How to maximize your income by adopting a pricing and distribution strategy adapted to the market positioning of your travel products
Approaching the subject of the pricing strategy of a travel company is to dive into a passionate universe shaped by history, brand identity and the vision of a leader for the future. On a daily basis, this means that the sales and revenue management teams struggle with fierce competition, ambitious goals and an unpredictable level of demand.
With the accelerated digitization of the 2000s and the emergence of new distribution channels, the tools, techniques and tactics available to managers have multiplied, to the point of erasing in some organizations the strategic foundations of price setting in the economic market. This is because when it comes to pricing travel industry products, there are only five proven strategies, dictated by where products are positioned in their market.
While we foresee an exit from the covid-19 crisis, with the year 2022 hopefully being one of sustainable recovery, it is time to review the pricing positioning of your products in the portfolio and recalibrate your strategies and tactics.
In this article we are going to review the 5 pricing strategies that will be beneficial for travel companies if applied to the right product, and implemented in the market using the right techniques. These strategies are determined by the positioning of a travel product in its market, measured by a market share indicator.
For a company, the concept of product will vary according to its activity:
If you are an airline, the products to take into account are directional O&Ds (origins - destinations) with a market share calculated for each type of cabin including all air carriers (or even rail companies) serving an O&D, including with stopover.
If you are a hotel chain, your product portfolio is made up of managed establishments, calculating each hotel's market share locally.
If you are a tour operator, travel products can be marketed destinations classified by type of service (circuit, package, combined, etc.).
If you are a cruise line, a travel product will be the combination of a departure port and a navigation region.
In all cases, we will prefer to work with market share data when available, and failing that with adjusted capacity shares, to create a product positioning matrix as presented below.
Once the matrix has been established, we will divide it into 5 categories corresponding to the 5 universal pricing strategies:
- Strategy 1: Commander - market share greater than 75%
- Strategy 2: Leader - market share between 35% and 75%
- Strategy 3: Player - market share between 15% and 35%
- Strategy 4: Challenger - market share between 5% and 15%
- Strategy 5: Nobody - market share less than 5%
It should be noted that the percentage values are approximate, and may vary up to 5% depending on the situation. When a product is positioned at the border between two strategies, it is advisable to study on a case-by-case basis which classification suits it best, while allowing oneself to apply the tactics of one or the other strategy according to the circumstances.
Strategy 1: Commander
It is estimated that once a product captures more than three-quarters of the demand in its segment, it has a hold on the market allowing it to significantly decorrelate its price from its perceived value and its operating costs in an aim for high profit margins.
Travel companies that hold such products in their portfolio over the long term rely on a historic market position, superior product characteristics, a competitive advantage that is difficult to replicate, an exclusive contract, strong investments, operational expertise, or significant risks taken.
When your company markets products that are classified in this way, then you control the prices, the stocks, and therefore the market. Your yield management teams must constantly play with the price elasticity of demand to maximize revenue, mainly with average prices above the competition.
When your market share approaches 100%, your position is qualified as a monopoly which implies certain responsibilities and constraints, especially if your product is qualified as a public utility. Therefore, you must master the art of defending your competitive advantage while staying on the edge of what the competition laws allow. Having effective institutional communication and good relations with external influencing bodies are essential to avoid getting bad press. The objective is to offer your revenue management department the greatest leeway so that it maximizes your income.
Price wars don't have to be with Commander products. When a competitor with a very small market share attacks you with low prices, it is economically more profitable to lose a few points of market share than to significantly lower its entry level price to maintain volumes. This does not mean, however, to take the affront without retaliating: your tariff response may be to attack another product of your competitor, or any other dominant market position it holds.
Regularly make reasonable price increases while at least covering inflation and the investment needs necessary to maintain your competitive advantage.
Your price promotions should be limited, and only initiated if the market can be stimulated, that is, when a reduction in the price allows sales to increase by a sufficient magnitude to compensate for the decrease in the average price, and without shifting demand from other portfolio products. If you forget this golden rule, you are sure to dilute your income and lower your profitability.
On the distribution side, you should not grant price exclusivity to an actor, unless it demonstrates its ability to increase the size of the market in value on a specific customer segment, in a context where the remaining stocks are abundant. Commissions and other sales incentives are not helpful.
But while you give all resellers the same price offer, you will also need to finely segment your market in order to come up with a price offer that maximizes revenue for each type of consumer.
Strategy 2: Leader
Your product is a Leader when it has one of the largest market shares, and there is at least one other serious competitor whose actions perpetually threaten your sales.
Your competitive landscape is therefore active with a permanent risk that a price war will break out, which would negatively impact your income. You must therefore act as a responsible player who authorizes pricing actions to stimulate the market without causing a continuous downward spiral in prices, in particular via a promotional calendar predictable by your competitors. As a leader, you react quickly and proportionately to the actions of your competitors, giving them no opportunity to further conquer your position in the market.
Being a Leader also means defining the right benchmarks and measuring yourself against competitors who play in the same category as you. So there are your direct competitors that you match head-on on the public distribution channels, and there are indirect competitors that you match from time to time without wanting to publicly disclose. To do this, you need to maintain an underground distribution network that will quietly sell your inventory at discounted prices to support periods of low occupancy, without diluting your total income, or upsetting your biggest partners.
The Leader drives its market with a predictable promotional schedule, while maintaining a strike power capable of winning large volumes by periodically launching flash promotions over very short sales periods.
The greater the volumes of demand for the product, the more you must secure the support of all distribution players: being a Leader means treating all your partners in a balanced manner. The worst commercial strategy would be to give exclusively to a partner more advantageous conditions than the rest of the market, because in a situation of high demand this would erode the yield, and in a situation of weak demand it would restrict your company to finding ephemeral relays to boost your sales.
Strategy 3: Player
The Player is in the game, but he is subject to the dictates of a Commander or a Leader who sets the pace and rules of the game. In very fragmented markets, there can be neither Commander nor Leader, but a multitude of Players who play without faith or law.
Unless you have an extremely differentiated product, the pricing strategy will consist of matching the Commander, Leader and other Players, possibly applying a price differential depending on the strengths and weaknesses of your product.
Under these conditions, defining your own promotional agenda is a permanent challenge, because it is unreadable and constantly upset by your competitors.
When you are a Player, what does not work is to systematically position yourself below the competition without having a more competitive cost structure. This posture sooner or later leads to serious financial problems.
If you are a Leader without a strong competitive advantage (superior product or lower costs), you have no alternative but to be smarter and more agile than the competition, by investing in a more motivated sales force that works at a level of detail that the competition does not know or does not want to do.
The strength of the Player (and also of the Challenger, which we will discuss shortly) is based on responsiveness: your sales force, closely associated with your pricing and revenue management team, must identify and match the public and private actions of the competition as quickly as possible, but also have the intellectual and technical flexibility to implement original offers and commercial partnerships.
Strategy 4: Challenger
Taking on the role of the Challenger means exercising fewer responsibilities and constraints than the Player, Leader or Commander, because any pricing action initiated will have only a limited impact on the market.
First, the Challenger does not have to worry about preserving value or increasing the size of the market, which allows it to take aggressive pricing postures, not to mention the golden rule of revenue maximization: the loss in average price must be overcompensated by an increase in volume.
Second, his actions trigger little or no reaction from the Player, Leader and Commander, as the latter would have too much to lose by matching the pricing actions of a Challenger. This gives you ample room to maneuver, such as the implementation of price guerrilla tactics; being aggressive and quickly gaining a lot of market share in terms of volume, then going back under the radar until the next raid.
When overall revenue targets are at risk of not being met, products positioned as Challenger may be aggressively priced, as the risk of revenue dilution is outweighed by their high potential for volume growth.
But the Challenger does not necessarily need to adopt an aggressive pricing stance. The mistake of many Challengers is to have a commercial approach based solely on a lower price than their competitors, without reflecting on their competitive advantages. As soon as a Challenger takes these questions seriously, it stops addressing the entire market to build economic relationships with niche customers by meeting their specific needs. It then creates a sustainable source of income at an average price higher than the market average.
Strategy 5: Nobody
This category includes 2 types of products:
- Dormant products or products recently introduced on the market, for which the company aims to lead them to a Challenger or Player positioning.
- Portfolio fund products whose development limits are known and which react little to price stimulation.
Theoretically, there is nothing to lose from aggressive pricing for these products, as long as the price covers variable costs. In practice, the art of managing these products is to give them attention in proportion to their income and potential. Good or bad, price positioning will have little impact on the company's total revenue. What there is to lose above all with Nobody products is time, energy and effort, therefore the attention of sales and revenue management teams, to the detriment of flagship products.
Adopt automated pricing rules and solutions for your Nobody products, accepting that their income is not perfectly optimized in the name of simplicity. The proliferation of pricing and commercial initiatives rarely offer positive returns on investment.
For further information
Industries governed by yield management techniques tend to adopt sophisticated pricing. The challenge for pricing teams is to monitor the competition, analyze data and benchmarks to react quickly. These tasks are time consuming and leave too little time for strategic thinking.
At YIELD TACTICS, we firmly believe that an effective pricing strategy must be based on automated benchmarks, strong data analysis capabilities, rapid time-to-market decisions, a segmented approach by customer type and distribution channel.
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