Chapter 4 2 Differential Pricing Greg Koch Objectives

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 P 1 P 2 Q 1 Q 2 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 ‘ 90 s 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