Revenue management: from marketing magic to surfer trends

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How Air France KLM stays at the cutting edge of revenue management

One of the many things Maarten van der Lei loves about working in the field of revenue management is that despite being a relatively mature discipline, the opportunities to break new ground remain huge. Today, to achieving such innovations you must combine solid Operations Research (OR) number-crunching with a willingness to reach out to ‘softer’ areas of the business like marketing and sales. The ability to embrace such an approach helps explain why, even within the air passenger services sector that pioneered revenue management optimization back in the 1970s, Air France KLM remains a frontrunner.

Maarten van der Lei

Maarten van der Lei

There is no better example of this than the key project with which Maarten has been involved in recent years. By coincidence, Air France KLM were due to migrate to a new revenue management system just two days after our meeting. The new, in-house built system, which was developed with support from ORTEC during the development and project phases, is expected to generate many millions in additional revenue.

“But equally important, the system also has definite improvements for both parties. For Air France it means moving to a system fully based on O&D (Origin & Destination). While for KLM there is a big improvement in the user interface, as well as other enhancements such as the PNV (Passenger Net Value) module that forecasts the value a specific passenger will bring.”

“Revenue management also brings benefits for passengers”

Passenger benefits

The migration marked the culmination of a nine-year long, not always smooth gestation period. “Like many big IT projects, the amount of resources it would require was perhaps underestimated at times. But the actual migration itself has seen relatively few problems. Though one issue has been with people making a request to fly out on a date before our migration to the new revenue management system and fly back on a date after migration. This sometimes results in people being quoted the wrong fare, something you want to avoid in such a price-sensitive industry.”

Usually such glitches mean putting back a project’s launch date. Ironically, in this case it persuaded Air France KLM to bring the migration forward to minimise the number of such bookings, which rise as the migration date approaches and obviously stop once it has been passed. That the team were happy to bring forward migration in this way says a lot about their confidence in the system’s robustness.

Clearly most revenue management developments are driven by business needs. Yet as Maarten points out, they have also brought benefits for passengers. “Perhaps driven initially by the bargain airlines, pricing is now far more transparent for passengers, with fewer and fewer conditions attached to tickets. And increasingly, so-called ancillary product elements such as baggage and ‘priority seating’ are taken out of the fare and bundled. Though whether this is a development that will ultimately be beneficial to the passenger is open to debate.”

Magic ingredient in the marketing mix

This brings Maarten to an area that clearly fascinates him: creating a culture that ensures Revenue Management contributes to a business’s wider goals.

“Traditionally revenue management is part of the marketing mix. But with so many years development in the various marketing disciplines, there is a risk that we move to over-specialism. With one department setting prices, sales doing promotions, a distribution department, marketing focused on communications and aircraft interior design, etcetera. But today’s dynamic environment calls for greater collaboration, breaking down the silos to do innovative things that exploit the strengths of each of these specialisms.”

Maarten cites the example of KLM’s recent ‘Monday Mystery Tickets’ promotion that his team developed with colleagues from e-commerce: 5 unrevealed European destinations, 100 tickets at €99 each, first come first served. Tickets go on sale Monday morning; you get to hear your destination Tuesday (and receive links to appropriate travel guides etc, opening up great cross-selling opportunities), fly Friday and return Sunday. The offer opened exclusively on Twitter and Facebook at 9:00am. By 9:02am all 100 tickets had been sold.

“To say air travel is now only about Cheap and Safe is over-simplistic”

More than the bottom line

90 jaar KLM

90 jaar KLM

Maarten feels this shows that while there is some truth in Ryan Air CEO Michael O’Leary’s view that in Europe it’s now only about Cheap and Safe, that’s a bit over-simplistic. A campaign like Monday Mystery Tickets primarily appeals to other consumer motivations, such as spontaneity and inspiration.

“It means that a good revenue marketing department is constantly also looking at the bigger picture: what’s the market saying, what’s the competition doing, and so on. And then building bridges with other departments. Without this mutual attitude, e-commerce and ourselves would never have come up with an idea like Monday Mystery Tickets.”

Of course a blinkered revenue management executive might say that 100 tickets at €99 is peanuts, but that would be to miss the point. “It’s about being open to new ideas, sometimes creating them, and always seeing their revenue management potential.”

“ORTEC people effectively work as KLM-ers to help us keep the system cutting edge”

KLM & ORTEC: a shared passion

The collaboration between ORTEC and KLM goes back some 15 years. “Since its early implementation days, ORTEC helped us develop, support and maintain the old revenue system; but also in an iterative way, with a steady flow of small and large enhancements and improvements. A real partnership, where ORTEC people are embedded in the organisation effectively working as KLM-ers to help us keep the system cutting edge.”

Though the new in-house built system was developed with ORTEC support in the development and project phase, the Air France IT team, who have less strong historical links with ORTEC, are the lead party for the new system.

“At KLM we’re very keen to maintain the ORTEC collaboration and with ORTEC are now investigating the viability of bringing our ‘old’ system, Odyssey, to market.” For both technical and commercial reasons, it has been decided to market Odyssey as an ORTEC software product with KLM as product endorser and ambassador. It’s early days but already there are promising signs of interest from some airlines.

Maarten says he hopes the Odyssey marketing project will be just the start. “Of course, there are many areas within KLM that require further optimization where we can hopefully collaborate with ORTEC in the future.”

True, but what makes KLM want to continue working with ORTEC? “ORTEC has a high level of professionalism. They’re pragmatic, close to the customer and try to speak your language. They deliver what they promise, are flexible, for example when it comes to up and down scaling, and importantly share our passion for achieving results through the use of quantitative models.”

“ORTEC shares our passion for achieving results through quantitative models”

Big data, big questions

When it comes to the issue currently hot with the media and wider public of Big Data, Maarten sees two key optimization questions in revenue management, which have been recognized now for many years. The first is finding the balance between volume and yield: whether you permit more seat sales long before departure with low yields or keep those seats empty to try to get more high-yield traffic closer to departure. This dilemma in turn creates two forecasting needs: for volume, the demand forecast; and for yield, the PNV (Passenger Net Value) forecast.

The demand forecast is highly complex because it has the quadratic O&D element, with all destinations connecting to all destinations, as well as a multitude of price-points and dates (and flights within dates) within a one-year sales window before the product perishes (at the time of flight).

“With so many variables, you want to avoid starting to forecast ‘noise’ by trying to accommodate too much detail. Nevertheless, we do drill down to a considerable level of detail, forecasting how many seats will be wanted within a specific class on a specific flight on a specific date. And that involves a lot of data.”

The PNV side is also pretty complex, as Maarten and his team have to relate historical volumes and observed values (data on tickets bought and how much revenue they generated) to current actual fares in the market.

Best behavior forecasting

The second key question relates to the complicating factor that people can also cancel their flights, which means you must make good forecasts of their cancellation behavior in order to overbook the aircraft in a way that makes optimal use of its capacity.

“This last question might seem straightforward: say, for example, that cancellations are about 3% across the network, you can then overbook accordingly. But that’s very crude. You can also take account of many other factors: if someone’s already paid for their ticket, if it’s a group or individual booking, local patterns — cancellation behavior in Nigeria, Japan and Argentina is very different.”

Surfer watching

But this is just looking at the ticketing and booking aspects of revenue management. KLM has also begun to look at the whole relatively new area of people’s behavior online, and critically what one can learn from that behavior.

This last, says Maarten, is a relatively underdeveloped area, and as such a good example of what for him makes revenue management so appealing. “It’s a mature field of research and yet very competitive. You need to be innovative, and there is still much unchartered territory within the relatively specialist area of pricing and revenue management. But it’s not a question of putting your feet on the desk and stargazing. Innovation in our world is always driven by insights based on solid, fact-based reporting.”

“You must avoid forecasting ‘noise’ by going for too much detail”

The forecast for forecasting

Asked to do a little of his own personal forecasting, Maarten says two exciting areas for the future spring to mind. The first is ancillary products. Although this currently only impacts a few percent of KLM’s European revenues, Maarten sees it as interesting for two reasons: first, it has the potential to be truly incremental and hit the bottom line. But also because it’s affected by how people react to dynamic pricing. For example, as pioneers among the traditional European airlines, KLM have removed baggage from the ticket price. At the same time they are offering Flying Blue members free baggage. So suddenly a loyalty scheme that previously had little to offer ‘junior’ members now provides a tangible benefit from flight one. Or so one might think: as Maarten reminds us, only the data will reveal just how people really respond.

The second is an area Maarten had already touched on, revenue management’s crossover with ecommerce and social media. So while the Monday Mystery Flights is a smart way to attract customers, what really interests Maarten and colleagues is how best to leverage the browsing and purchasing data such campaigns generate.

“What can online purchasing behavior tell us about our competitive pricing? How can we better steer bidding behavior to meet our needs? If you offer a certain price, do people surf away quicker than if we offer a lower price? What’s the conversion rate some time before departure compared with closer to departure? These are areas that we’re only just starting to explore in revenue management.”

So, plenty more scope for innovation and improvement, then. And you leave Maarten van der Lei’s office with the distinct impression that whichever direction those developments take revenue management as a discipline in the coming years, Maarten and his colleagues will be amongst those leading the way.

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