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Revenue Management 101 for Loyalty Executives - Part One
What do loyalty and RM need to know about each other, and who should they talk to for the best results?
Readers of this blog from Kenya Airways or Dutch flag carrier KLM will know how recently landed Kenyan rosebuds are sold at the Aalsmeer Flower Auction. A large clock on the wall starts the bidding at a high price and the price falls until a bidder pushes the buy button. And for all it’s mystery, revenue management (RM) at those two airlines and every other is essentially the same process: if seats will not be sold at a higher price, the meter keeps falling until somebody pulls the trigger.
RM and loyalty are perhaps the two departments at airlines that have the most influence on an airline’s revenue. But at many airlines the two teams sit in separate silos, which is unfortunate because if they were able to work together more effectively the returns to the airline in terms of revenue growth would probably exceed the sum of their parts.
This article, the first of three, examines issues that revenue management and loyalty executives need to understand in order to work well together. It is based on webinar I did with AI Events and Mark Ross-Smith on 3rd August 2021. Click here for the video.
Click here for Part 2.
Click here for Part 3.
What do loyalty people need to know about RM?
Revenue management ensures that the right seat is sold to the right customer at the right time (all for the right price) to enable an airline to collect as much revenue as possible. There are three core things that RM does:
· Setting the prices (pricing), determining appropriate upsells, discounts and incentives (pricing strategy) and ensuring that they are available for sale (tariffs)
· Determining how many seats to sell at each price point (known in the trade as “assortment optimisation”) based on a demand forecast
· Ensuring that flights are ready for departure with the right number of seats available and the aircraft correctly balanced, a process known as inventory management.
RM tends to be extremely transaction-focused, selling one seat at a time. As far as a revenue manager is concerned, if there is only one seat left and Anna is prepared to pay more for it than Bob, Anna should get access and Bob should not.
What do RM people need to know about loyalty?
Loyalty also has the goal of maximising revenue for an airline, but based on repeat sales, distribution of the airline’s miles and points currency and status. Their view of the world is quite different from RM’s. Anna may be willing to pay more than Bob for a flight to Dubai at half term, but if Bob flies ten times a year in Club and wants cheap seats for his family, Loyalty could make a good case that Bob should get access because keeping Bob happy is better for the airline in the long term.
One of the main reasons that it is hard for RM to see Loyalty’s view here is that the industry selling platforms are not really geared up for looking at the lifetime value of a passenger. IATA’s One ID should solve this problem but is too far in the future to have any impact for today’s RM and Loyalty teams.
Loyalty wonks seeking to work better with RM will find it helpful to bear in mind the goals of One ID and frame their collaboration in terms of realising these benefits earlier. RM boffins seeking to work better with Loyalty could do worse than getting their heads around the idea of lifetime value.
While RM have fares and inventory in their arsenal of revenue growing tactics, loyalty have miles and points. These are distributed to travellers both directly as a reward for flying and indirectly as third-party retailers participate in the programme by using the airline’s currency as a sales incentive. The key reason that people love to collect airline loyalty points is that travel, especially in premium cabins, is extremely aspirational and memorable in a way that spending the same reward on groceries is not.
Modern miles and points are effectively a currency for purchasing flights and any other services that the airline can make available. Banks, credit card brands, retailers, insurers and others pay good money for the points that they give to consumers. Loyalty and RM will find it helpful to make this a key point in their discussions – these days, a seat paid for with points is as good as a seat paid for with cash.
One final part of the loyalty product which it is easy for RM to underestimate is status, typically earned when people pay cash for seats, supporting RM in the process. While many passengers will indeed book the cheapest airline that flies the route and time they require there are a significant number who will pay more to retain their gold or silver card, or enjoy the benefits like lounge access. The effect is an increase in demand which raises revenue in four ways:
· More seats being sold (or as we say in RM, a reduction in spoilage costs)
· Some seats being sold in higher fare classes as assortment optimisation accounts for the higher demand
· There may be an opportunity to charge higher fares for some specific market segments at some specific times
· A multiplier effect combining all of the above.
Who should loyalty talk to in RM?
As well as pricing, demand forecasting and inventory teams it is common for RM to also hold a number of support functions, such as reservations control, systems development and revenue integrity. Sometimes some RM teams like to see collaboration with other departments as purely a technical matter, something that is more about making different IT platforms work well together rather than the tactics and strategy that will raise revenue. My top tip for loyalty teams seeking to make the most out of their collaboration with RM is to understand this and make sure that they work with every part of RM to get the right conditions in place for loyalty to get the best possible access to seats. More on that next time.
How does loyalty get more seats?
Is it better to sell seats through the loyalty channel or the revenue channel?
How can loyalty managers avoid devaluations?
What RM data supports the loyalty process?
What loyalty data supports the RM process?
How can RM and loyalty use data to work closer together?
oliver AT ransonpricing DOT com