{"id":11864,"date":"2018-03-26T16:36:36","date_gmt":"2018-03-26T14:36:36","guid":{"rendered":"http:\/\/revva.net\/?p=11864"},"modified":"2023-11-23T15:49:43","modified_gmt":"2023-11-23T15:49:43","slug":"dynamic-pricing-for-tour-operators","status":"publish","type":"post","link":"https:\/\/imssc.org\/biflix\/dynamic-pricing-for-tour-operators\/","title":{"rendered":"Dynamic Pricing for Tour Operators: science, not religion"},"content":{"rendered":"

The owner of the big OTA chuckled at my question. \u201cEvery morning we have an entire team checking competitors\u2019 rates and adjusting ours<\/em>\u201d, he said. \u201cDynamic pricing is essential today. It was a logical process for us<\/em>\u201d.<\/p>\n

Of course, it was. Less technology-prone patrons dind’t follow the same path, though, and I am having a really hard time trying to verbally explain what the hell this dynamic pricing<\/em> is to customers and prospects in the travel arena.<\/p>\n

Since you\u2019ve read this far, I\u2019m assuming you at least grasp that this is another thrive-or-fade-away subject in modern travel trade\u2026 so I\u2019ll do my best to put it down as easy as possible.<\/p>\n

Overview<\/strong><\/h4>\n

If you\u2019re barely familiar with the term, or think it just applies to carriers and hotels, please read first this short but entertaining article from The Guardian >><\/a> , then come back.<\/p>\n

This ongoing revolution originated during the \u201880s\u00a0 in a barber\u2019s shop (of all places), from a brilliant airline executive (read the true story here >><\/a>) and has since been massively benefiting travel companies. That\u2019s the main reason you don\u2019t see many empty flights these days!<\/p>\n

The simplest way I can put it is:<\/p>\n

\n

Dynamic Pricing means to adjust rates downward when demand is low, only to raise them up when demand is expected to soar (in order to maximize profits).<\/span><\/strong><\/p>\n<\/blockquote>\n

Makes sense, and the results are quite pleasing: less empty seats, more profits, early-booking incentive, improved forecasts, higher loyalty, and so on. The next question, then, comes naturally\u2026<\/p>\n

Why haven\u2019t Tour Operators massively adopted DP yet?<\/strong><\/h4>\n

It\u2019s not surprising, actually; there\u2019s almost no published material on the subject. Granted, people running businesses tend to avoid changing procedures they preceive<\/em> as working, especially if sales continue to be higher than break-even point. \u00a0To that inertia towards change\u00a0(\u201cI\u2019ve been doing this forever, it works for me!\u201d), maybe we can add uncertainty\u00a0<\/strong>(\u201cHow do I know if it works?\u201d) and\u00a0arrogance\u00a0<\/strong>(\u201cWho does this chap believe he is to tell me how I should run my business?\u201d).
\nThere\u2019s more to it, though: DP is easier said than done! While it is feasible for the smallest operator to design and implement a basic dynamic pricing policy with no specific software, it takes a certain \u201cmind for numbers\u201d (uncommon SMB material) to actually put it in place. A larger business, on the other hand, would find it extremely hard to do manually, as people with deep mathematical and statistical skills would have to be hired. Even greater complexity awaits operators with XML distribution means! As of 2016, only large OTAs and monopolists had the resources and back-bone to deploy specialists working out profitable dynamic pricing strategies. They did it quietly, of course, because it wasn\u2019t a good idea to have customers aware of pricing fluctuations, nor to wake up smaller but faster competitors. These days the big guys are showing their kit, as you\u2019ll notice in job portals: check how their HR Departments are looking like crazy for data scientists, data managers, data architects, and so on. Ludicrous attempts, I\u2019ll add, as most job ads denote a complete lack of knowledge in the area: that\u2019s another reason why information shouldn\u2019t be compartmentalized in silos and analytical tools must be used for\u2026
\nSorry for digressing, I\u2019ll write an article about this subject later on.<\/p>\n

\"Dynamic<\/p>\n

From 2015-2016 onwards, a few multi-million worth operators realized they could access the technological tools to act revenue management strategies, while the heavyweight boys were starting to experiment with consumer behavioral paths defined by artificial intelligence, as well as chatbots, blockchain, or whatever the buzzword of the day was.<\/p>\n

But fear not, my SMB friend: at the present time, there are much cheaper and easier to use analytic and even automation tools that allow small to mid-sized operators to obtain great results and fight the travel behemoths with their own weapons. There are no more excuses, unless you\u2019re planning to shut down and retire in the next couple of years.<\/p>\n

On to the ensuing natural question, then.<\/p>\n

Which results can be expected from DP implementation?<\/strong><\/h4>\n

That\u2019s the only relevant question here, right? Academic and Industrial studies have established long ago that Airlines and Hotels see between 7% and 11% income increases after the first year of deploying revenue management procedures (closely related to dynamic pricing but not the same thing!). According to a paper from the prestigious Boston Consulting Group >><\/a> , an average 10% revenue increase<\/strong> is what you ought to experience with DP. Very often I get derided by this seemingly tiny financial improvement; for those not scoring high in the \u201cmind for numbers\u201d grade, I\u2019ll expand the idea with a paragraph from the same BCG whitepaper:<\/p>\n

[\u2026] more than 2,800 companies across multiple industries indicates that a 1 percent improvement in price has a far greater impact on operating profit\u2014more than 11 percent\u2014than a similar level of improvement in other critical factors, such as sales volume or variable or fixed costs. Yet while four out of five managers think they have a good handle on costs, less than two-thirds believe they understand their product\u2019s value to their customers, only one-third think they grasp the impact of a price change, and only one-fifth believe they are well informed about their customers\u2019 acceptance of prices charged.\u00a0[\u2026]<\/em><\/p>\n

Got it, Boss? Next time you tell me \u201cNot interested in Dynamic Pricing, thanks<\/em>\u201d I won\u2019t feel sorry for you.<\/p>\n

Fact is, any tour operator (incoming, outgoing, whatever) will significantly increase their profits just by stop maintaining a fixed-price policy for their products and services. And that\u2019s just a single variable of the equation, there\u2019s still much room for improvement! I realize it still sounds complicated\u2026 Bear with me, a noticeably surge in profitability will compensate your patience soon enough.\"Dynamic<\/p>\n

How long does it take to see real results from DP implementation?<\/strong><\/h4>\n

It depends. If you are somehow doing it already, adopting a specific solution may not bring spectacular monetary gains, but it will happen almost immediately, and the huge chunks of time you\u2019ll save can be considered money as well, I\u2019m sure you\u2019ll agree.
\nOn the contrary, if you have no pricing policy in place, or if your existing one is shabby, it might take longer for DP to bring results, but those will be significant\u2026 although probably you\u2019ll see revenue improvement right away.<\/p>\n

Dynamic Pricing for Travel Dummies<\/strong><\/h4>\n

So far, you\u2019ve sold your packages, tickets or transfers at a more or less fixed price, all year long, near to or on same-day departure date, correct? It\u2019s always been like this, nothing wrong there\u2026 except it\u2019s an operational nightmare, for starters. Wouldn\u2019t you like to predict how many passengers you\u2019ll have for a determined date\/tour\/package, on each sales channel? Can you imagine how much money would that save your Company? How much your profit will go up? Well, it\u2019s perfectly possible combining dynamic pricing and revenue management, a subject I\u2019ll address in my next article.<\/p>\n

Now, let\u2019s focus on the pricing portion of the magic formula. I came across a great article from Amanda Campbell at Farelogix >>:<\/a> although her text focus on the airline industry, she makes great points valid to all travel-related businesses. I hope she doesn\u2019t mind if I replicate here a very useful paragraph she wrote:<\/p>\n

\u00a0\u00a0[\u2026] \u00a0In a nutshell, dynamic pricing is the automatic adjustment of a starting price based on data insights for the purposes of optimizing both revenue and customer uptake. Starting price data can come from any number of sources \u2013 ranging from Revenue Management (RM) systems to filed fares \u2013 and can be focused on any number of factors, including:\u00a0<\/em><\/p>\n