How high should reward prices go?

A worked example from Virgin Atlantic

Last week I was discussing dynamic award pricing with colleagues on Chris Staab’s webinar “Revenue Management & Loyalty: Friends or Foes?” – you can watch it for free here.

The topic of the moment was about airlines who make all their seats available for purchase with points.

I argued that having reward prices that are unrealistic for the majority of frequent flyers will ultimately put people off the programme. My idea was that after a certain point prices just look ridiculous. The airline will be better off switching off reward availability rather than making their programme look silly.

During the webinar an audience member asked how airlines could find that point. I said it should be linked to customer behaviour – a frequent flyer actually travelling regularly on a route should expect to be able to make a redemption.

The way it came over on the webinar was not quite right. After thought I would like to set my principle as follows:

The highest price for a return pair of reward seats should, in my opinion, represent the miles earned on ten trips in the same cabin, without a co-brand card.

When dynamic pricing proposes price points above this limit, I would switch off availability if I was running the show.

In today’s edition I take a look at Virgin Atlantic’s dynamic pricing of it’s reward seats.

I find that many destinations that look expensive at first glance, such as California, have reasonable availability with my 10x rule in mind. This means that by using dynamic pricing Virgin Atlantic is rewarding many of their most valuable frequent flyers.

However I also find that some destinations, such as Cape Town, still look entirely unfeasible with points and should be switched off almost entirely.

A few data points

I used Virgin Atlantic’s online points calculator to figure out how many miles and Gold member would earn on a return trip in each cabin, at the non-flexible fares. I did not require purchase with a co-brand credit card. My thinking is as follows: