Insight and analysis 2013

Insight & analysis in 2013
From the Knowledge Centre
© Ranson Pricing Ltd 2013 1!
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TABLE OF CONTENTS
These articles were written by pricing expert Oliver Ranson and published on
ransonpricing.com during 2013.
Page 2
You wait all this time and three come along at once
Originally published in September
Page 5
Are you over-dependent on pricing technology? Take our test to find
out…
Originally published in September
Page 7
Moving away from the market price
Originally published in November
Page 10
Is pricing an art or a science? Three things revenue managers must
know
Page 12
Off the rails? Pricing strategy for UK railways

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YOU WAIT ALL THIS TIME AND THREE COME ALONG AT ONCE
It is well known among Londoners that when you wait a long time for a bus
three will arrive at once.
The problem, called “platooning”, is caused when a small delay at one stop
creates time for more passengers to gather at stops down the road. Since
passenger boarding takes a large amount of time the first bus spends longer
picking up traffic than the second and third, who eventually catch up.
Airlines have been waiting many years to make good profits as intense price
competition makes this industry one of the hardest in which to make a strong
return. Along the way they have embraced e-commerce and adopted ancillary
models but these alone have not been enough to drive significant profitability
improvements.
But just like the proverbial bus, three new pricing opportunities have come
along that promise to provide a strong boost to revenue for airlines that adopt
them. But unlike passengers waiting for a bus, airlines can jump on all three at
once.
The opportunities are summarised in Exhibit A below.
Opportunity 1: proclivity analysis, using analytical techniques to identify
regular trends and patterns in buying behaviour.
Airlines have been forecasting demand in order to understand trends and
patterns in buying behaviour for years. But such analysis can be taken further
in the pricing field to answer three important questions:
i) How should I segment my market?
ii) When should I have a sale?
iii) Which distribution channels should I use?
Market segmentation is certainly not new in the travel industry and traditional
advance purchase or change penalty controls achieve segmentation nicely.
But where proclivity analysis comes in handy is to tailor the controls to fit
nicely to each individual market. The trick is to adopt a hypothesis-driven
approach, testing a variety of controls over time and a number of distribution
channels to evaluate their impact on your revenue performance.
Sales certainly are not a new phenomenon either. But proclivity analysis can
be extremely helpful when determining whether or not a sale has been a
success and if the sales themselves alter customer behaviour. This in turn
informs the airline’s entire promotion strategy.
Similar techniques of behaviour analysis can also help an airline determine
which distribution channels each of its pricing products are best suited to.

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Opportunity 2: frequent flyer programme-driven pricing (FFP, a loyalty
scheme)
Texas International Airlines launched their frequent flyer programme in 1979,
offering passengers the opportunity to earn and burn airmiles. Nowadays
almost all major carriers offer their own loyalty schemes.
As a consequence airlines have been able to acquire a large amount of data
on the purchasing and flying habits of individual members. Airlines can
potentially use this data to develop personalised promotional fares for their
members.
Ranson Pricing identifies three categories of scheme members for pricing
purposes:
i) High frequency flyers
ii) Regular passengers
iii) The long tail
High frequency flyers are those who take many trips over a short period of
time. Their itineraries may be similar or widely varied and the airline should
have good data that can be used to tailor pricing products accordingly.
Regular passengers fly on the airline over many years but may take only one
or two trips a year. Once again the airline should have plenty of good data
that they can use to tailor personalised pricing products.
The long tail represents those FFP members who have not taken many flights
with the airline but who nevertheless are members of the loyalty programme.
Traditional pricing mechanisms including sales and promotions may remain
the best mechanisms for serving these individuals.
At Ranson Pricing we believe that developing tailored pricing products
through proclivity analysis on FFP data can potentially be extremely valuable
to airlines. Visit our Pricing Strategy Toolbox page or contact us to find out
more.
The one hindrance may be the distribution market. But depending on
individual circumstances airlines may well find strong cases for abandoning
full content agreements in light of the opportunities analysis on FFP data
presents.
For extremely bold carriers, there is a third opportunity to grasp that promises
to deliver vaster revenue increments than ever before. This is alternative
distribution.

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Opportunity 3: alternative distribution
Mobile technology has glued many passengers to their phone screens.
Printing boarding cards to the screen may be only the beginning of the airline
mobile revolution. There may be great potential for airlines to provide more
services through mobile channels, potentially entirely bypassing traditional
distribution providers.
For carriers who may not want to take the risk of abandoning GDS yet there
are possibilities for airlines to shift towards opaque pricing models through
third parties. This allows an airline to avoid incentivising their direct
competitors to cut fares in response.
Exhibit A: three pricing opportunities for airlines

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ARE YOU OVER-DEPENDENT ON PRICING TECHNOLOGY?
Take our test to find out…
Technology vendors are keen to offer complex and expensive IT systems to
address pricing challenges. It is easy to get drawn in to these charismatic
initiatives without knowing whether or not you are effectively balancing other
aspects of your organisation’s pricing performance against the technology’s
requirements.
Ranson Pricing has created a short quiz to help determine how well you have
balanced your pricing strategy and your pricing technology.
Resource allocation
Question 1: What proportion of your management time do you devote to your
pricing and revenue technology challenges compared to strategy and
operations?
a) much more
b) about the same
c) much less
Question 2: What proportion of your wage bill do you devote to your pricing
and revenue technology specialists compared to strategy and operations?
a) much less
b) much more
c) about the same
Question 3: What proportion of your consulting and technology spend do you
devote to your pricing and revenue technology specialists compared to
strategy and operations?
a) about the same
b) much more
c) much less
Question 4: What proportion of your pricing specialists spend relatively more
of their time using pricing technology rather than building their own models?
a) much more
b) about the same
c) much less
Planning
Question 5: Are you more inclined to offer promotions:
a) when demand materialised is less than demand forecast?
b) in accordance with a pre-determined strategy based on customer
behaviour analysis?
c) a roughly even mixture of the two above?

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Question 6: Are you more inclined to experiment with your pricing:
a) through adjusting availability of each inventory class?
b) through adjusting the restrictions associated with each pricing product?
Question 7: Do you institutionalise knowledge primarily:
a) as part of a demand-optimisation tool?
b) as part of a bespoke pricing strategy tool?
Knowledge diffusion
Question 8: To what extent do other pricing stakeholders in your organisation
(e.g. Sales & Marketing) understand how prices are determined?
a) a great deal
b) somewhat
c) not at all
Question 9: How much training is required to use your organisation’s pricing
technology?
a) more than a week
b) between three and five days
c) between one and two days
Tools & analysis
Question 10: What proportion of your pricing tools and analytical techniques
are developed in-house?
a) more than 50%
b) more than 25%
c) less than 25%
Scoring guide
Question 1 a) +9 points, b) +3 points, c) 0 points
Question 2 a) 0 points, b) +6 points, c) +3 points
Question 5 a) +5 points, b) 0 points, c) +2 points
Question 8 a) 0 points, b) +1 point, c) +5 points
Question 9 a) +5 points, b) +1 point, c) 0 points
Question 10 a) 0 points, b) +2 points, c) +5 points
How did you score?
36 or more: diverting more resources to strategy might be worthwhile
15 to 35: it looks like you have a good balance of technology and strategy
14 or less: diverting more resources to technology might be worthwhile

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MOVING AWAY FROM THE MARKET PRICE
A job advert proudly stating “salary: competitive” probably means “salary: OK
but a bit disappointing”. In the same way companies basing their pricing
entirely on competitive analysis will experience lacklustre revenue
performance.
Pile high and sell cheap works in some cases but in industries where revenue
management principles apply it is essential to move beyond the “market price”
approach to something better.
Exhibit B: pricing strategy evolution
Moving to a willingness to pay approach: Three pricing strategy models
Exhibit B above shows how companies seeking to optimise their pricing can
move between three pricing models to boost revenue first by basing their
pricing on so-called proclivity (behaviour) analysis and then adopting a utility-
driven approach.

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Businesses traditionally set prices based on how they perceived their product
to be positioned in the market, represented by the red “Benchmark” model in
the chart. There are three possible outcomes to this approach:
i) Premium price when one product is considered better than another
ii) Match a competitors price when products are considered the same
iii) Undercut when one product considered not as good another.
Whilst easy to implement this method does not lead to effective market
segmentation and the associated benefits.
But thanks to progress and investment in business intelligence, loyalty
schemes and IT equipment firms now enjoy deeper understanding of how
their customers buy a product than ever before. Standard practice now
involves behaviour-driven pricing.
Under this approach, represented by the orange “Behaviour” model in the
chart, organisations conduct so-called conjoint analysis to determine
attributes of a product that customers value and then set different price levels
on the basis of measurable indicators of these attributes.
Examples include time of purchase, quantity bought, sales channel and
product standard. Once these indicators have been identified companies can
trial various initiatives to calibrate their pricing strategy to market behaviour.
But neither the “Benchmark” or the “Behaviour” models are particularly good
at indicating what specific customers are willing to pay for a particular product
or service. As a result there will be many customers who pay much less than
they might otherwise do, representing an economic loss to the business.
To achieve further revenue boosts beyond the behaviour-driven models,
pricing practices need to adopt more advanced utility-driven pricing,
represented by the green “Utility” model in the chart.
Reach deep into a customer’s wallet: Key elements of utility-based
pricing
“Utility” is a bit of an abstract concept and is difficult to measure directly. But
valuable insights can be gained with the aid of three ingredients:
i) A “utility function”
ii) A “risk-adjustment” factor
iii) Analysis of company data.
The utility functions are a series of mathematical models proposed by
economists to indicate how buyers set preference between specific goods and
services. In a utility-driven pricing model each such model needs to be risk
adjusted to account for the fact that a consumer may not actually find that the
product or service meets their needs.

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Both utility functions and risk-adjustment factors can be calibrated through
analysis of company data and setting in place a series of trials to gauge
market reaction, just as would be done when a company moves between the
Benchmark and Behaviour approaches.
Changing the market: Companies should not be afraid to take the lead
Organisations setting prices under the “Benchmark” model where this is the
market practice may almost by definition find it extremely hard to see the case
for moving to the “Behaviour” and “Utility” models.
In order to secure buy-in from relevant stakeholders Ranson Pricing
recommends a step-by-step approach, putting in place small initiatives and
monitoring the revenue impact to show reluctant stakeholders that
experimenting with pricing initiatives helps them meet their own revenue
objectives.
Organisational hurdles: Moving between the models can be difficult
Moving between any of the three models is a difficult process for many
organisations. Standard practice, existing skillsets and inertia in the face of
change present significant obstacles to overcome.
Ranson Pricing perceives three interlinked opportunities to jump over these
hurdles: organisational, strategic and human capital.
The first opportunity is for companies to adopt organisational structures that
recognise the role of pricing in an organisation. Pricing must no longer be a
subsidiary of marketing or sales but a standalone commercial unit.
The second opportunity is for companies to focus on pricing at the strategic
level. Where the executive management team are focussed on pricing
strategy, the company’s management have a strong incentive to ensure that
their own initiatives complement those of the pricing department.
Finally, pricing must be seen as a profession in it’s own right. The
organisation must recruit, motivate, retain and promote talented pricing
specialists with incentives to match their contribution. Ranson Pricing would
be surprised if at a mature pricing organisation top analysts were
compensated any less than top sales professionals.

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IS PRICING AN ART OR A SCIENCE? THREE THINGS REVENUE
MANAGERS MUST KNOW
It seems to be fashionable these days for pricing strategy and revenue
management professionals to call themselves “scientists”. But is pricing really
a science or is it more of an art? Ranson Pricing believes that it has a little bit
in common with both.
We caution against an especially strong emphasis on science due to the old
adage “to blind with science”, which refers to cases where one person
deliberately confuses another with a sequence of complex words and facts.
Key issue 1: The scientific method is easily applied to pricing strategy
The classical scientific method formulates, tests and modifies hypotheses.
Measurable and objective criteria, experiment and observation are the
cornerstones of this approach.
This is certainly a sound approach for pricing professionals to take for three
reasons:
i) Pricing initiatives can be tailored to each individual market’s requirements
and a hypothesis-driven approach establishes clear criteria to determine
whether or not a particular initiative was a success
ii) Deep diving into data and rigorous analysis can help identify trends,
patterns and opportunities to boost revenue that would otherwise not be
visible
iii) Observation and measurement of market changes in response to pricing
initiatives informs future business cases and helps convince stakeholders to
buy-in.
So pricing strategy clearly has some common elements with science, or at
least the scientific method.
Key issue 2: Selecting the initiatives to test and performing the
experiments is more of an art
Whilst rigorous analysis can help identify potential opportunities and the costs
and benefits of each, determining precisely the right path to follow remains
firmly in the realm of the management decision and is much more of an art
than a science.
Budget and capacity constraints, economies of scale and a business’ existing
capabilities also need to be accounted for when determining the right path to
follow and there inevitably comes a point where judgement rather than
analysis comes into play.

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Pricing specialists must bear these issues in mind when developing their
strategies, and this is clearly much more of an art than a science.
Key issue 3: Analysis needs to be presented to non-specialists to
achieve consensus
Sound pricing is much more about delivering commercial results than
academic concepts. Pricing strategists must operate with non-specialists and
make convincing cases to secure their support. When it comes to pricing
strategy, consensus is extremely worthwhile.
Accordingly a key skill for pricing professionals is the ability to set out their
business cases, experiments and discoveries in terms that are easily
understood across the business yet convincing. And this is clearly much more
of an art than a science.
Physicist Ernest Rutherford famously said that “an alleged scientific discovery
has no merit unless it can be explained to a barmaid”. Perhaps the best
indicator of whether or not a pricing strategy is truly brilliant is when even
customers paying a premium understand and even agree with it!

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OFF THE RAILS? PRICING STRATEGY FOR UK RAILWAYS
Last month the Department for Transport in London (DfT) published “Rail
Fares and Ticketing: Next Steps”. According to this document the government
are seeking to blend the best elements of market forces with the best
elements of regulation to “give passengers a better, more modern and more
flexible deal on fares”.
Fine sentiments, and many elements of the DfT’s strategy are commendable.
But Ranson Pricing believes that the DfT falls short in several regards and it
will take a bit more work to get rail pricing in the UK fully on track.
Advance fares: A great success with opportunities to improve
The DfT rightly note that Advance fares, which offer passengers booking one
day or more ahead of travel and for a specific service the opportunity to enjoy
a significant discount on the more flexible tickets, have been a great success.
Some operators, typically those operating longer routes, offer a wide range of
these fares.
In addition to increasing the volume of discretionary journeys and allowing
some passengers to pay less for their rail travel the Advance fares allow
operators to effectively spread demand across journeys and classes of
service (first and standard) to manage passenger flow and minimise
overcrowding.
The DfT state that they are considering allowing operators to sell Advance
tickets up to between ten and fifteen minutes prior to departure. Currently
these fares can only be purchased up to 23:59 the day before. Ranson Pricing
welcomes these initiatives and has identified some further opportunities to
expand and liberalise the Advance structure.
Opportunity: Flexibility to change and cancel
Currently Advance fares can be changed for a penalty of GBP 10.00 plus the
difference in fare for the new journey. No refund is issued if the passenger
decides not to travel.
Ranson Pricing believes that there may be scope for operators to offer a
variety of flexibility options with some tickets offering very little flexibility and
others offering much more.
These need not necessarily be under the same model as airlines, with higher
fares offering progressively more flexibility. For example whatever the fare
level passengers might be given the option for a surcharge (which could vary
by the price of the fare purchased) to pay a premium for right to change or
refund.

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The key challenge in this field will be communication to the market, as DfT
consider that passengers do not fully understand the current fare structure.
However at Ranson Pricing we believe that this should be achievable and it
would be unfair to cause some passengers to lose out on a potential benefit
simply because it is more complex than the current arrangements.
Flexible tickets: Price caps may be unsustainable in the medium to long
term
DfT has welcomed an initiative from train operators to cap prices for standard
class journeys at GBP 250 each way. Ranson Pricing is concerned that
although these fares will not currently affect the vast majority of passengers it
is possible that political pressure to maintain price caps could lead to
economic inefficiencies in the medium to long term.
Season tickets: Some opportunities are not explored
DfT recognise that the existing ticketing and fares arrangements for
commuters, which rely on a variety of season ticket options, do not
necessarily reflect modern working practices. They acknowledge that there is
no cost-free way to adjust the options but at the same time are keen to ensure
that no commuters have to pay more for their season tickets.
Ranson Pricing believes that this approach is misguided and will neither
alleviate overcrowding or offer value for money. We consider that the DfT
should consider permitting a variety of season tickets in respect of
refundability, offering customers who need full refundability tickets that cost
more and a discount to those who do not.
Penalties: Regulations are outdated and unreasonably punitive in trivial
cases
Under the current regulations and byelaws passengers can suffer
unreasonable penalties for minor changes to journeys.
For example, a passenger holding a non-flexible first class Advance ticket
from London King’s Cross to Durham (254 miles, 53 chains) who gets off at
Doncaster instead (232 miles, 50 chains on the same train) could be required
to pay for an entirely new ticket from London to Doncaster.
The passenger could have paid between GBP 44.50 and GBP 188.65 for their
ticket to Durham. But the entirely new ticket the passenger must purchase at
Darlington would be GBP 205.00 in addition to the fare already paid.
If the passenger had originally purchased a ticket to Darlington then they
would have paid between GBP 44.00 and GBP 186.70, marginally less than
the original fare paid. Refusal to pay for the new ticket could result in the
passenger getting a criminal record for being unable to show a valid ticket on
demand.

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In case the passenger stayed on the train to Durham when ticketed to
Darlington the penalty would only be a ticket from Darlington to Durham at
GBP 10.40. So passengers alighting earlier than their ticket validity are
penalised a great deal more than passengers alighting later, which is clearly
unfair.
Accordingly Ranson Pricing believes that the existing regulations and byelaws
covering penalties, which date largely from a time before Advance tickets
were introduced, are out-dated and need to be reformed.
Such reforms would be fully aligned with the DfT’s stated objective to avoid
“squeezing more revenue out of regulated fares” and could only benefit
passengers.
Potential solutions include:
i) Collecting the difference in fare between that already paid and the price of
a new ticket, perhaps plus the standard change penalty, currently GBP 10.00
ii) Introducing a fixed surcharge, perhaps based on a zone system to keep it
simple, for passengers alighting early – the surcharge could potentially vary
by time of day.

Insight and analysis 2013

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