Transcript Chapter 4.2 Differential Pricing

Chapter 4.2 Differential Pricing
Greg Koch
Objectives
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Differential pricing
Willingness to Pay
Market Segments
Goals of Differential Pricing
Traditional/ Restrictive Structure
Simplified Structure
Impacts of Pricing
Differential Pricing
• Present a range of fare product options
– Allows consumers to trade off price and
restrictions
– Products geared towards different market
segments
• Business travels willing to pay higher prices with no
restrictions
• Leisure travels willing to deal with restrictions for a
cheaper ticket
Willingness To Pay (WTP)
• The Maximum Price any number of customers
will all pay for a specified product or service.
Price
P1
P2
Q1
Q2
Quantity
Market Segmentation
• Revenue is maximized by charging every
customer a different amount exactly equal to
their WTP
• Identify Different Demand Groups
– Not practical to know the WTP for every customer
– Instead Customers are split into Segments
• Segments have similar characteristics
– Trip purpose
– Price Sensitivity
– Time Sensitivity
Goals of Differential Pricing
Maximize Revenue:
– Sufficient market segments
• Customers pay WTP amount
• Airlines get maximum amount from customers
• Cheaper products allow people to fly who otherwise would
not
– Avoid Diversion
• Use Service Amenities to attract Segments to paying a higher
price
• Use Change Fees, Advanced booking, Saturday night Stay to
keep customers with a higher WTP from buying cheaper
tickets
Traditional/ Restrictive Airline
Structure
• To Avoid Diversion:
– Service Amenities
• Seats: First, Business, Economy Class tickets
• Separation: Special Check in, Lounges, assigned seats
– Restrictions
• Advanced Purchase
• Saturday night Stay
• Cancellation/Change Fees
Simplified Structure
• 2001 Dot Com Bust and Economic Recession
reduced the willingness of Business Travelers to
pay a premium for tickets
• Online Ticket Outlets made it easier to
comparison shop for cheaper flights
• In Response the Airlines moved to Simplified
Fares
– Fewer Fare levels
– Often the Saturday night stay restriction is removed
Impacts of Pricing
• Differential Pricing led to great profits in the
‘90s due
• Differential pricing theory remains valid and in
use today
• The Simplified Fare Structure was originally
adopted by low cost carriers – increasingly
legacy carriers have adopted it to reduce their
losses in market share