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Chapter 4.2 Differential Pricing

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 f are p roduct options

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Chapter 4.2 Differential Pricing

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  1. Chapter 4.2 Differential Pricing Greg Koch

  2. Objectives • Differential pricing • Willingness to Pay • Market Segments • Goals of Differential Pricing • Traditional/ Restrictive Structure • Simplified Structure • Impacts of Pricing

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

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