Name your price: The power of Big Data and analytics
A new generation of pricing and revenue management practices can lead to meaningful results quickly.
- February 2013
- Philipp M. Lühr, Stefano Redaelli, Abdul Shaikh, James Thom, and Michael Zea
In the travel industry, pricing has always been a tough job. Overprice an airline seat, hotel room, cruise cabin, or rental car today, and you won’t get a second chance to move that unsold unit tomorrow. Set the price too low, and you destroy value by selling out limited inventory too soon. No wonder, then, that the industry boasts some of the most sophisticated pricing capabilities anywhere. But in the era of Big Data, those capabilities are looking increasingly outdated and inadequate.
Blame the Internet. An explosion of new sales channels, with price-comparison sites such as Expedia and Kayak, has ratcheted up competition and ever more frequent price changes. Digital technology and social media have also greatly raised the scope for one-to-one marketing — and made it possible to track the behaviors of millions of individual customers.
As a result, pricing managers are faced with an overwhelming amount of information stored in a variety of places. For example, one travel company we know has three terabytes of pricing data in eight systems — including inventory data, current booking levels, historic demand patterns, and competitor information across thousands of categories.
How can companies make sense of all this data — and use it to drive value? The answer lies in a new generation of pricing and revenue management practices that can yield meaningful results quickly. These have helped travel companies improve revenue per unit by 3-8 percent, and market share by 1-2 percentage points. But it is not just a matter of a software tool or a single new analysis. It requires a sharp prioritization, iterative building of tools, and hands-on engagement of many functions across the organization.
What, then, are the practical steps that pricing managers can take to master Big Data?
1. Pinpoint the most promising opportunities. In the travel industry, those opportunities include determining exactly what each customer is willing to pay (through customer segmentation, targeted promotions and micro-marketing, sell-up, and cross-selling), and maximizing the use of available inventory (through, competitive pricing, overbooking, substitutions and upgrades, and so on). Effective pricing and revenue management organizations must have the talent and know-how to identify such opportunities consistently and systematically.
2. Move quickly to automate key analyses. To meet the demands of large data sets and respond rapidly to fluctuations, targeted automation is a must have. To maximize use of inventory, for example, companies can develop automated utilization forecasts based on past booking patterns, current advance reservations, competitor information, and so on. Just as importantly, the output needs to be in easy-to-use, flexible formats, such as Excel-based tables or web interfaces. One tool we worked with automated the combination of revenue forecasts and inventory utilization data that was previously stored in separate systems; this allowed managers to track progress in real time and make pricing decisions that were much faster and better-informed. To analyze and simplify large volumes of sales data across locations, you’ll generally need customized IT solutions and applications. The best performers can get advanced systems in place in weeks then test and adjust, rather than waiting for months or even years to implement new applications.
3. Align the organization around pricing performance. Companies often spend most of their energies and resources on building advanced analytics tools. But in our experience, they need to spend as much or more time making necessary changes to organizations and processes. At one travel company, pricing team interactions with supporting business units were originally ad-hoc and unstructured. So they developed a systematic process that allocated responsibilities for pricing and revenue management amongst the relevant departments, including pricing, marketing, inventory management, and distribution — and described when and how they should work together to create alignment on pricing decisions. As one output of this process, inventory managers developed a new appreciation for revenue metrics, and understood that these should take precedence over the utilization metrics that had previously been their focus. It’s also important to develop clear incentives that reward managers for pricing performance; and to recruit a new generation of pricing talent with more of a “trader” profile than an “analyst” one, ie. results-driven, comfortable with risk and experimentation, and able to make quick decisions.
4. Train to sustain. Gains from improved pricing performance are hard to sustain unless companies commit to extensive and intensive training. Training should focus on the most critical elements of pricing that drive revenues, best practices for pricing and inventory management, and how to use new tools. Rather than using traditional classroom instruction, training needs to emphasize simulations involving real data and decisions that affect the company’s pricing in the market. This approach allows participants to review actual results and the impact of the decisions they’ve made. In addition, this type of training prepares participants to take calculated risks, rather than relying on standard pricing principles, and inculcates an innovative mindset that characterizes the best pricing managers. To be successful, such training must involve the relevant functions beyond pricing. For example, inventory and sales managers must also learn to calibrate demand and supply through pricing to maximize revenue generation.
Pricing data is just going to get bigger and move faster in the travel industry — and in many others, for that matter. Companies that can keep up will find the growth and margin to stay ahead of the competition.
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