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Imagine you are driving a car. But this car can only go one speed - 60mph. Entering standing traffic moving at 60mph wouldn’t be a very pleasant experience. So, what do you do to change this situation? You could add some more speed levels, say 40mph and 50mph. However, an ideal car is one that lets you drive any speed you like. Possibly with cruise control, in case you really want a certain speed maintained.
Interestingly, air carriers have the same sort of issue with prices. Airlines can file fares with predefined amounts and then make those fares available or not. This leaves them with a few dozen possible prices. But distribute that over cabins, fare families, and frequent flyer classes, and airlines are left with just a few prices to pick from when deciding what to offer.
Following the car analogy, the current pricing systems can evolve to ones that enable air carriers to offer the right price for a given situation. This is exactly what Amadeus Dynamic Pricing offers airlines. Not just $150 and $200, but also $149.99 and $201. The best thing about dynamic pricing is that it calculates exactly what that price should be. It takes into consideration airlines' competitors’ prices and schedules, and the customer segment that the request is coming from. Plus, it considers what you could make with that seat later on if you don’t sell now; and it can take this information from any revenue management system.
How does Amadeus Dynamic Pricing do this? Well, it does not try to estimate how much demand there is for a price-point, as it is often done. Nowadays, airlines have to add many fare classes in order to cope with inflexible methods. New research has shown that adding more and more fare classes actually has a negative impact on revenues because there is even less data left to estimate what the best price would really be.
Amadeus Dynamic Pricing looks at past searches and bookings to see what was offered – airlines, schedules, prices – and what the customer chose. It then balances that data in real-time to find the optimal price. This is the revenue-optimal 'sweet spot' between raising the price to make more money per seat and lowering the price to increase the probability of the customer picking your offer. It can be a low price in a competitive market for a price-sensitive customer segment. Or it can be a high price if you have a superior product and a customer segment that values that.
Amadeus internal simulations are in line with new research that was carried out at the renowned Massachusetts Institute of Technology (MIT). It shows that dynamic pricing can deliver significant revenue gains compared to traditional revenue management alone. Simulations have shown that adding dynamic pricing on top of today’s revenue management techniques can lead to revenue gains of up to 3% – 7% when dynamic pricing is used by a single airline in a competitive environment.
We believe now is the time to incorporate true dynamic pricing within the airline industry, and that our investments in this field are going to benefit our customers. For more about this important topic – check out the Amadeus Dynamic Pricing website.