The Merchandising Evolution (and why NDC Matters)
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  • 1. The Merchandising Evolution (and why NDC Matters) John Thomas Global Aviation Head L.E.K. Consulting © L.E.K. Consulting LLC. All rights reserved.
  • 2. NDC  in  Ac)on  Topics !  The evolution of consumer expectations !  Merchandising’s potential !  Why does NDC matter? !  10 questions to ask about your ancillary strategy 2  © L.E.K. Consulting LLC. All rights reserved.
  • 3. NDC  in  Ac)on   How have consumer expectations evolved? Let’s go back to 2007… 3  © L.E.K. Consulting LLC. All rights reserved.
  • 4. NDC  in  Ac)on   The customer experience just seven years ago… Facebook had 12 million users (no mobile) 4   Mobile looked like this (no iPhone/Android) Amazon revenue was $15 billion (no Kindle, no Prime in most countries) 23 airlines reported global ancillary revenue of $2.5 billion (no 1st/2nd checked bag fees) © L.E.K. Consulting LLC. All rights reserved.
  • 5. NDC  in  Ac)on  Things have changed 0 250 500 750 Global PC / mobile device unit sales Millions of units PCs   Smartphones  /   tablets   12  11  10  09  08  2007   Information and purchasing capabilities are now personal and ubiquitous Source: IDC, Gartner 5  © L.E.K. Consulting LLC. All rights reserved.
  • 6. NDC  in  Ac)on  Things have changed People are getting information from peers and highly targeted ads 1,100 845 610 350 150 60 12 0 200 400 600 800 1,000 1,200 12  11  09   Facebook active users Millions of people (beginning of year) 10  08  2007   13   Source: 6  © L.E.K. Consulting LLC. All rights reserved.
  • 7. NDC  in  Ac)on  Things have changed E-commerce and personalized recommendations are mainstream 61 48 34 25 20 15 0 10 20 30 40 50 60 70 Amazon total revenue Billions of dollars 11  10  09  08  2007   12   Source: Amazon 7  © L.E.K. Consulting LLC. All rights reserved.
  • 8. NDC  in  Ac)on   Consumer expectations are changing too !  Too much information puts a premium on curation; offers come to me !  Omni-channel learning, trial, and purchase experiences !  Assume you’ll remember me !  Customization, menus, and targeted / personalized options and extras !  My price !   Information opaque and inaccessible; “know what you want and go hunt for it” !   Single channel for discovery and purchase !   Anonymity the norm !   Limited choices; accustomed to standard offers and a “one size fits all” experience !   One price TomorrowYesterday 8  © L.E.K. Consulting LLC. All rights reserved.
  • 9. NDC  in  Ac)on   We are caught in this seismic shift at a time of transitioning to being more B2C !  Much more direct B2C relationships with our customers !  Taking back control of selling to our customers even though some of that will still happen through 3rd parties !  Forced into B2C to reduce distribution costs and increase revenue effectiveness !   Heavy reliance on 3rd party distribution !   Focus was on marketing to customers not selling to customers TodayYesterday 9  © L.E.K. Consulting LLC. All rights reserved.
  • 10. NDC  in  Ac)on   As we shift to being retailers, traditional retailers are way ahead of us 10  © L.E.K. Consulting LLC. All rights reserved.
  • 11. NDC  in  Ac)on   Meanwhile, ancillary revenue has grown… 36 33 23 13 10 2 0 10 20 30 40 50 43   A  La  Carte   FF  /     Commission   Global airline ancillary revenue (estimates based on reported) Billions of dollars 13F  12  11  10  09  08  2007   Source: IdeaWorks, Ancillary revenue isn’t optional, it’s oxygen Global  total  net   income  is  expected   to  be  ~$12  billion   11  © L.E.K. Consulting LLC. All rights reserved.
  • 12. NDC  in  Ac)on   … and helped crown a new set of leaders 2.5   1.0   2.0   1.5   0.5   0.0   Top 10 airlines by economic profit, 2008-12 Billions of dollars 0.3  0.3  0.4  0.4  0.4  0.5   0.9   2.2   1.1   1.5   EP   ranking   ’03-­‐12   61   1   59   4   6   5   7   2   3   N/A   #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 Source: Capital IQ, Bloomberg, CompuStat, DOT Form 41, L.E.K. analysis EMEA   Asia-­‐Pacific   Americas   12   © L.E.K. Consulting LLC. All rights reserved.
  • 13. NDC  in  Ac)on   A vision of merchandised ancillaries 13   Right offer Right place Right person Right price Right time !   Room offered with OTA in booking flow !   Meal/seat sent to his mobile the day before / in airport Example We believe merchandising in this way can double ancillary revenue !   “John, a 35-year-old infrequent flier with us, visiting Disney World with his gluten-allergic infant” !   Discounted hotel room !   Gluten-free meal paired with empty adjacent seat, etc. !   Room offered at a discount to drive ticket purchase !   Meal/seat offered at premium (unless inventory high) !   Room offered during initial comparison shopping !   Meal/seat offered during check-in © L.E.K. Consulting LLC. All rights reserved.
  • 14. NDC  in  Ac)on  Why does NDC matter? Future new standards and tools enable powerful new strategies The freedom and power to change the game 14   Historically, legacy technology dictated ancillary strategy What should you be asking yourself before implementing the technology? “What should we do?” determined by “what can we do?” © L.E.K. Consulting LLC. All rights reserved.
  • 15. NDC  in  Ac)on   1) What is the overall strategic objective? !  Incremental revenue and profit? !  Customer experience enhancements? !  Rewarding and reinforcing loyalty? !  Reduction of core product cost through unbundling? !  Passenger behavioral changes? 15  © L.E.K. Consulting LLC. All rights reserved.
  • 16. NDC  in  Ac)on  2) Who is your customer? Customer segments (historical) Customer segments (today) •  Mostly male passengers, usually 34-55, who travel business itineraries Business Travelers •  High-income individuals, couples or families traveling for leisure High-Income Leisure •  Mostly male passengers, usually 34-55, who travel 20+ business itineraries p.a. •  Often business class passengers traveling alone Road Warriors •  Mostly male passengers, usually 34-55, who travel <20 business itineraries p.a. •  Economy class travelers more likely to travel with colleagues Occasional Business •  Male and female passengers over 55, who travel for leisure purposes exclusively •  Value-oriented, economy class passengers Retirees •  High-income individuals, couples or families traveling for leisure •  Travelers who value comfort, often on long haul flights High-Income Leisure •  Younger, tech savvy passengers under 30, traveling for pleasure, college, or job opportunities •  Value-oriented, economy class passengers Etc. •  Older individuals, couples or families traveling to visit friends and/or relatives •  Primarily middle-income, economy class travelers VFR •  Value-oriented travelers, particularly families traveling for entertainment or outdoor recreation •  Primarily middle-income, economy class travelers Package Vacationers 16   Young Singles © L.E.K. Consulting LLC. All rights reserved.
  • 17. NDC  in  Ac)on   3) Do you treat them as accounts? Do you understand their journey? 17   Boarding / take-off Planning Booking Managing Dreaming Inflight DeplaningAirport Hotel Transport Return journey Need states Destination -focused Frugal Practical Stressed Bored Excited Leisure passenger journey © L.E.K. Consulting LLC. All rights reserved.
  • 18. NDC  in  Ac)on   4) What does your brand stand forand what experience should you aim to create? 18   What customer experience will fulfill your brand promise? What do you aspire to mean to passengers? What do people associate with your brand today? © L.E.K. Consulting LLC. All rights reserved.
  • 19. NDC  in  Ac)on   5) What products and services should you offer? Repackaged B2C Airport Lounge Packages Family Traveler Packages Child Traveler Packages Business Traveler Packages Core  Product   Enhanced Mix of B2C & B2B “Window Shopping” (On-line stores) On-line Gambling 2   2   2   2   4   4   6   7   4   1   4   6   Enhanced B2C Internet On-Board In-Flight Entertainment Food/Beverage On- Board Upscale Amenity Packs 2   2   2   5   5   4   5   Core B2B IFE/Web Advertising 5   Core B2C Baggage Fees Booking over the Phone Confirmed Seat Assignment Fee to Stand by Ticketing Fees Miles Rationalization Unaccompanied Minor 2   2   1   1   1   6   7   1   1   3   Experience Packages 1   Product 2   Flight Experience 4   Airport Experience 6   Mileage and Status 7   Customer Service 5   3   B2B B2C  B2B   Enhanced B2B Enhanced Advertising Consumer Trials3   3   Enhanced B2C Premium Seating Lounge Access Priority Baggage Priority Security Priority Check In and Boarding Elite Status a la carte Mileage Purchase Trip Protection Insurance Repackaged B2C Subscription Services for Amenities FF Gaming Bundles Entertainment Packages Enhanced B2B Vacation Packages 2.0 Off- vessel On- vessel Core B2B Traditional Advertising Hotel Partnerships Mileage Redemption Rental Cars Financial Services 6   7   3   7   3   19  © L.E.K. Consulting LLC. All rights reserved.
  • 20. NDC  in  Ac)on   6) What costs a fee vs. what is free? What should you bundle together? Fully Bundled A la Carte Bundling of Ancillary Products / Services EnhancementsOffered Low High Merchandising Unbundling Enhancements   Bundle Optimization 20  © L.E.K. Consulting LLC. All rights reserved.
  • 21. NDC  in  Ac)on   7) How do you target, personalize, and price dynamically? 21   Merchandising engine © L.E.K. Consulting LLC. All rights reserved.
  • 22. NDC  in  Ac)on   8) How do you advertise and sell across channels? 22   !  Have consistency across all channels, both direct and indirect !  Think outside the box online !  Advertise differently than you sell !  Use channels for different things (exploration vs. sharing vs. problem-solving vs. impulse-purchases vs... ) © L.E.K. Consulting LLC. All rights reserved.
  • 23. NDC  in  Ac)on   9) How do you deliver without operational compromise? 23   Generally requires: !  Strong core operations to begin with (e.g., on-time performance) !  Simplicity through technology !  Training and tools for frontline staff !  A cultural shift and extensive communication !  The ability to measure and course-correct © L.E.K. Consulting LLC. All rights reserved.
  • 24. NDC  in  Ac)on   10) How do you turn product developmentinto a core capability? 24   To make this a competitive advantage, you need: !  A well-oiled new product development (NPD) process !  Measurement and metrics to conduct product portfolio optimization !  The structure, staff, and processes to manage the products !  Ongoing strategic investment in the technology © L.E.K. Consulting LLC. All rights reserved.
  • 25. NDC  in  Ac)on   L.E.K. has advised on nearly all marquis ancillary revenue implementations… 25   Client  example   Project  emphasis   Results #1  Full  Service  Carrier    in   Americas   #2  Full  Service  Carrier  in   Americas   #1  LCC   in  Americas   Major  Value-­‐oriented   Brand   l  Advised  on  fee  strategy  generaRng  hundreds  of   millions  of  dollars  in  incremental  revenue   l  Helped  airline  unbundle  their  services  to   maximize  $1.4B  in  potenRal  ancillary  revenue   l  Full  merchandising  strategy  development  and   implementaRon  with  an  esRmated  $1B  in   addiRonal  revenue  gained   l  World  class  product  improvement  and   industry-­‐leading  digital  interface   l  Increased  priority  service  offerings  to   aZract  high-­‐value  passengers   l  MoneRzaRon  strategy  of  extra  legroom  on   aircra[  resulRng  in    annual  profit  increase  of  > $150M   l  Developed  wide  variety  of  lucraRve  ways   for  customers  to  buy-­‐up  to  improve    their   customer  experience   Pioneering  Flag  Carrier*   l  Industry  leading  personalizaRon  of  the   airport  experience   l  Groundbreaking  strategy  to  moneRze  revenue   streams  on  back  of  new  fare  class  structure;   incremental  hundreds  of  millions  of  dollars**   l  Industry  leading  traveler  “opRons”  and   incorporaRon  of  upselling  and  loyalty   program  to  build  a  comfort  product  that  is   the  airline’s  most  valuable  feature   Major  European  Airline   Brand   l  Complete  brand-­‐equity  aligned  Ancillary  Revenue   strategy  and  execuRon,  leading  to   transforma)onal  economics   l  CreaRon  of  edgy  services  consistent  with   world-­‐leading  brand  proposiRon   © L.E.K. Consulting LLC. All rights reserved.
  • 26. NDC  in  Ac)on   …and is recognized as a world leader in Travel Ancillary Revenue 26   Strategic  Partnerships  NewsleZer   Partner  Brief   Istanbul, Turkey (2008) Los Angeles, CA Frankfurt, Germany Vienna, Austria (2009) Merchandising  Thought  Leadership  –     Sample  speaking  Engagements  and  Published  Work   © L.E.K. Consulting LLC. All rights reserved.
  • 27. NDC  in  Ac)on   Thank you !  Website: www.lek.com !  Email: j.thomas@lek.com !  LinkedIn: L.E.K. Consulting / John F Thomas 27  © L.E.K. Consulting LLC. All rights reserved.