Skip to 0 minutes and 8 secondsThe pricing simulation game you just played reflects the type of decision any revenue manager has to make on its pricing over time. Here we have focused on a plane of fixed capacity but it could have been a theatre, a hotel, a theme park, or any type of perishable good or service. As you have noticed, neither the composition of the
Skip to 0 minutes and 33 secondsdemand, nor its intensity are uniform over time: People with the highest willingness to pay book later than people more sensitive to prices ready to fly only at a low price. The latter are more numerous. So if the demand is not uniform over time, why would the prices be uniform?
Skip to 0 minutes and 56 secondsYou may have tried to increase your prices as the departure date approached, which is a good idea. Maybe you doubled your prices between the first and third period? Maybe even more? Good! Experimenting is a good way to learn how demand reacts to your pricing strategy.
Skip to 1 minute and 16 secondsMaybe you have filled your plane very quickly and regretted it, because you could have sold your seats at a higher price? That's also a good experience, as you now know that there are lots of people ready to fly at a low price. Well, I hope that you managed your prices such that you made some profit at the end of the period, and even at the end of the year. Each year, the second period is off-peak where the demand is lower. This is a common feature in many businesses. Here it is clearly announced, so maybe you decided to lower your prices. Still, even in an off-peak period there are people travelling for business and ready to pay a high price.
Skip to 2 minutes and 0 secondsSo, you may have ended up with some empty seats, but still with reasonably high prices for those last-minute travellers.
Skip to 2 minutes and 9 secondsIn the second year, the exercise was more challenging, because you could choose your plane and thus your capacity. That capacity was then fixed for both peak and off-peak periods. So you had to make a strategic decision before choosing your prices. Choosing a big airplane gives you the opportunity to satisfy all the demand, including the demand at the lower price. But the plane may be more difficult to fill in the off-peak period. On the contrary, having a small airplane helped you increase your prices in the peak period, but you had fewer seats to sell.
Skip to 2 minutes and 48 secondsSo, as you have experienced, the total capacity had an impact on your prices, and the remaining capacity after each pricing decision was surely also influencing your next pricing decision. Paying attention to your previous results and how demand reacted to your price variations is also very useful for forecasting the demand. Finally, in the third year, you had a glimpse of another element that strongly affected demand behaviour and, in particular, the business demand. You had the option of changing the frequency of the flights and therefore the time of the departure.
Skip to 3 minutes and 31 secondsAs you may have discovered, the value of time was higher for business demand, and having more frequent flights attracted more people willing to pay higher prices.
Skip to 3 minutes and 43 secondsI ought to mention that you can keep playing that pricing simulation game over and over if you wish, and that you will play another simulation game in Week 4. While you were in a monopoly situation here, so all the demand was addressed to your company, you will face a competitor in Week 4.
Skip to 4 minutes and 4 secondsThis week, you are going to explore more deeply some of the elements you experimented with, starting by looking from the consumer’s side. One may wonder if the welfare of consumers is affected by those pricing strategies. So, first up this week is how to measure welfare in economics. You will then focus on the mechanisms used to differentiate people according to their preferences and willingness to pay. This is central to revenue management and will be explained using economic concepts and illustrated with examples.
Skip to 4 minutes and 42 secondsYou probably noticed in the pricing simulation game that your customers were reacting to price variations. You’ll explore this sensitivity to price changes and define what economists call ‘price elasticity of demand’. Finally, you‘ll listen to our expert, Bill Swan, on the relationship between the costs and the pricing of an airline. This should sound familiar to you, based on what you just experienced in the simulation game. I hope you enjoy will this second week.
Simulation Debrief and Week 2 Intro
Are there some tricks to beat a record in the game?
There is no magic trick, but they are some useful insights to be learned from the game. The best strategies are based on informed predictions of demand for a given price. These strategies also depend upon the remaining capacity of the aircraft. Did you take those parameters into account?
We discuss and illustrate these insights here and introduce the week to come.
Check the DOWNLOADS section to access a printable version of the slides included in this video.
© By ENAC - Christophe Bontemps CC BY-NC-SA 3.0