OFFER OPTIMIZATION AND MAXIMIZING NDC

Transcription

1 WHITE PAPER OFFER OPTIMIZATION AND MAXIMIZING NDC BY STEVE BONDI Realize Your Potential

2 INTRODUCTION The IATA New Distribution Capability (NDC) initiative is a call to upgrade the age-old messaging formats in the airline industry, but there are deeper implications as well. For the optimistic, the initiative is viewed as forwardthinking and revenue-boosting for airlines, with hopes that it will improve customer satisfaction. But for the pessimistic, there is concern that NDC will confuse travelers and cause travel agents to lose customers. While there may be some lost travel agency business and reduced revenue for Global Distribution Systems (GDSs), consumers and airlines alike will ultimately benefit from NDC due to the concept of offer optimization. This paper describes in brief the history leading up to the NDC initiative and how offer optimization will solve many of the problems Start of IATA 1990s Airlines begin selling tickets online 2012 Beginning stages of NDC s Beginning of the GDS 1996 Launch of Expedia, followed by other OTAs 2014 DOT granted approval of NDC 2

3 Years of a Reliable Distribution Infrastructure In the 1950s, global airlines like American Airlines realized that they needed a mechanism to effectively distribute their product worldwide to travel agents. Out of this, the GDS was born and has reliably served the airline industry for over six decades. To serve this function with the limited computer power and data communication speeds of the time, GDSs were designed to heavily depend on cached schedules, cached ATPCO (Airline Tariff Publishing Company) fares, cached availability (the vast majority of the time), self-contained itinerary building logic, and selfcontained fare quoting logic. This allowed GDSs to respond quickly to requests, since they did not have to talk to the airline systems and wait for a response in real-time. Destructive Distribution for Modern Shopping The distribution design created in the pre-internet era has remained mostly unchanged and many of the data processing constraints it was built with are no longer applicable today. For modern shopping, airlines feel they are losing revenue due to destructive distribution for the following reasons: A generic comparison of airfares only does not provide an accurate picture to consumers. The simplistic comparison of products across airlines based solely on the base airfare is very misleading to the consumer. For example, for a traveler who chooses the cheapest ticket to her destination, finds out later that the premier airline with a higher fare included one checked bag while the low cost airline (that she chose) did not. In the end, she paid more for her journey. That s because beyond overall total price, there is also the overall value to consider. For example, for a long trip overseas, consumers presented with only base airfare do not see that the airline with the slightly higher fare has much better seating (recline and legroom), better entertainment, and better meals all ideal for a long trip. As a result, consumers definitely lose out with the current generic comparison design. SCIENTIFIC PRICING FOR WINNING GROUP SALES 3

4 A generic, long list of itineraries frustrates shoppers. GDSs use very generic unbiased logic that is not driven by the airlines to build the airline itineraries applicable to a request. This also includes a generic ordering based on price (base airfare) or time (travel time), and a limited filtering algorithm mostly based on minimum connection times that often results in hundreds of itineraries displayed. With today s modern shopping, where consumers use an Online Travel Agency (OTA) like Expedia to shop, is it frustrating to have to scroll through hundreds or even thousands of generically chosen lines to try to find what truly meets their underlying criteria, which is often more than simply price and time. What s more, there are some issues with GDSs basing their itinerary building on cached OAG (travel intelligence company) schedules as opposed to airlines real-time schedules. Cached availability of airfares does not support airlines dynamic strategies. In today s world, major airlines are focused on the more profitable Origin-and-Destination (O&D) control, which often includes dynamic strategies that can be evaluated in real-time using specific customer attributes and flight conditions. However, various key distribution channels cannot fully support this. Instead, they only support the legacy cached availability, and those that do support it are often too slow or too expensive to satisfy modern shopping needs. The limited number of pre-filed price points with ATPCO results in lost demand and suboptimal revenue management recommendations. With an average of only booking classes used by an airline for a cabin, there are often major gaps between each price point. For example, if a lower class is closed down because the profitability point is between the higher and lower class price points, the price could jump up by $100. Demand with a maximum willingness-to-pay above the profitability point but below the higher class fare would be lost. In addition, the revenue optimization algorithm can t work properly against these arbitrary price points, which were not optimized in any way, and, as a result, cannot provide truly optimal recommendations. Offers built generically by distribution providers do not consider the customer s unique value to the airline. A valuable customer to one airline is not necessarily provided a better offer for that airline compared to the offer of another airline for which they do not have such major value. In addition, a customer s buying behavior and needs are not uniquely factored into the offers, which means the ideal offer that meets their underlying needs can be hidden deep in the hundreds to thousands of lines or maybe not even provided at all. 4

5 GDS Progress Over the Years Over the years GDSs have enhanced their products to the benefit of airlines, travel agents, and consumers. This includes various features to support ancillary products and services and even some personalization to help airlines better differentiate their products. But these enhancements are far from what is needed to defeat destructive distribution. This is what led to the IATA NDC initiative. IATA NDC is Born Based on the challenges and money lost to modern shopping, frustrated airlines gathered together in 2012 to change the way this age-old infrastructure works. They started with the core building block of the infrastructure, proposing a modern XML-based message structure instead of EDIFACT to support a comprehensive airline offer concept. But even though on the surface NDC appears to be about changing EDIFACT messages to XML, it is also very much about all the new processes to support the airline offer concept. Seeking Approval from U.S. DOT While GDSs initially stated that they were onboard with the NDC concept, most of them later focused on the costs and complexity of the change, pushing back on any aggressive timelines suggested for full compliance. IATA airlines sought approval from the U.S. Department of Transportation (DOT) with Resolution 787 to make their case undeniably stronger. This request included replies from key GDSs that argued against the change, since they have already integrated many mechanisms to allow personalization by airlines. These arguments were not strong enough to sway the DOT, and in 2014 the DOT agreed to the need for the NDC initiative and granted their final approval. Implementing NDC Pilots to Prove the Concepts in Production As a prudent step to total adoption, IATA engaged multiple NDC pilots to prove the concepts in test and eventually in production environments. This is the current state, and with these NDC pilots, the IATA also plans to address the skeptics that questioned whether performance requirements can be maintained with a more real-time design. SCIENTIFIC PRICING FOR WINNING GROUP SALES 5

6 Time is Needed to Implement a New Industry-Wide Infrastructure Even though the NDC pilots will help accelerate adoption, it would be very optimistic to think that a new industry-wide standard can be in place before 2020; it would be much more realistic to hope for However, progressive airlines will find a way to work with key vendors to implement pieces of NDC well before then. Some low cost carriers (LCCs) could be the most likely to adopt NDC principles sooner due to their lack of dependencies on industry infrastructures. What is NDC Actually Striving to Accomplish? From changing messaging structures to implementing the related new processes to support the airline offer concept, it may not be clear to some people what NDC is actually striving to accomplish. To understand this, it helps to look at the win-win situations from both the end-consumer and supplier perspectives: $ Clear comparison across airlines Targeted offer-sets Customercentric pricing Valuable cross-sells An offer-set A reasonable price END- CONSUMER A clear comparison of the important differences across airline products. targeted to their needs, eliminating scrolling through hundreds of irrelevant offers. A good price commensurate with their specific value to each airline. for valuable convenience and luxury amenities normally not considered. A high win-rate with AIRLINE A fair assessment of the overall value offered by the airline. offers that meet customer needs and the airline s goals (including lower costs with fewer More compelling offers to better maintain loyalty for their best customers. More revenue from reasonably priced cross-sells that were never previously considered. transactions). 6

7 What are the Key Components of Customized Offer Sets? While there are many aspects to airline offers, when focusing on customized offer sets, there are five basic concepts of offer optimization to consider: 1. Ordering 2. Filtering 3. Dynamic Pricing 4. Dynamic Packaging 5. Customer and Market CRM Ordering and Filtering A major feature that NDC provides is the ability for an airline to control what is offered to a customer. Current distribution engines generically spit out hundreds to thousands of offers to a consumer typically based on a questionable lowest price order that does not consider some important differences in the products that are being quoted next to each other. This is a design that often frustrates consumers who are trying to quickly find something that meets their underlying criteria. It is analogous to those new soda machines in restaurants that give you over 20 flavors of Coke, or those sandwich places where you have to build your own sandwich with so many kinds of meats, cheeses, and extras, overwhelming the customer. The problem is that these are static generic environments that cannot dynamically assess what the consumer s preferences are, so they cannot provide a limited custom set of choices for them. However, with NDC, the airline s offer box will be able to do this, which will increase the hit rate of an offer and the average revenue per sale with consumer-desired cross-sells. Dynamic Pricing With today s antiquated architecture, airlines are focused on limited booking classes, on average 10 to 16 per cabin, so they arbitrarily file limited price points which end up with pretty big gaps for every market. When the price point of $300 is not available, the consumer is offered the next higher price point of $400. However, if the consumer s maximum willingness-to-pay is say $350, they go elsewhere! Not being limited to price points, dynamic pricing science could assess the optimal dynamic price for airfare to be $325 in this example. This means the airline still gets the margins desired, while the passenger is now not lost, since their willingness-topay is met. An intelligent dynamic price that is not limited to artificial constraints imposed by an aging architecture will bring more revenue to an airline. Dynamic Packaging One could argue that the biggest feature offered by NDC is allowing airlines to control their ancillary offerings. It s true that many traditional executives for premier airlines still seem to view ancillary offerings as something only for LCCs that want to quote artificially ultra-low fares, but then end up nickel-and-diming consumers for features that are traditionally included in a full service product. But more progressive executives believe that custom offers with ancillary offerings can be done in a way to provide the customer exactly what they want at a price they consider fair, and ultimately provide more revenue to airlines from intelligent cross-selling. Overall, unbundling or custom bundling with custom prices, including ancillaries, is something that can benefit all airlines from LCCs to full service. 7

8 Customer and Market CRM Loyal customers often wonder after years of travel why airlines have not recognized their buying preferences. Not only that, they often feel they are not getting special recognition, like better discounts commensurate with their lifetime value to the airlines. Offer optimization would leverage specific CRM information, or abstracted marketcentric info when the passenger chooses not to identify themselves, offering options and prices customized for the specific traveler and considering their value to the airline. Conclusion Airline distribution needs an overhaul. The availability of so many choices to consumers not only overwhelms buyers, but creates a landscape that stifles an airline s ability to compete effectively. The current distribution system is not equipped to deal with the modern buyer and changes in technology. Created in the pre-internet era, it has remained mostly unchanged today, and many of the data processing constraints it was built with are no longer applicable. Complicating matters is that airlines are losing revenue due to what can be described as destructive distribution: The inability to offer product differentiation as well as fast and accurate time-to-market. The inability for customers and travel agents to access full and rich content. A lack of a transparent shopping experience. The good news? NDC is a great start. Next, new revenue management technologies that provide offer optimization and dynamic pricing and packaging will allow airlines to capitalize on industry changes. Contact PROS today for more information about how our capabilities and vision for the future of revenue management can allow airlines to transform the consumer experience while generating meaningful revenue growth. 8

9 About Steve Bondi Steve Bondi joined PROS in 1987 and has been a key product architect for all PROS airline products. He has worked with a vast group of customers with different business environments during the course of the solution development, addressing their diverse business needs with a single product of flexible configuration. Currently, as the VP of Product Management, he heads the Strategic Innovation area, ensuring and coordinating innovation for PROS established products in Sales Effectiveness, Price Optimization, and Revenue Management, and for any future products. Prior to joining PROS, Mr. Bondi managed the Information Technology at Florida Express Airlines. SCIENTIFIC PRICING FOR WINNING GROUP SALES 9

10 About PROS PROS Holdings, Inc. (NYSE: PRO) is a revenue and profit realization company that helps B2B and B2C customers consistently realize their potential through the perfect blend of simplicity and data science. PROS offers solutions to accelerate sales, formulate winning pricing strategies and align product, demand and availability. PROS customers experience meaningful revenue growth, sustained profitability and modernized business processes because of PROS revenue and profit realization solutions. To learn more, visit pros.com. Copyright 2016, PROS Inc. All rights reserved. This document is provided for information purposes only and the contents hereof are subject to change without notice. This document is not warranted to be error -free, nor subject to any other warranties or conditions, whether expressed orally or implied in law, including implied warranties and conditions of 10 merchantability or fitness for a particular purpose. We specifically disclaim any liability with respect to this document and no contractual obligations are formed either directly or indirectly by this document. This document may not be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without our prior written permission.