Personalized Pricing: The pricing of the future airlines!

"The growth of the network airline and the drop in the cost of computing has brought revenue management to whole new levels of sophistication." - Robert W. Mann

Gone are the days when the flight prices used to be based on flight lengths (longer the flight, more the fuel and maintenance costs) and government regulated. Today, a lot of factors – including the duration of your flight, the length of your entire trip, how far in advance you book, what day you book for and the airports served are fed into complex algorithms which ultimately decide the many different fares available on a single airline – even in the same cabin on the same flight.

Pricing Strategies have been disrupted in airline space many a time. When low-cost carrier concept came into existence, it took the entire market by storm. These airlines bare bone service as cheaply as possible and then charge extra for any frills on demand. To keep the prices low, they make smaller airports their hubs to save on the airport fee, use one type of aircraft (to reduce maintenance costs), make the whole cabin economy class and make seating ‘first-come-first-serve’ among many other things. And they can get even notorious to lower down the prices by charging extra for reserved seating and priority boarding.

Well, from the pre-decided hard pricing strategies the world of airlines has moved to a pricing system more akin to dynamically managed ‘airline revenue system’. Techniques like Expected Marginal Seat Revenue are some of the best ways to optimise the fares in real time, not only on a particular route but also taking into consideration revenue-generating opportunities across the network. This is why flying from London to Dubai may cost the same as flying to Mumbai via Dubai. Now, how these airlines know what to charge whom? For that, they use customer profiling and decide, by the destination, what type of travellers will be plying that route. For example, the famous leisure destinations, like Goa tend to be booked early by the leisure travellers for want of their choice of destinations and date/time for that location. So, the prices will be high early on and will adjust according to the market. Whereas on the business routes like Delhi-Mumbai, the rates will be lower early on to latch onto the leisure travellers who otherwise wouldn’t fly and charge higher to the business travellers who tend to book last minute.

Here comes the possibility of a new pricing strategy – Personalized Pricing. Airlines are now looking for the total value that a customer can generate for the airline, including revenue-allocated seats, meals, luggage etc. The airlines are currently testing a strategy that could customise the airfare pricing based on who is searching. These prices could take into account where you live, how often you fly and other personal information. But this comes with a caveat, privacy violations and wrong end user identification. Critics worry that this could lead to incorrect target prices as the algorithm will take into account the information of the person who is booking even if he is doing it for someone else.

Well, this might look like a distant reality but expect it to hit the ground running sooner than later.