Chapter 4.2 Differential Pricing Greg Koch

Objectives 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 Quantity Q1 Q2 P1 P2

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