases, the role of RM has become even more important than before in terms of revenue creation and optimisation. It is important that this is realised by top management and other departments. Ideally, there should be joint meetings discussing the strategy. And RM would become more active and a driver in terms of commercial strategy whilst it often has been left alone focusing on their analytics. This led to silo thinking and diverging objectives for sales and other areas. The common entity is the customer, and the customer cannot be deal with in silos.
XXL: What do you mean by each type of flight?
LL: In order to simplify, flights are categorised according to their revenue potential. Top management and key decision makers for different parts of the marketing mix should be part of the discussion and take responsibility for the overall strategic direction for RM , in line with an overall strategic direction to be decided.
This includes questions such as how aggressive to be versus competitors, whether market share or profitability are more important, which different strategies to test etc. Everyone needs to understand the implications, best and worst cases. And RM analysts’ insight would then be used for the overall strategy, and they would be able to develop their tools so that they can react fast in line with this strategy.
XXL: Is that easy? Possible?
LL: No it is not easy and usually time consuming. Most of the time traditional RM systems take a certain lapse of time to detect some changes in booking patterns and may react late. And for most systems, there is no simple dashboard for management to be able to follow and be alert with regard to certain activities.
LL: Because they are more centred on internal data like sales and revenue pattern than on external signs on the market, like competitor prices or demand pressure. RM systems should recognize faster any change in the market, anticipate its impact, and be able to adapt fast its strategy accordingly.
XXL: So how do you see the RM system of the future?
LL: They should be reactive and pro-active, able to analyze automatically whether they have to react to any market change at micro level, whether it is due to a competitor price move or to a change in demand pressure for a specific flight.
LL: They should also be flexible, able to react fast to a top management strategy change.
XXL: You mean to THINK “micro and macro” at the same time.
LL: Yes. At YieldIn we have created YRIS, a sophisticated RM concept that has been first designed for Airlines but which can be adaptable to other industries, like bus, train and later ecommerce. It reacts fast to any change in the market, but only if necessary.
Yris stands for yield revenue innovation systems, it is a modular approach to support revenue management strategies for airlines and other industries
XXL: Can you explain what you mean by “if necessary”?
LL: There are different ways of achieving revenue targets. High load factor increases awareness and the opportunity to sell optional services. It can also be a marketing objective at specific periods of time to gain new customers.
But you would want to avoid spilling revenue by being too price aggressive. You might realise that your strategy was right, and that your flight is full or forecast to be full in spite of higher prices to competition. Ultimately, schedule and other factors such as luggage allowance, ease of booking, loyalty program, brand preference etc do have an influence on the buying decision as well.
However, if your flight is forecast to be only 95% full, adjustment of prices can lead to 100% seat load factor and ultimately higher revenues, directly related to the flight / seat purchase as well as to ancillary revenues.
LL: Moreover, if one route seems to be below budget for a specific month, you can change the strategy for this route month by pushing a button, and subsequently increase the probability to reach targets.
XXL: Is it possible to analyse afterwards if RM strategies have been applied well and whether the price was always right?
LL: It is not easy and often not enough time is taken for this. But you are right, post mortem analysis is crucial. They should be compulsory and become a normal part of the daily routine.
XXL: How can you improve if you don’t check the quality of your work.
LL : You are right. RM is a tough job. When a market is going down, analysts can still do a good job but optimise revenue for losing less. However, management may think they don’t do well. This is why at YieldIn we have developed a tool that analyses all your past flight inventory, revenue, competitor price data and detect incoherencies, if any.
XXL: Don’t you think RM analysts could be afraid about such a machine that will analyse every decision they took?
LL : No! They can use it for better understanding, for improving, and justifying the quality of their work, for instance on difficult markets, prove they have done what they had to. If introduced and dealt with in the right spirit they should actually benefit from it as their work gets more recognition.
XXL: Do you work on other innovative features.
LL: Yes. We are doing some researches about how to use Web Demand for improving RM.
XXL: Can you tell us what you refer to with Web Demand?
LL: We simply measure the number of demand / requests and the number of sales in one day on the airline’s website for a specific flight date and city / destination pair. It can be used in order to challenge the forecast, or to compare the demand with last year. We can also compare demand for “themed” destinations, eg. beach holidays, to understand how much different pricing strategies might influence customers to shift.
XXL: How - comparing web demand pressure with last year - one can help you to set the right price?
LL: It does not help you directly. But let’s say you have for all April flights on one route 30% less demand than last year for the same capacities, and only 15% less sales conversion? What could you conclude?
XXL: Maybe that there is less demand and that in fact RM is performing well.
LL: Maybe; but at least you will understand that you are facing a flow issue, not an RM issue. You may have to work on other elements of the marketing mix before thinking about changing your RM tactics and strategy.
LL: We also compare web demand and sales curve shapes. During high season we can find out some routes for which the sales booking curve pattern is much earlier than the demand one, showing potential dilution. Being late in regards to last year may be an opportunity, not an issue.
XXL: I wish you good luck to convince a top manager that being late is an opportunity.
LL: You may be right but we think that if you show clear data and curves, top management is open for taking some computed risks.
XXL: I understand that you are working on a lot more innovative approaches, also related to ancillary revenue and personalised dynamic pricing. We look forward to seeing more in the future. Many thanks 6for this interesting discussion and wish you good luck for you future developments.
LL: You are welcome. It has been a pleasure to talk to you.
Laurent Lebard is Co-Founder and President at YieldIn. He has extensive experience in the area of Revenue Management in the airline, tour operating and hospatility as well as academic area.
Laurent was among others Director Revenue Management and Network for Flybaboo, RM Project and Analyst Manager at Club Med and Lecturer in RM, eCommerce and Business Mathematics at César Ritz Colleges Switzerland.
YieldIn is a team of revenue management experts, thought leaders and innovators who want to make revenue growth a general concern in the organisation. YieldIn offers software solutions, software development, consulting services and audit services in the revenue management area.
YieldIn is known for their innovative and tailor made approach and helped several clients in aviation, rail, travel and across other industries to overcome some of the deficiencies of the traditional revenue management systems, develop solutions for pro-active and dynamic management of ancillary services and other approaches to increase revenue.
Customers include XL Airways, Air Malta, Monarch Airlines.
Recognized by the French Research Ministry as JEI, Young Innovative Company.
XXL Solutions is a boutique consultancy which helps airlines, airports, other travel stakeholders, technology innovators and start ups to develop and implement a strategy for success and to turn digital into opportunities. Change management, digital transformation, turnaround management, commercial strategy, retail strategy, trend watch, customer experience, modern HR approaches and people engagement, mentoring and innovation workshops are a selection of services that are offered.
The latest innovation is the first ever curated digital innovation club, which is an effective way for organisations to support their transformation strategy. XXL Solutions also organise and participate in a number of events, including think future - Hamburg Aviation Conference, webinars, various strategic hackathons and travel tech con and other tech start ups and tech innovation events.