Skip to 0 minutes and 8 secondsOver the next four weeks we will look at some case studies together and use some basic economic principles to analyse them closely, with the help of some colleagues and experts. But first, let’s focus on a problem that airlines face.
Skip to 0 minutes and 24 secondsAs you may be aware, airline managers, as well as hotel managers, car rental managers, campsite managers, or any other similar business managers, need to be clever at optimising their revenues.
Skip to 0 minutes and 41 secondsIn this case, our manager is using a single price and is trying to increase revenue by shifting the price up or down. This is called ‘uniform pricing’ in economics. In other words, ‘everybody pays the same price’. Here, the manager made some lucky decisions; things could have been very bad for him. Let’s look at what could have happened when he decreased the price. Thankfully, there were plenty of people ready to pay for a seat at that low price. Imagine what would have happened if there were only 120 people willing to travel that day? The airline would have had the same number of passengers, each paying a lower price. The price difference between €400 and €250 is €150 per passenger.
Skip to 1 minute and 31 secondsThe decrease in revenue would have been €150 multiplied by 120 passengers, that is €18 000. That’s a reduction of 37% compared to the baseline price of €400€, and the plane would still have been far from full.
Skip to 1 minute and 54 secondsSo, decreasing the price does not always lead to more customers and more revenue. Thankfully, in this case, there was some ‘unsatisfied demand’ at a price of €400.
Skip to 2 minutes and 8 secondsThis means that some people were ready to pay €250, but not €400. So things worked out OK that time!
Skip to 2 minutes and 18 secondsIncreasing the price is also a risky option. Imagine that none, or very few, of the 120 people who were ready to pay €400 were ready to pay €550!
Skip to 2 minutes and 32 secondsIt could be a catastrophe, with a revenue close to €0. So, increasing the price does not always lead to an increase in revenue either.
Skip to 2 minutes and 44 secondsThankfully, there were quite a lot of people ready to pay €550 for this flight. These people were probably businessmen and women, and they are generally not very sensitive to prices. This means that they really need to take this particular flight and are ready to pay quite a lot for it.
Skip to 3 minutes and 5 secondsBoth strategies worked well for our airline manager. Whatever price he chose (€250 or €550) brought him a higher revenue, but we learned something. We learned that people were willing to pay different prices. Even if everybody prefers a low price, some are willing to pay a higher price, while others are only willing to buy the ticket if the price is low enough. We could use this information to pursue a more subtle strategy. We could use our knowledge about the demand for the flight and set different prices according to how much we know people are willing to pay. This is called ‘demand-based pricing’.
Skip to 3 minutes and 53 secondsLet’s see how a new manager of the same flight uses that
Skip to 3 minutes and 56 secondsinformation to increase the flight’s revenue:
Skip to 4 minutes and 2 secondsJennifer has replaced you as the manager at ENAC Wings, and she has observed your price variation experiments with great interest. She has also analysed the results in term of the number of seats sold at each price, and found that the travellers on this flight are always more or less the same. What she knows now is that some of the travellers are willing to pay more than others for the same ticket. Some are willing to pay €550, others €400, and some will pay no more than €250.
Skip to 4 minutes and 40 secondsShe has decided to split the travellers into 3 separate groups, each paying different prices. This may not be so easy to do in real life, but let us assume she can. You will see how she does it later. The first group of travellers is made up of people who are willing to pay the highest price. She knows that there are 100 customers who are willing to pay €550, so she lets them pay that price! The revenue for this first group is then €55,000. Jennifer is off to a good start. Jennifer also knows that there were 120 travellers ready to pay €400 for that flight. Among these, 100 have already paid €550.
Skip to 5 minutes and 31 secondsThis means that there are still 20 customers willing to pay €400. ‘Let them pay the €400 that they are willing to pay’, Jennifer declares. The additional revenue from this second group of 20 people is €8,000 and the plane is still not full.
Skip to 5 minutes and 51 secondsThere are still 80 remaining seats in the aircraft, and Jennifer knows that she will find enough customers to fill those seats at €250. The revenue from those additional 80 seats is €20,000. Jennifer has greatly increased the revenue of that flight on her first day, just by using the results obtained in previous situations.
Skip to 6 minutes and 15 secondsAnalysts at ENAC Wings are now counting the revenue: It is €55,000 for the first group, made up mostly of businessmen and women + €8,000 for the second group of 20 people, + €20,000 for the remaining group of people who, by the way, are very happy with the discounted price. Selling seats at different prices, to different groups of passengers, really was a great idea, although it is certainly not easy to do in real life.
Skip to 6 minutes and 51 secondsThe outcome is rewarding for the airline: the aircraft is full, and the total revenue is €83,000!
Skip to 7 minutes and 0 secondsThis is about 50% more than the best solution of €55,000 reached with the single price strategy. If only the first manager had studied economics like Jennifer did…
Skip to 7 minutes and 15 secondsThat’s a great happy ending, right? Of course, you already knew this solution, and have probably experienced this situation either as a customer or in your own business. One product – a seat on a plane or train; a cabin in a boat; a space in a campsite; a ticket for the theatre; entrance to a pool or park; or an item in a mobile game – whatever the good or service, is sold at different prices to different people. It seems simple, but it is more complex in real life, and this is what you are going to experience over the next 4 weeks.
Skip to 7 minutes and 55 secondsAs with uniform pricing, there are conditions for this pricing strategy to work, and there are some useful concepts to understand and practise before you will be able to do ‘revenue management’.
Skip to 8 minutes and 8 secondsSo, this week has already started by looking at managing prices in a simple way. Over the rest of the week, you will be introduced to some economic notions and you will be shown how to use them in the airline case studies. As soon as next week, you will have the opportunity to experiment with pricing strategies by playing an online pricing simulation game. Afterwards we will discuss pricing strategies and see how they are applied in practice to various businesses.
Skip to 8 minutes and 41 secondsWeek 3 will be devoted to implementing revenue management when, as in real life, you face some uncertainty about the number of customer you may have. This will involve defining the risks associated with that uncertainty. Starting with a very simple case study and a cartoon, you will learn how to manage the seat inventory in that context. Finally, experts from various industries will share their experiences in the practice of revenue management.
Skip to 9 minutes and 15 secondsIn the fourth and final week, you’ll be in charge! You will take control of the revenue management of an airline. This will be close to a real-life situation thanks to an online pricing simulation game. We will then bring back our experts to share their view on the future of revenue management.
Skip to 9 minutes and 35 secondsSince ‘all knowledge is an answer to a question’, you will sometimes be asked to take some short quizzes to check your understanding of the key points and you’ll end each week with a test. More importantly, there will be many discussions to “join in with” during the course. We highly recommended that you participate in those discussions, share your views, and gain insights from other learners. Welcome to the course! I hope you will enjoy the next 4 weeks on this exciting topic!
A broader view - course introduction
Prices are very powerful tools that can be used to increase revenue.
Managing prices is not an easy task, some strategies may or may not work in different circumstances. Focusing on the case study, we analyse the conditions under which a change in prices leads to an increase in revenue and propose to have a first look on how revenue management could lead to substantial increase in revenue.
Our Lead Educator will first debrief the short case study on the airline management problem and describe the main topics to be covered during the four weeks, starting with a detailed presentation of the current week.
Check the DOWNLOADS section at the bottom of this page to access a printable version of the slides included in this video.
Join the discussion
Revenue management is becoming more and more widespread in many sectors of the economy.
According to you and to your experience, why do we observe prices that change over time or from one customer to another?
Write one phrase in answer to this question, and remember to read and respond to other learners’ comments, too.
© By ENAC - Christophe Bontemps CC BY-NC-SA 3.0