Related Expertise: Travel and Tourism, Pricing and Revenue Management
Hotter-than-ever competition. Overcapacity. Commoditized offerings. Fickle customers comparing prices and products with mere swipes of their mobile screens. These and other forces are squeezing many travel and tourism players, putting unprecedented pressure on prices in some sectors and geographies. But the same forces are also creating new opportunities—because companies that achieve a competitive edge in pricing will see a magnified impact on performance.
Under these conditions, A Renaissance for Revenue Management in Travel and Tourism? is more crucial than ever. With that in mind, some players have begun experimenting with innovative techniques like personalized pricing and dynamic online repricing. But even before these advances deliver their full impact, companies still have a major opportunity to get more from P&RM.
The Boston Consulting Group’s recent survey of C-suite executives and P&RM leaders from multiple travel and tourism sectors suggests that P&RM counts among the most pressing topics on industry leaders’
Sure, some sectors—most notably, commercial aviation—have long used practices like dynamic pricing. For companies in these sectors, additional benefits from improved P&RM may fall in the 2% to 6% range—still a valuable opportunity. But in sectors where use of sophisticated P&RM practices hasn’t yet become standard—such as railways, cruise lines, and tour operators—deploying such practices can deliver a considerably larger advantage.
Yet mastering the complex art of P&RM isn’t easy. Success hinges on active involvement from stakeholders at all levels of the organization—from the CEO to IT system managers. As the company moves along the path to better P&RM, it can encounter a number of common pitfalls.
For instance, the P&RM team may not be attuned to the strategic direction defined by top management. Our survey findings suggest that many P&RM heads see less of an opportunity from improving P&RM than senior executives perceive. Companies in which the two groups are aligned on P&RM’s potential have a better chance of fully capitalizing on the opportunity.
Other companies fall into the “black-box” trap. In this trap, the P&RM team doesn’t have full visibility into how the P&RM systems they’re using operate. Consequently, those systems may not fully support the company’s objectives, its business model, or the competitive dynamics of the industry as these change over time.
To overcome these challenges, craft the right P&RM strategies, and ensure that those strategies are successfully executed, companies need a holistic, end-to-end approach to P&RM.
BCG’s P&RM blueprint—developed from the outcomes of 100-plus client projects across a range of travel and tourism sectors and geographies—is built on the understanding that to effectively manage their pricing and revenue, companies must address four crucial questions:
The BCG blueprint is designed to help companies answer these questions and identify changes needed to optimize revenue in their day-to-day operations.
In developing P&RM strategies, travel and tourism companies must weigh a number of considerations, such as which value drivers to maximize; how to define their competitive positioning; and which customers should be prioritized.
Choose the right value drivers. As many as 70% of our survey respondents said they base their P&RM decisions on how best to maximize load factor, occupancy, or other equivalent measures of capacity utilization—even at the expense of average price. In our experience, strategies aimed at maximizing RCU, which combines load factor and average price, deliver greater value. What’s more, companies that focus on improving total revenues across tickets and ancillary products sold are better positioned to capture the full value on offer in specific markets and customer segments.
The way a company is organized can influence choices about which value drivers to focus on. For example, companies with a strong sales function—one that has veto power on pricing or even full ownership over pricing decisions—may tend to focus on maximizing volume rather than RCU. Such companies may thus set prices that don’t capture the full potential of individual customers’ willingness to pay (WTP).
To help senior leaders make the right strategic choices, P&RM teams should provide dedicated reports showing performance on the full set of relevant metrics.
De-average your competitive positioning. Our survey results suggest that in sectors with commoditized products and scant opportunity for differentiation, companies tend to use benchmarking to determine their price positioning. Indeed, 90% of the P&RM heads in our survey who work in commercial aviation rely on benchmarking to set prices. Sectors with opportunities to more sharply differentiate their offerings, such as cruises and tour operators, are more likely to use a strategic approach, by basing their pricing on WTP.
Some companies have an opportunity to develop price positioning strategies no longer at high-level but for individual markets—such as a rail route or a cruise itinerary—and by taking an analytical, structured approach to capturing each market’s full potential value. For instance, they must factor into their analyses elements such as intensity of competition, cross-price elasticity, WTP, and the product’s quality service index.
To implement their P&RM strategies, companies need the right methodology—the set of algorithms and logical steps the organization uses to make decisions in areas such as price structure and dynamic pricing, promotions and personalization, and ancillaries and bundling. With the right methodology, all key P&RM activities are more likely to consistently deliver the intended impact on the final prices presented to customers.
In our experience, companies can boost value significantly by improving their pricing methodology for ancillaries and bundling. For instance, they can conduct more scientific analyses of differences in WTP. A good first step to unlocking this opportunity can be to deploy business intelligence tools and systems to better support ancillary and bundling revenue management decisions.
To systematically apply their selected P&RM methodology, companies need support from P&RM systems and tools—which must process vast volumes of data to inform day-to-day pricing decisions. The right system fit, along with appropriate system architecture, interfaces, and decision-support tools, can help.
Manage your P&RM system fit to company’s objectives and capabilities. Companies rely heavily on IT systems to manage dynamic pricing. These systems comprise sophisticated algorithms aimed at helping a company to optimize prices based on demand estimates and supply constraints. In some companies, such systems are more sophisticated than they need to be to maximize prices and revenue—and may even become too sophisticated for P&RM teams to use, given their current capabilities.
Using custom-built systems or customizing vendor-provided systems seems to help companies surmount these challenges. In our survey, 85% of respondents from companies operating such systems said they were satisfied with their P&RM performance and consider their dynamic pricing “strong.” Only 60% of respondents using an off-the-shelf system expressed the same sentiments.
To make sure that their chosen P&RM methodology will work as intended, companies must also activate organization enablers such as the following.
Experts who excel at pricing analysis or inventory analysis along with data science will bring the most value to P&RM teams in the future.
Given the tough conditions reshaping the travel and tourism industry today, companies can’t afford to ignore the opportunity to strengthen their P&RM approach. BCG’s P&RM blueprint provides an end-to-end approach that can help. By applying this blueprint, companies improve their chances of breaking free from the forces currently squeezing travel and tourism players—and achieving revenue benefits of up to 10%.