Potential customers for a product or service can be segmented into valuation groups. High valuation groups are willing to pay more for the product or service, while low valuation groups are only willing to pay a lesser amount for the same product or service. This presentation provides a basic background on yield management through customer segmentation, and a hands-on example of modeling airline customer segmentation using Excel.

1. PRICING ANALYTICS
Segmenting Customers to Maximize Revenue

2. Customer Segmentation
•Customers can be segmented into value groups in some markets
•High valuation groups are willing to pay more for a product or service
•Low valuation groups are only willing to spend less for the same product or service

3. Airline Customer Segmentation
•Older method used Saturday night stay to separate leisure and business passengers
•Modern methods use advance purchase time as a primary discriminator
•The later a passenger purchases a ticket, the more they’re willing to pay

4. Example: Malaysia Airlines Flight 19
•Maximize revenue on MH Flight 19 (Amsterdam to Kuala Lumpur)
•Surveyed 2% of market (10 people) on their valuation of flight
$463
$732
$569
$701
$457
$746
$719
$607
$758
$685

5. Example: Malaysia Airlines Flight 19
•Valuations effectively the same as points on the demand curve
•Calculate demand by finding number of people who would buy tickets at each price point
$463
$732
$569
$701
$457
$746
$719
$607
$758
$685

6. Enter fare valuations from passenger survey

7. Enter demand summing formula: =COUNTIF($C$2:$C:$11,“>=”&C2)
Accept formula

8. Select handle at bottom right of formula cell, then drag down

9. Enter market adjustment formula:
=A2*50 Accept formula

10. Select handle at bottom right of formula cell, then drag down

11. Select cells containing demand and price data

12. Choose “Scatter With Only Markers”

13. d = a - bp
Right-click one of the data points Choose “Add Trendline…”

14. Select “Linear” Check “Display Equation on Chart”
Click “Close”

15. a
b d = 838.9 – 0.7p

16. Enter guess for optimal single price

17. Enter demand curve formula: =838.9-0.7*E14
Accept formula

18. Enter total revenue formula: =E15*E14
Accept formula

19. Launch Excel’s Solver tool

20. Maximize Revenue
Ticket Price Choose GRG Nonlinear solving method
Click “Solve”

21. Click “OK”

22. Optimized ticket price: $599 Optimized revenue: $251,340

23. Yield Management
•Goal: charge a set of customers more for the same product to increase revenue
•Ideal (from the airline’s perspective): charge rich people and desperate people more money
•Doing that’s illegal (at least in US and EU) – discrimination
•Legal method: yield management

24. Yield Management
•We need to find some variable that strongly correlates to how much a customer is willing to pay
•Airline example: how early a passenger buys a ticket before a flight
•Low-valuation customers (tourists, students, bargain hunters) buy tickets long before a flight
•High-value customers (business travel, emergencies, HBS alumni) buy tickets last-minute

25. Modeling Yield Management
•Incorporate two price points into our existing single-price model
•High-value customer demand formula (same as single price):
High Value Demand = 838.9 – 0.7 x High Price
•Low-value customer demand formula:
Low Value Demand = (838.9 – 0.7 x Low Price) -
High Value Demand

26. Enter guess for low price point Enter guess for high price point

27. Enter low price demand formula:
=(838.9-0.7*B1)-B5 Accept formula

28. Enter high price demand formula:
=838.9-0.7*B2 Accept formula

29. Enter low price revenue formula:
=B4*B1
Accept formula

30. Enter high price revenue formula:
=B5*B2 Accept formula

31. Enter revenue summing formula:
=SUM(B7:B8) Accept formula

32. Launch Excel’s Solver tool

33. Maximize
Total Revenue
Ticket Prices
Choose GRG Nonlinear solving method Click “Solve”

34. Click “OK”

35. Optimized ticket price for low-value passengers: $399
Optimized revenue: $335,121 Optimized ticket price for high-value passengers: $799
33% Increase

36. Capacity Constraints
•Current model assumes an unlimited number of seats on airplane
•Need to add a capacity constraint to accurately model pricing
•Aircraft (Boeing 777) holds 341 passengers

37. Enter total # passengers formula: =B4+B5
Accept formula

38. Restart Excel’s Solver tool

39. Click Add button

40. Total passengers
Less than/equal to
Aircraft capacity: 341 Click OK

41. Click Solve button

42. Click OK button

43. Optimized ticket price for low-value passengers: $711
Optimized ticket price for high-value passengers: $955