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Pricing insights for airlines

Feb 2018: White paper: Next generation airline pricing
Feb 2018: Distance- vs. revenue-based rewards
Feb 2018: Dynamic pricing of reward flights
Feb 2018: Pricing supersonic flights
Dec 2017: Gamification in airline pricing
Dec 2017: Airline pricing & revenue management 2020
Jul 2017: Airline should avoid making these retail pricing mistakes
Jul 2017: Pricing airline staff travel
Jun 2017: Why airlines should be cautious about auctioning upgrades
Mar 2017: Airline lounges are not good ancillary revenue sources
Jan 2017: Revenue optimisation in airline lounges
Nov 2016: Are airlines ready for NDC?
Sep 2016: Developing business cases for airline buy-on-board
Apr 2016: Incorporating the value of premium travel in pricing
Feb 2016: There has never been a better time to abandon full-content agreements
Feb 2016: Why every airline needs a revenue entrepreneur
Sep 2015: How a plane ticket can 'go viral'
Sep 2013: You wait all this time and three come along at once - three new revenue opportunities for airlines​

Pricing technology & methods insights

Dec 2017: Pricing is not a black box technology
Dec 2017: Culture, not technology, is the main barrier to pricing change
Jan 2017: Using Monte Carlo methods in both B2B & B2C pricing
Sep 2016: Excel is still the most important pricing tool (apart from people)
Feb 2016: Avoiding common pricing technology pitfalls through effective RFI
Sep 2015: A brand new distribution channel - are you ready to price in augmented reality?
Sep 2013: Are you over-dependent on pricing technology? Take our test to find out...

Pricing skills & organisations insights

Jun 2017: One word that can solve the pricing skills crisis
​​Sep 2016: The differences between Pricing & Operational Research
Jun 2016: Do you have all six pricing skill sets in your team?
Apr 2016: Pricing and data science
May 2015: Pricing & organisational structures
May 2015: How is B2B pricing distinct from B2C?

Pricing insights for financial services

Jun 2017: Is actuarial pricing untouchable?
Sep 2016: Three pricing challenges for commercial banks

Pricing insights for SMEs

Jul 2017: What SME CEOs need to know about pricing - part III
Jun 2017: What SME CEOs need to know about pricing - part II
Mar 2017: What SME CEOs need to know about pricing
Nov 2015: Pricing checklist for SME

General pricing strategy insights

Jul 2017: Pricing elevator pitch
Mar 2017: Soft intelligence & pricing
Mar 2017: Open the world with distressed inventory pricing
Jan 2017: Pricing for party planners
Jan 2017: What charities need to know about pricing
Nov 2016: Some myths about pricing
Nov 2016: Pricing strategies on RMS Titanic
Nov 2016: Why we don't want to compete with big consulting firms
Jun 2016: Price escalators - the part of pricing many people forget about
Jun 2016: Are you ready for the next downturn?
​Jun 2016: Pricing's magic number
Apr 2016: Using war games to make the right pricing decisions
​Apr 2016: Karl Marx, Revenue Manager
Feb 2016: Defining customer archetypes
Nov 2015: Rapid reaction pricing - handle with care
Nov 2015: Packaging, packing & pricing
Nov 2015: Why are there no jokes about pricing?
Sep 2015: The case against promoting your sales
Sep 2015: Umbrellas and randomised pricing
Mar 2015: Doubling-up on loyalty
Mar 2015: It's cold outside, so why can't I buy a coat?
Jan 2015: Is the end of 99p pricing coming?
Jan 2015: Simon Cowell the pricing strategy expert
Nov 2014: What are the next three big things in pricing?
Nov 2014: What happened when Waitrose came to town?
Sep 2014: Great insights from our Clients
May 2014: Unlocking your inner retailer
May 2014: The any-time-but-January sale
Mar 2014: A different price for every customer
Mar 2014: Popcorn, please! Essential elements of ancillary revenue
Jan 2014: In the Wild West of pricing, the law is a funny thing
Jan 2014: What if Ryanair ran a hotel?
Nov 2013: Moving away from the market price
Nov 2013: Is pricing an art of a science: three things revenue managers must know
Nov 2013: Off the rails? Pricing strategy for UK railways

White paper: Next generation airline pricing

Airlines developing next generation pricing must solve three challenges regarding data, internal process management and implementation. Our latest white paper shows how airlines can achieve pricing that is effectively personalised and dynamic with today’s data and technology.

In some more detail, the three challenges are:
(i) Where does the data come from, how can it be quantified and how robust can it be?
(ii) What needs to be achieved before next generation pricing can be realised?
(iii) How can airlines effectively implement next generation pricing with today’s technology?

Solutions to each challenge must be appropriate to both seat sale and ancillary revenue sources, especially in economy. They must also incorporate premium cabin seat product and service processes, which can vary across routes.

Contact us today to receive this white paper and inform your discussion about dynamic and personalised pricing.

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Dynamic pricing of reward flights

Airlines have operated loyalty schemes for decades, awarding miles to passengers that can be exchanged at a fixed rate for a reward flight. Availability is typically managed through traditional revenue optimisation, although it is always hard to know what bid price to apply when opening or closing reward availability. Now though it is possible for airlines to dynamically price the mileage required for an award. Should they do it, and if so how?
 
How could airlines dynamically price reward flights?
Ranson Pricing has identified nine key issues that airlines seeking to dynamically price reward flights should resolve. These are:
 
(i) Should reward flights be priced by using sector, point-of-sale or point-of-origin/point-of-turnaround logic?
(ii) Should inventory availability be determined by point-of-sale or point-of-origin/point-of-turnaround logic?
(iii) Should the mileage (i.e. the currency used to purchase the flight) component of the fare change at different points in the booking window?
(iv) Should any cash component of the fare change at different points in the booking window?
(v) Should either inventory availability or the cash/mileage components be personalised to different passengers, even when they are seeking to book the same flights at the same time?
(vi) If passengers are seeking to book return or open jaw flights, should there be length of stay restrictions (e.g. a Saturday night stay restriction on the grounds that airlines may wish for business travellers to pay cash as far as possible)?
(vii) Should fares be priced on a one-way, half-return or return basis, and is there a case to manage this strategy dynamically?
(viii) What penalties should be associated with reward flights and how should the mileage component of the fare influence these penalties?
(ix) Should mileage-cash equivalence be introduced and if so should the exchange rate be managed proactively either on a seasonal or itinerary-specific basis?
(x) Should rewards flights be subject to sales and promotions, and how should the reward sales, promotions, discount and availability strategy map to the discounting strategies applied to tickets paid for entirely with cash?

Should airlines dynamically price reward flights?
Arguments in favour include matching reward prices and terms with willingness to pay, which could make loyalty programmes more favourable to passengers who might not otherwise engage. For example, passengers who do not travel so much as others could find that under a sales and discounting/heavy change penalty strategy reward flights that would not otherwise be available become feasible. This could make the difference between seats going sold and unsold if some passengers boost their loyalty.
 
Another important argument in favour is that in certain circumstances an airline may be able to dramatically increase the number of miles redeemed for flights, reducing it’s liability (if one exists beyond the world of accounting, which Ranson Pricing doubts) and encouraging the redeemer to book even more cash flights to earn enough miles to fund their redemptions. Such cases could include increasing the mileage required for passengers who wish to change or cancel their reward booking.
 
On the other hand, one of the most important arguments against is complexity (real or perceived), which can put passengers off joining a loyalty scheme in the first place and limit their engagement once they are in. Such complexity could rise by design (e.g. tiered structures of redemption fares, that would be hard to communicate to passengers) or accidentally (e.g. if the marketing department heavily publicise cheaper redemptions and then the revenue management team decide to manage availability to an extremely limited amount).
 
Ultimately the decision to introduce dynamic pricing of reward flights lies with each individual airline. Carriers considering these opportunities must be sure to consider all the pricing issues and, as always in pricing, determine through careful research and analysis whether or not proposals are worth pursuing. They must then carefully trial and improve initiatives to deliver the best possible revenue outcome.
 
Ranson Pricing is always available to help airlines take advantage of pricing opportunities in the loyalty space. Contact us today for a no obligation discussion.

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Distance- vs. revenue-based rewards

Many airlines find it fashionable to remodel their loyalty programme to focus on revenue generated by passengers rather than distance flown. At Ranson Pricing we think that such a move is unwise. Although loyalty does need to reward those who make the greatest contributions to revenue, there are six reasons to believe that this logic is not necessarily aligned with the highest value fare products.
 
Observation 1: Corporate discounts apply
Passengers booking the most expensive fares are often business travellers receiving either a front- or back-end rebate. Although the nominal value of the fare paid may be high, the total passenger value is not necessarily as great as it might first appear. For this reason, aligning booking class with loyalty benefits may be unwise.
 
Observation 2: Airlines practice revenue management
Due to revenue management, passengers booking the most expensive fares (especially those who do not require flexibility) are often traveling on the most constrained flights. In these cases, it is likely that they could be replaced with another passenger if they chose to fly with a different carrier. Such a passenger’s loyalty may exist, but may not be particularly valuable.
 
Observation 3: Different fares offer different flexibility packages
Passengers booking the highest fares typically enjoy flexibility to change or cancel their flights if their plans change, even at the last minute. Such passengers may not require mileage as an incentive to fly as what they are really paying for is flexibility. It is hard to imagine that any sane passenger will pay a high fare difference for flexibility they do not need just to get a small additional number of loyalty points.
 
Observation 4: Loyalty operates over a whole business cycle
Some people claim that these observations might have been relevant in the past but are not any more because schedules have been trimmed to match capacity and demand more closely. Critics say that most flights are full these days and due to revenue and capacity management the passenger displacement arguments do not apply. But airlines do not just offer their loyalty programmes when times are good or when times are bad. They offer them over the entire business cycle, meaning that loyalty programmes developed today need to be appropriate to the next time when demand may not be quite as high as it is now. During an economic boom average fares will probably be higher, especially in premium cabins, but there will also be more competition for seats. More flights will go full or close to full, and more passengers could be replaced with others if they chose not to travel which reduces the value of any one high fare paying passenger's loyalty. On the other hand, passengers travelling during a downturn (even at lower fares) will be more likely to pay for seats that would otherwise go unsold and airlines will value their loyalty highly. For this reason, the loyalty of passengers paying relatively higher fares on the economic peak may be less valuable to an airline than passengers paying lower fares at the trough and revenue-based loyalty programmes may be misguided.
 
Observation 5: Personal travel is paid for from taxed income
In many countries when a business or other organisation pays for a ticket it does so out of income that is not subject to tax until profits are known and accounts filed. Their tickets reduce that profit and so reduce their tax liability. When people buy tickets for personal reasons though they need to pay out of taxed income. When a higher rate taxpayer buys a discounted seat the income they effectively need to earn before tax and at the margin to make that purchase could be double the price. We often observe flexible fares coming at double the price of less flexible products, particularly in the premium cabins, but the total pre-tax income sacrificed to pay for those seats may be the same in both cases. With that in mind, we do not see why one group of passengers should receive more favourable loyalty benefits than the other.
 
Observation 6: Passengers often buy ancillaries
When people travel on planes they often like to buy extras, including but not limited to excess baggage, premium lounge access, onboard catering and potentially other services too like hotels and travel insurance. Should a passenger who pays double the fare in ancillary purchases be offered fewer loyalty rewards than a passenger who pays double the fare but does not buy ancillaries? Should different types of purchases be treated differently? We see a large amount of ambiguity and so see one final reason to be cautious against offering revenue-based rewards.
 
Potential alternatives:
We see potential for airlines to adjust their loyalty programmes in two ways:
(i) Airlines should shift to distance-band based loyalty to reflect the reality that from a passenger’s perspective flights operating over similar distances are effectively the same.
(ii) Airlines should offer hidden discounts to certain frequent flyers in accordance careful definition of passenger archetypes and the six observations outlined in this article.
 
Ranson Pricing is always available to discuss loyalty initiatives, which are one side of the pricing coin. Contact us today for a no obligation discussion.
​
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Pricing supersonic flights

From 1976 until 2003 lucky passengers whizzed across the globe faster than the speed of sound. Concorde first operated to Bahrain and Rio de Janeiro, but she was most famous for flights between London and New York that allowed busy executives to breakfast in both cities. Now supersonic transport is back in the news, with a new manufacturer called Boom Supersonic receiving USD 10 million investment from Japan Airlines. If supersonic transport does return, there are ten pricing challenges that operating airlines will face.
 
In this article supersonic transport is abbreviated as “SST”.
 
Challenge 1: When is SST a Veblen good?
A Veblen good is a product or service for which demand increases along with price. SST are unlikely to offer vast amounts of space or fully flat beds for passengers, although high service and catering standards should be possible, subject to economic constraints. For most SST passengers the benefit of ultra fast travel will be time saved.
 
But for some passengers there may be significant “status” benefits of taking SST flights. For example, citing “urgent business requirements” to justify a high fare could impress a passenger's peers, colleagues and customers. The higher the price, the higher the perceived status, and airlines should be aware of point in the booking cycle where status-hungry market segments are booking. Should enough status-hungry passengers  be booking relative to others booking at one time the fares charged for SST could be enormous, at multiples of the same market first class fare.
 
Challenge 2: How do different market segments prioritise time, status & other elements of the SST experience, and how does this vary by market or stage in the booking cycle?
SST’s value points are clustered in two groups, those specific to SST and those applicable elsewhere in aviation. Value specific to SST includes time saved over conventional flights and SST's status, discussed above. Other value points may influence both of these to some extent.
 
More general value points include indicators that apply when pricing products across the whole of aviation. These include catering and service standards, ground benefits, seat comfort and space, seat features (such as power and in-flight entertainment), on-board amenities and the ability to work, relax and enjoy privacy. Some of these may influence SST’s specific value points, for example high catering and service standards could influence the perceived status of flying supersonic, and a generous check-in process (for example up to 20 minutes before departure) could influence time saved.
 
Different market segments will place consider each value point differently. Airlines considering SST should carefully research how each passenger group may value SST and use this information not only in pricing, but also in developing on-board hard and soft products.
 
Challenge 3: How comparable should SST prices be to First, Business and Economy fares, and what should the discounting strategy be for seats that would otherwise go unsold?
Flat beds are unlikely to be available on SST due to space constraints. At best, SST seats might be similar to regional Business Class, and in practice they may be comparable to Premium Economy. For short three or four hour flights operating within normal waking hours across both time zones (like the London to New York flights operated by Concorde) this probably does not matter and SST can be priced and discounted as a Super First, First, Super Business or Business Class product. But if the aircraft is used for longer sectors, for example trans-Pacific, missing a night’s sleep could limit the appeal to high yield passengers.
 
Whichever cabin an airline benchmarks against, it will be important to have clarity regarding whether or not the product should be discounted, and if so to what extent. At Ranson Pricing we believe that the market for premium travel is potentially vast, and that airlines who are simultaneously the cheapest and most expensive in the market are probably doing something right. So even if SST is sometimes sold at Super First and Super Business prices, selling seats that would otherwise go unsold at Business Class or even Premium Economy promotion levels might be sensible too.
 
Challenge 4: Do scarcity or exclusivity premiums outweigh spoilage costs?
Sometimes SST will have empty seats, said to be spoiled. Higher fares come with higher spoilage costs because passengers choose non-SST options or competitors. At lower fares, spoilage costs are potentially lower too due to the law of demand, but since fares achieved are lower this comes with another cost, called spillage. Airlines will need to think carefully about whether any scarcity or exclusivity premium can offset spoilage costs. One solution could be to use spare SST capacity for overbooking schedule-aligned non-SST services. Passengers overbooked, re-accommodated on SST and arriving at their destination earlier than planned may have no cause yo complain. Care should be taken to ensure passengers from re-accommodated are selected from an appropriate cabin. In some cases First and Business Class passengers may be glad to take SST, but in other cases they could be sorry to lose a flat bed, especially on an overnight sector, and overbooking (Premium) Economy may be a better option.
 
Challenge 5: How does the schedule impact valuation of speed and the attracted market segments?
As we mentioned in Challenge 3, if SST is used to operate flights within normal waking hours at both arrival and departure points passengers should value it’s speed highly. But if flying SST causes a passenger to miss a night’s sleep their valuation of the speed may be quite different. Airlines planning on operating overnight or long sectors should be sure to do plenty of research about how their customers might pay for these services as part of the aircraft procurement process.
 
Challenge 6: To what extent should SST fares be combinable with non-SST fares?
If airlines decide that SST is a premium and exclusive product, they will need to think carefully about whether or not it may be combined with other fares. Should passengers be permitted to combine SST fares with any other fare, or only premium cabin fares?

Challenge 7: Should SST be available for interline, SPA carriers and alliance members?
SST seats represent capacity that can be used to raise revenue through selling interline tickets. But if an airline is the only one in the partnership to offer SST then there might be benefits in keeping the special seats only for people who book under that airline's code and through that airline's own channels. Even if partners have access to some fares, it might make sense for the operating airline to make special deals only available to their own passengers. Similar logic might be applied with agents. One final point: Ranson Pricing encourages airlines to make SST available for booking under re-protection agreements, provided that seats would not otherwise be sold to regular passengers.
 
Challenge 8: Should SST be available for staff and agency travel?
At Ranson Pricing we believe that there is no benefit to airlines of restricting staff travel. If an airline operates SST, their staff should be able to pay for seats that would otherwise go unsold, subject to covering marginal costs, both on duty and for leisure. Why turn down the revenue? For agency travel on the other hand, airlines should be careful to ensure that agencies who might otherwise pay for SST, especially if the airline operates a mature discounting strategy, do not buy rebate fares instead.
 
Challenge 9: Should SST pricing be different on connecting vs. point-to-point itineraries?
When passengers connect to SST from non-SST some of the time benefits disappear, although they are still present. Where SST with a connection has comparable travel time to direct flights from the airport in question, it might be sensible to price SST as if it were a business or premium economy class direct flight. Where there are no direct flights from an airport, SST may be eligible for a premium over first, business or premium economy fares in view of the time saving, especially if the target passengers in that market are status-hungry.
 
Challenge 10: What ancillary products and services should be bundled or unbundled in the SST experience?
Concorde was marketed as a luxury experience, with high service and catering standards. Super First Class was the benchmark. However in times when every longhaul Business Class offers flat beds, airlines operating SST will need to carefully consider whether or not their product is really First, Business or Premium Economy standard, which will influence the ancillaries bundled into the experience. One final point for careful thought is whether or not SST should be offer more than one cabin.
 
Ranson Pricing is always available to help airlines price innovative new products and services. Contact us today for a no obligation discussion.

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Gamification in airline pricing

Do you swipe left and swipe right? Many people do, whether they are looking for new clothes or the love of their life. But what if they were looking for flights? There are opportunities for airlines to make the process of booking flights fun, earning extra revenue in the process.
 
Promotions and offers
Inspiring passengers to engage with airline content through turning information about your products and their prices into fun games could be an interesting way to foster engagement, causing some passengers who would not otherwise buy your seats to do so. Airlines could distribute special fares to passengers who achieve certain objectives in a game that cements the airline’s brand as a quality carrier to fly with in their mind, giving passengers a strong incentive to understand why they should book with the carrier in question today and in the future. The only thing left for airlines to decide is what these special offers should be and how they should differ from those available to the general public.
 
Upgrades, extras & ancillaries
Imagine if upgrading to a higher cabin, buying extras or purchasing ancillary services was as easy and fun as swiping left or right. Some passengers might be more inclined to give the higher cabin or value added services a try, potentially earning the carrier extra revenue on otherwise unsold premium seats or inventory, offering a chance to resell a lower cabin seat and transitioning a passenger’s preferences to premium travel in general. Airlines could easily make this happen in their Internet and mobile booking and reservation management processes. When combined with special offers targeted to a passenger’s individual willingness to pay, this could be a powerful way of raising revenue from premium seats that would otherwise go unsold.
 
Competitions
Competitions are an under-represented component of the pricing process. Giving away free seats, lounge access, catering or other value added services to winners can encourage more people to book than might otherwise be the case, covering the cost of the prize. Airlines can potentially revenue manage competitions by adjusting terms, conditions, winner numbers and the nature of the prize across markets and seasons.
 
A final note about full content agreements
Gamifcation has potential to circumvent GDS full content agreements, as special fares and deals are potentially available to anybody who is willing to go through the process of playing a game. At Ranson Pricing we believe that airlines should welcome any opportunity to move away from traditional GDS models, and gamification may be one such mode.
 
Ranson Pricing can help you understand how to unleash the power of gamification at your airline or other business. Contact us today for a no obligation discussion.

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​Airline pricing & revenue management 2020

Traditional pricing and revenue management (“PRM”) may be obsolete soon. In the years to 2020 it’s most valuable component will no longer be demand forecasting and optimisation, but delivering and distributing innovative fare products that are closely aligned with each passenger’s personal willingness to pay. Ranson Pricing has identified nine open questions to help airlines structure their thinking.
 
1. When should I start getting ready for PRM 2020?
Now is the time to start preparing for PRM in 2020 as airlines that are late to the party will miss the best opportunities – you need to understand what to do now, what targets to aim for and what performance measures to put in place. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
2. Should I try to price like retailers in 2020?
Airlines hoping that using NDC will transform themselves into retailers will need to avoid pricing mistakes that almost all retailers make and ensure that standard retail pricing practices that are not appropriate to airlines are avoided. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
3. What career paths should I create for PRM specialists in 2020?
Airline PRM specialists are currently paid on average 20% to 25% less than their peers in other industries and salary gaps are likely to increase – you may be at risk of losing pricing talent without alternative career paths that retain and motivate top staff. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
4. What will constitute good PRM performance in 2020?
There are at least 20 different ways of identifying good performance in PRM today and complexity will increase by 2020 - your management team will need to reach agreement on what constitutes good performance. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
5. How should I distribute my fares to market in 2020?
GDS technology is more than 50 years old and does not reflect the reality of how passengers think about and want to buy travel – as 2020 approaches airlines relying on out of date GDS technology will lose increasingly larger revenue opportunities. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
6. How should I manage tensions between stakeholders in 2020?
There is often a tension between PRM, sales, and distribution, which can be harnessed productively or negatively – airlines that find ways to leverage strengths across their entire commercial function will enjoy higher profits than others in the 2020s. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
7. How will PRM and Product Development specialists work together in 2020?
Ancillary revenues will contribute a growing share of airline revenue and profits in 2020, and not many airlines really understand the value drivers of their cabin and seating products, especially in the premium section – your pricing team will need to work with product development specialists to ensure that services you offer are designed to maximise profits. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
8. What can I do today that will last until 2020?
Expensive technical solutions available now will be obsolete by 2020 – investing in people and best practices to create a culture where revenue and profit is at the heart of your airline is the only long lasting way to secure profitability. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
9. What new PRM concepts will appear by 2020?
Open-source demand estimation, machine learning, artificial intelligence and commodification of ASKs will be standard practice in PRM in the 2020s – airlines that prepare now will enjoy a revenue dividend. Ranson Pricing can help you understand how to do this. Contact us to receive our brochure explaining how we can help.
 
Since 2007 Ranson Pricing’s airline pricing experts have generated more than USD 1 billion in additional revenue for five airlines. Contact us today for a no obligation discussion.

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​Pricing is not a black box technology

A “black box technology” is a tool, system or process that claims to do something or provide value without showing or explaining how it’s outcomes are achieved. Many business operators are rightfully sceptical of these “solutions”, especially when the vendors’ own sales force avoid going into details about how they work or, worse, hoping that using scary words like “Bayesian” will make the end-users stop asking difficult questions.
 
What pricing technology does and does not do well
 
When correctly applied, pricing technology can do three things well:
 
(i) Analyse historical sales to use understanding of what has come before to inform decisions when you are called upon to take pricing actions (note that Excel can easily do this too, if your staff have the skills to manage the analysis)
(ii) Execute pricing of more products than a human can manually price to ensure that customers receive the right prices
(iii) Optimise revenue based on real-time information about customer behaviour and offer or remove specific products and services to maximise revenue given price levels.
 
Despite having pricing focus in common, each of these three things are quite different and not really interlinked. Be wary of any technology that claims it can offer all of these together. But when you are buying tools that offer these, make sure that you really understand how it works. Has the vendor explained things clearly? If they have not, then there is a good chance that they do not understand how it works themselves.
 
But there are six things that pricing technology does not do well:
 
(i) Decide who your competitors are or how your customers behave
(ii) Plan for the future
(iii) Take strategic and tactical decisions
(iv) Understand built-in bias
(v) Know when things change in the real world
(vi) Guarantee success
 
Be wary of technology that claims it can provide any of these. Of course, technology can be used to facilitate these six things (for example writing down a plan in a word processor) but the human element is the most important ingredient to great pricing.
 
Pricing enablement
 
In order to incorporate the human element in pricing, at Ranson Pricing we offer what we call “pricing enablement”. This is as far away from a black box technology as it is possible to get. It focuses on helping you use the people and resources that you already have to find great pricing opportunities. It includes training programmes and workshops to help team members gain confidence in pricing, collaborating with your teams in their day to day work so that they can bring out pricing skills that they never thought they had and deliver profit growth quickly, and conducting special projects that find new ways to grow profit and directly show a business how to handle pricing over the long term.
 
The size of the pricing prize
 
The size of the pricing prize is typically 5% to 10% of revenue in low-margin industries and 40% to 60% of profits in higher margin industries. How much you spend to achieve these amazing outcomes is up to you. But remember that pricing technology vendors will seek to get you to hand over a large proportion of this prize just to get you to use their systems, including systems that may not be right for your business. Pricing enablement is the critical, and cheapest, first step in building pricing in your business.
 
Ranson Pricing is always interested in helping companies find pricing skills that their teams never knew they had. Contact us today for a no obligation discussion.

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Culture, not technology, is the main barrier to pricing change

Many businesses would love to enjoy the benefits of better pricing, which are profits to invest in new products, better customer service and motivated employees that support growth. Unfortunately, these extra profits will not be available to companies that invest only in technology without changing their culture.
 
There needs to be a sense of urgency to achieve results.
 
Every business is staffed with people who go to work every day believing that they are working hard and doing a good job. But reaching a leadership position in many organisations normally requires caution about cost, risk avoidance in revenue and a tendency to manage by committee, so decisions can take an extremely long time and implementation even longer. As a result building the pricing practice you need can be a lower priority than less valuable projects and take forever to implement as the responsible manager prepares a business case, persuades the finance department to offer the budget, adds it to a large list of priorities and checks with his executive that the matter is still a priority. And when the new pricing is in place, it cannot represent a great step forward because that would be too risky to achieve management and finance sign-off. A business that can adopt more agile methods, trust it’s staff to take the right course of action and build a culture where people just actually do stuff could become a leader in it’s class extremely quickly. Ranson Pricing’s pricing enablement programme is designed to help companies achieve this.
 
Companies do not hire good quality pricing staff.
 
Your pricing staff are an extremely valuable asset. They are more than anybody else responsible for making sure that your business makes an actual profit, which is not just about making a sale but extracting value from your customers. Yet too often at Ranson Pricing we see businesses that are prepared to offer good salaries to accountants, digital marketers or a sales force but only prepared to pay pricing professionals an administrators’ wage. Ultimately most businesses will be better off engaging one awesome pricing specialist on GBP 150k rather than three average pricing specialists on GBP 50k because the best pricing people can release ten or more times more value than the average. Persuading budget holders, hiring managers and the executive team that investing in pricing people and diverting resources from sales or marketing for this purpose is worthwhile is a key component of Ranson Pricing’s pricing enablement programme.
 
Aspire to greatness – don’t just copy mediocre competitors.
 
At many businesses people keep a keen eye on what their competitors are up to, often reaching decisions simply by copying what the other guys are doing. But if the competitors do not have a great pricing team in place, and most companies do not, then their pricing decisions are probably poor and it would be unwise to copy them. Instead, it often makes sense to consider how companies in other industries price their products and services because even if they do not do it well, the different models, ideas and practices they use can help you spot opportunities in your industry that would not otherwise be apparent. Ranson Pricing’s pricing enablement programme highlights the importance of finding alternative revenue models and equips the businesses we work with to find and develop these over the longer term.
 
Ranson Pricing’s pricing enablement programme helps you use the resources that you already have to price more effectively, ultimately raising revenue without changing costs. Contact us today for a no obligation discussion.

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​Pricing elevator pitch

Ranson Pricing is participating in the Entrepreneurial Spark acceleration programme, which helps us manage growth and serve you, our customers, more effectively. As part of the programme Oliver Ranson has been hanging out with interesting companies, many of whom have awesome 60-second elevator pitches. He made one too…

[…]s represent dramatic pauses!

Do you want your business to survive … or thrive?

Companies that don’t invest in pricing leave up to 50% of their profits on the table … and that can make all the difference.

Ranson Pricing helps businesses like yours find that extra revenue without changing costs. And if we do a project together we will really get to know your business to deliver pricing solutions that are truly bespoke and long-lasting. When it comes to pricing, off-the-shelf services simply do not unlock all the value and have a limited life.

Whether you want to find your meal deal … unleash your inner Uber … or maintain yields while winning deals Ranson Pricing is the advisor for you, with ten years experience pricing products and services in B2B and B2C markets … we have advised companies at every stage of development, through SMEs, mid-range and large corporates.

When it comes to pricing, picking a number is not enough … the art of pricing is what you do next!

Contact us to find out more about what we do. Contact Entrepreneurial Spark to apply to participate in their accelerator programme.

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What SME CEOs need to know about pricing - part III

What SME CEOs need to know about pricing - part IIIRanson Pricing has recently developed a pricing boot camp for SME CEOs, which we are delivering in partnership with a leadership training organisation. This article is the third in a series of three and covers the human capital and information assets SME CEOs need to provide to make sure that their company is on track to price effectively.

Read Part I here – what is pricing and why is it so powerful?
Read Part II here – what human capital and information assets are relevant to pricing?

This part is all about the essential elements of a pricing programme that, while highly relevant to all businesses, are achievable at SMEs.

Pricing strategy follows a five-stage cycle – you need to be able to implement each of these:

(i) Conduct pricing research to understand the customer base and competitive environment
(ii) Develop a pricing strategy by determining options and conducting cost-benefit analysis to evaluate which is the best
(iii) Define menus of tariffs, which may include a dynamic element (e.g. when to change prices and have a sale)
(iv) Distribute tariffs to the market place once they are finalised – distribution platforms can be real-world or online
(v) Manage your pricing assets by making sure they are working as intended – keep an eye on average prices and the max/min range, the bundles of products purchased and customer feedback about their perception of value for money.

You should develop and implement pricing research programmes that incorporate three pathways to understanding your customers, competitors and markets:

(i) Mining and analysing your existing data
(ii) Directly asking customers – do not underestimate the power of well-written surveys with measurable and meaningful outcomes, as well as “soft intelligence”-driven free text comments
(iii) Trial and improvement exercises to test ideas in the real world.

Remember that pricing technology can do three things:

(i) Analyse historical sales to use understanding of what has come before to inform your decisions when you are called upon to act
(ii) Execute pricing of more products than a human can manually price to ensure that customers receive the right prices
(iii) Optimise revenue based on real-time information about customer behaviour and offer or remove specific products and services to maximise revenue given price levels.

Critically, remember that pricing technology does not (i) decide who your competitors are or how your customers behave, (ii) plan for the future, (iii) take strategic and tactical decisions, (iv) understand built-in bias, (v) know when things change in the real world, (vi) guarantee success – before you invest in expensive technology, do not underestimate how far you can get with common sense and spreadsheets.

Some final things to consider:

(i) Always use a price escalator to keep up with inflation
(ii) Carefully define how and when you should offer sales
(iii) How you can use pricing to encourage customers to pay using your preferred payment mechanism and (if applicable) your preferred currency.

Ranson Pricing is always available to provide pricing training relevant to any part of your organisation. Contact us today for a no obligation discussion.

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Airlines should avoid making these retail pricing mistakes

With the New Distribution Capability and it’s associated software coming on the scene, airlines are starting to think of themselves as retailers, selling a diverse set of products and services through their agents. But when airlines consider what prices to charge for their products, especially in the ancillary space, they should be cautious of seeking inspiration from the retailers because of three retail pricing practices that may be inappropriate for the industry.

Beware margins – focus on willingness to pay instead
At every stage of the retail supply chain, participants speak of margin as the be-all and end-all of pricing. For example, a chocolate brand owner may seek a 40% margin on sale to a wholesaler, who in turn will target a 20% margin on sale to a supermarket. Heading backwards through the supply chain, the supermarkets attempt to estimate costs for their suppliers and use these as part of an aggressive strategy to buy their goods at the cheapest “fair” price possible.

There are two general drawbacks with this approach:
(i) It is not clear why customer willingness to pay for a product or service should be related to it’s cost of production, which is what margin analysis is all about – airlines should consider carefully what customers may be willing to pay for ancillary products before trialling and improving a pricing strategy
(ii) Strict margins may not facilitate bundling into more profitable packages, which for a supermarket (or an airline offering buy-on-board catering) are meal deals, BOGOFs (buy-one-get-one-free) and other promotions – airlines should consider carefully whether they want passengers to buy products individually or as bundles before considering margins.

For airlines in particular, margin analysis is of limited value because:
(i) The intra-airline supply chain and associated costs of service (not least fuel burn and galley space optimisation) are much more complex than for a supermarket
(ii) Passengers may place widely varying values on the products offered due to different home locations and cultural heritages – ideally airlines will offer different bundles of products at different price points across all of their different routes.

Instead, airlines should use research and trial-improvement methods to gauge the customer willingness to pay that most profitably balances volume and yield.

Aggressive purchase behaviour can alienate suppliers
Supermarkets and airlines are well known for aggressive procurement strategies. And when airlines were including a product as free at the point of supply there might have been a case for this. However when passengers are being asked to pay for on-board food and beverage airlines may alienate their suppliers if they are seen to be pricing too aggressively, especially when the suppliers are used to standard retail prices and margins, which may be much lower than those required to successfully deliver a product in the logistically complex world of flight catering.

For buy-on-board catering, intra-product quality differentiators may be less preferable to inter-product variety
Supermarkets and airlines both love the good-better-best pricing model as whether a shopper is seeking to buy chocolate biscuits or cabin products, the presence of higher quality items (e.g. “Finest” for chocolate business, and business/first class for airlines) can cause some customers who would otherwise pay for the basic product only to buy up to a higher product/cabin because the presence of the higher tier makes the intermediate tier look like better value for money.

But when it comes to buy-on-board catering, limited galley space and potentially vast difference in passenger taste will most likely require that only one tier of each product can be offered. Airlines will have to think carefully about whether or not they should offer a higher quality product at a slightly higher price point (note that a high portion of the costs associated with airline catering are in logistics).

But most importantly, airlines will probably find that a wide variety of products (e.g. a pizza slice, a sandwich and a sweet treat) will cause passengers to provide more revenue than a selection of pizza slices of varying quality or just a pizza slice on it's own.

Ranson Pricing is always available to help airlines price their ancillary products and services, either through traditional channels or non-traditional channels. Contact us today for a no obligation discussion.

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​Pricing airline staff travel

For airlines, some of their most loyal customers are their own staff. And access to low prices for the company’s products and services are important perks of the job that keep colleagues inspired, motivated and ready to develop their careers with the carrier in question, ultimately boosting long-term profitability. But pricing staff travel perks is not a clear science, with four models that each have their own costs and benefits.

The low fixed price (ID90/ID50) model
This pricing model is all about giving staff access to products and services at one fixed, low price that is generally lower than the tariffs available to the public. This model is common practice in the airline industry, with ID (industry discount) fares offering seats to staff when they are not required by regular passengers. Typically seats are offered as ID90 (supposedly a 90% discount, although in practice this is based on long out of date fare structures) or ID50 (50% of the old fares, which while still extremely cheap in most cases have higher priority than ID90).

The advantages of this approach are that the prices they are simple to manage and easy to implement. The disadvantages are that when the product in question is in constrained, price cannot be used as a differentiating mechanism and airlines are forced to use other rationing methods (e.g. seniority) to allocate seats when more staff want to travel than there are seats available. Theoretically the airline could be turning down significant amounts of revenue from staff passengers who might otherwise pay for tickets with a smaller discount.

The standardised discount model
This pricing model is all about offering a standard discount on currently available fares. For example, when a fare is USD 500 a 90% discount would lead to a fare of USD 50, and when a fare is USD 1,000 a 90% discount would allow the staff passenger to buy a seat for USD 100. This approach allows airlines to monetise seasonality in staff travel. The drawback is that unless seats are confirmed (which could displace full fare passengers) the airline still has to find a way of deciding which passengers to accommodate when there is excess demand. Seniority can be used or the price paid could be too, but there is no clear decision that can be entirely optimal for the employer and entirely fair for the employees.

The dynamic discount model
Taking the standardised discount model a little further, airlines might find it worthwhile actively managing staff discount levels. For example, when demand is expected to be extremely high the discount might be only a few percentage points, but when flights are not expected to be constrained the discount level might be set at 80% or 90%. This approach permits a high degree of revenue optimisation and can be incorporated into the inventory management processes, but might require confirmed seats for passengers holding discounts, which could displace higher fare paying regular passengers. Blackouts at peak-of-the-peak could help mitigate regular passenger displacement.

The auction model
Methods used to auction higher cabin seats could also be used to allocate seats to staff on a revenue basis. If all staff are able to bid for any available seats, the airline will be able to truly optimise revenue. The cautious airline might incorporate reserve prices to cover marginal costs. While this process can be used to avoid displacing regular passengers, the airline might be concerned about loyal, long-serving yet junior employees being outbid by more highly paid staff.

Ranson Pricing is always available to help price staff discounts. Contact us today for a no obligation discussion.

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​Is actuarial pricing untouchable?

Actuaries price financial products by using sophisticated methods aggregating risk, market conditions and human factors. Their pricing has for many years been much more sophisticated than other methods used in the financial services industry, but that may be about to change.
 
B2C finance houses can easily adopt pricing best-practices across their entire range of non-actuarial products
The B2C finance product range includes: (i) savings and money management products such as current accounts and ISAs, (ii) borrowing facilities including loans, overdrafts, mortgages and credit cards and (iii) actuarially priced products such as insurance and assurance. But unlike many products and services the prices can be fixed money amounts (e.g. GBP 6.00 to use an arranged overdraft in one month), percentages (e.g. an interest rate of 11.0% on arranged overdrafts) or a combination of the two.
 
Interest rates are often aligned with those set by an external authority, reducing banks’ ability to price flexibly, but the amount banks receive moves with amounts under interest, which may change with inflation. On the other hand, banks can change fixed charges and the balance between fixed and interest-based charges. They should do this gradually to ensure that steady price escalators move to match inflation and avoid consumer fright at sudden price jumps.
 
B2C finance houses will need to decide whether or not to place actuarially priced products in bundles
The ideas proposed above are quite radical in finance, especially in the UK where “free” banking is currently market practice. But as the environment changes banks may be tempted to bundle actuarial and non-actuarial prices together. They could decide that prices set by an actuary, and which previously would be inviolate, should be increased or reduced in order to encourage customers to buy a bundle of other services.
 
B2C finance houses should exercise caution
Reducing prices for actuarially priced products through bundling may reduce revenue in the long term if it creates incentives to sell actuarially priced products at cost to shift other, less profitable products in volume. Financial institutions should be sure to do their homework and trial proposed changes in a controlled, careful and scientific manner.
 
Ranson Pricing is always available to help banks and financial institutions understand how to adopt pricing best-practices from other B2C industries. Contact us today for a no obligation discussion.

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​What SME CEOs need to know about pricing - part II

Click here for part I

​Ranson Pricing has recently developed a pricing boot camp for SME CEOs, which we are delivering in partnership with a leadership training organisation. This article is the second in a series of three and covers the human capital and information assets SME CEOs need to provide to make sure that their company is on track to price effectively.
 
Supply and demand
Introductory economics courses teach that price levels result from the interaction of supply and demand. So when you are setting prices you need to understand supply-side issues and demand-side issues. The former include understanding who the competitors are, where your products fit in the market place and, when developing or launching a new product, where your new and future products fit in the future market place. On the demand side, take a look at when customers buy, how they pay, what attributes of your product or service they value and what bundles of products or services are bought by specific market segments.
 
Human capital assets required for pricing
Pricing is not difficult, but like so many matters in the commercial environment it requires a certain thoroughness, rigour and attention to detail to carry off effectively. Your pricing team will require:
 
(i) The ability to evaluate and draw inference about customer behaviour from data
(ii) The ability to take decisions and make clear recommendations
(iii) The ability to follow a hypothesis-driven approach, testing whether or not opportunities deliver value in the real world
(iv) The ability to think like a customer.
 
A strong intuitive understanding of the core pricing skills outlined above are more important than technical skills, which can be learned – do not set down a shopping list of 20 tools and software products that job candidates must be able to use already – that candidate does not exist! It is important to note that while a certain amount of expertise is required to handle pricing matters effectively, critical skills must not be lost to the organisation when colleagues, retire, move to other roles or resign.
 
Information assets required for pricing
A good pricing team will take decisions and make recommendations on the basis of facts. To access these facts, SME CEOs will need to make sure that the following information assets are available:
 
(i) Invoice data: contains all manner of useful information about your customers, showing what they bought, when they bought it and how much they paid – thorough analysis reveals trends and patterns, many of which you will know or suspect but some might be more subtle
(ii) Product KPIs: pricing and product are two sides of the same coin – you need to understand what your product offers and how it compares with what competitors offer to price effectively
(iii) Marginal costs: although cost-based pricing is largely obsolete, it is normally extremely unwise to price below marginal cost
(iv) Market share: it is helpful to have information available about your market share so that you can gauge the effectiveness of promotions and measure whether price increases worked well
(v) Customer value: finding a means of measuring and recording the value customers attach to your product is extremely helpful – do not underestimate the effectiveness of surveys in pricing.
 
Who “owns” pricing?
Many businesses make the mistake of having no clear owner of the pricing process. In many cases SME CEOs can enjoy an advantage over their competitors simply by making it clear who is responsible for pricing at their business. There are five options:
 
(i) A dedicated pricing team, reporting to the CEO
Advantages: autonomy facilitates decision making
Disadvantages: employing dedicated pricing professionals may not be cost-efficient
(ii) Sales specialists handle pricing
Advantages: proximity to customers facilitates rapid reaction to market changes
Disadvantages: sales skills tend to emphasise volume at times requiring yield
(iii) Marketing specialists handle pricing
Advantages: potentially a strong understanding of your product features and how customers react to initiatives
Disadvantages: marketing skills tend to emphasise the product component of the pricing rather than other relevant elements
(iv) Data management & reporting specialists handle pricing
Advantages: strong understanding of data can facilitate analysis and reporting
Disadvantages: pricing requires data analysis rather than data management skills and the ability to convince other stakeholders to take decisions, which are skill sets not always held by data managers
(v) Customer service specialists handle pricing
Advantages: proximity to customers facilitates understanding of their preferences
Disadvantages: customer service specialists may lack the analytical skills required to draw convincing business cases from data.
 
Ranson Pricing is always available to provide pricing training relevant to any part of your organisation. Contact us today for a no obligation discussion.

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​One word that can solve the pricing skills crisis

Sourcing and retaining great pricing specialists seems harder than it should be and we are not surprised. The traditional “Pricing Analyst” role is obsolete, divorced from organisational requirements and career expectations. Changing one word in the job description solves these problems.
 
Our proposed solution – the “Revenue Engineer”
Whether you are in the travel industry, the software business or the world of heavy machinery, the word “engineer” suggests resourcefulness and experience, great assets for any team and not just pricing.
 
The word “analyst” on the other hand is often associated with entry-level and junior positions for people who find out information for others to act upon. At many firms pay scales for analysts are lower than those for engineers. If you can find a way of associating pricing more closely with engineering than with entry-level positions then you might be able to persuade budget holders to increase salaries commensurately, improving your ability to attract and retain great pricing talent. Simply renaming the job title could be enough to get this started!
 
Recruitment – growing the accessible talent base
In the digital technology business “engineers” are the most talented staff. And as pricing becomes more of a transferable skill talents pricing professionals from this field will likely be happy to help companies in your industry too. Call your pricing staff engineers to show applicants that they will be accorded the responsibility that their experience warrants and you will improve your ability to access the most valuable talent.
 
Retention side A – the new career path
Once upon a time Pricing Analysts became Pricing Managers and, sometimes, Vice Presidents. In order to progress a pricing specialist needed to take on management responsibility, performing tasks such as line management, appraisal and planning that may not have been aligned with their ability to increase revenue without changing costs. This was the only way for people to increase their compensation and seniority in the organisation. But it is now out of date.
 
Ideally pricing professionals will be able to progress and benefit from their skills at pricing, not management, should this be the path they choose. Having an “engineering” path where individuals can progress to Lead Revenue Engineer and Senior Revenue Engineer with the benefits of being managers without needing to do management will help your business recognise, reward and retain great pricing potential, ultimately increasing revenue and reducing costs.
 
Retention side B – motivation
Your business only needs a certain number of managers and bottlenecks can appear when incumbents stay for a long time, reducing the ability of younger staff to progress – they leave instead, and you will have costs to find and train replacements.
 
Introducing an “engineering” path will allow you to recognise and reward skilled pricing professionals without needing to move them into a management position that is not available. Your pricing people will be more inspired to boost revenue when they know that they can be promoted without a management-level position becoming available and your HR and Finance departments will be sure that you are not creating unnecessary management positions just to promote staff who deserve it.
 
How to structure a new revenue engineering department
Pay grades: Senior Manager = Senior Revenue Engineer, Manager = Lead Revenue Engineer, Analysts are replaced with Revenue Engineers.
Responsibility: Managers plan, organise and measure, Engineers do pricing.
Organisation: Engineers report to Managers and Senior Managers. Managers and Senior Managers report to the Vice President. Senior and Lead Engineers report to the Vice President too.
 
Ranson Pricing is always available to help you recruit, train and retain your team of skilled pricing specialists. Contact us today for a no obligation discussion.

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Why airlines should be cautious about auctioning upgrades

Airlines are increasingly auctioning unsold first and business class seats as departure approaches. Technology vendors offer “solutions” promising instant revenue which commercial directors in an extremely tough operating environment find hard to resist. We believe this is unwise.
 
Auction mechanisms
There are four ways that airlines can offer premium cabin seats for auction:
 
Mechanism 1 – open offer, sealed bids: Airlines offer everybody the chance to bid for seats but while other passengers know that everyone can bid they cannot see what other people are bidding – the spare premium seats go to the passengers offering the most, but the airline may still control the number of awards and implement a reserve price if they choose.
 
Mechanism 2 – sealed offer for price takers: Airlines offer all or selected passengers the chance to accept a particular price for upgrade – if nobody buys at that price point the airline can reduce the price, either to the same group of passengers or to others who were not approached before.
 
Mechanism 3 – open offer, open outcry: Airlines offer everybody the chance to bid for seats and make information about bids submitted so far public. The airline may still let premium seats go unsold through limiting the number of seats available in the auction or by implementing a reserve price. The airline will also need to decide whether or not to make the result (i.e. number of upgrades sold) public.
 
Mechanism 4 – sealed offer, open outcry: Airlines make an offer to a selected group of passengers and let that group understand how quickly the offer is taken up. Once again the airline may or may not choose to make the result public.
 
Short term benefits
Auction models can potentially provide a handy boost to revenue over the short term at almost no cost. Some passengers who would not otherwise have paid for the premium cabin seat will pay a little extra and might even be inspired to pay for business class outright next time.
 
Long term costs
However it is likely that some premium cabin passengers will decide that they can risk bidding for upgrades rather than paying high fares up front. While for leisure passengers buying fares at the lower end of the range the ultimate fare difference may be small, passengers requiring fully flexible itineraries could enjoy substantial discounts. On flights that are not forecast to be fully booked these passengers will not be replaced with others and the revenue loss to the airline is real. There is also a risk that some passengers acquiring a taste for premium cabin travel could desert the airline altogether if they discover that other carriers offer confirmed business class travel for the price of an economy fare and a winning upgrade bid.
 
Hidden costs
First and business class seats are valuable products and airlines benefit through making them available to their staff and agents. When travelling on duty, these passengers will arrive at their destination relaxed and refreshed, which will help further the airline’s business and premium cabin availability for holiday travel is a key incentive for the airline’s people, who they should consider their most valuable asset. Auctioning premium cabin seats on the other hand risks seats that would otherwise be occupied by valuable staff and agency travel going for a lower price than they really should.
 
Recommendations
In general Ranson Pricing considers sealed offer mechanisms preferable to open offer. They create the impression that upgrade auctions are not always available and help limit the long term costs. We also recommend sealed bids to open outcry because some passengers may be encouraged to bid high. But overall we prefer the approach of airlines simply “auctioning” through traditional pricing and revenue management, making good value premium fares available for passengers to buy in advance when seats are expected to go unsold and high fare passengers are unlikely to book. Such an approach enables the airline to be simultaneously the cheapest and most expensive in the market while still capturing passengers who prefer the security of a confirmed business or first class seat.
 
Ranson Pricing enjoys implementing auction-based price mechanisms and can help your airline or other business achieve revenue growth. Contact us today for a no obligation discussion.

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​Airline lounges are not good ancillary revenue sources

In January Emirates announced that they will allow passengers travelling in economy to pay for access to their premium cabin lounges. Although Ranson Pricing wrote last time about how to make the most of opportunities to monetise lounge space, we see four reasons to be sceptical in the Emirates case.
 
First, the good bit
Emirates require that passengers paying to access their lounges must sign up to their frequent flyer programme. This is a good idea because it allows the carrier to add the passengers to their special offers, potentially increasing sales in the medium term.
 
Emirates’ proposed fees seem high for the value on offer
Access to the business class lounge is available to economy passengers for USD 100 per person and both economy and business class passengers can access the first class lounge for USD 200 per person. These prices seem quite high for access to a chair and an acceptable buffet. No doubt elsewhere in the terminal the same money would go a long way, so Ranson Pricing finds it hard to see where the value lies for passengers.
 
Children will be charged half price, which might increase spoilage costs
Since adult prices are high, offering children access at half price might help sell lounge space that would otherwise go unused. But paid lounge access might cause adults paying for tickets to book their children into the economy cabin on the grounds that they will all be together on the ground. This could increase spoilage costs for Emirates if premium cabin seats go unsold as a result. Although it is possible that children paying 65% fares could have their seats sold to adults at 100% fares instead, in practice the children in question are likely to be members of Emirati families and their 65% of high point to point fares originating in Dubai are likely to be higher than 100% of transiting sixth freedom fares so the revenue outlook for Emirates does not look good.
 
Cash and Skywards miles are not accepted, which indicate bad things
On the cash side, clearly Emirates either do not trust their staff to handle cash or do not trust their passengers to provide genuine notes, which seems bizarre. On the mileage side, lounge access could be a good way of reducing the airline’s mileage liabilities without having to spill revenue on seats.
 
Passengers need to pay for access beyond four hours if their flight is delayed, which could harm Emirates’ brand when things go wrong
Given the high price point and the relatively small number of flights that will be delayed under normal operating conditions this seems a bit harsh. There is a risk that Emirates’ passengers might be more upset at being hit with the double-whammy of suffering a delay and being kicked out of the lounge than they would be with a delay on it’s own, which could harm Emirates’ brand perception in the long term. On the other hand, at times when there are many delays Emirates would not want to turn away business and first class passengers because the lounge is full, so they have no choice but to impose the maximum stay. Perhaps they would have been better off not allowing lounge access at a fee at all.
 
All in all, Ranson Pricing is not confident that Emirates have done their homework. We hope that they do not suffer in the long term as a result of this decision.
 
There are alternatives though
Gulf carriers like Emirates often make premium cabin fares from their hubs (Emirati families are likely to be the main source of demand for the paid lounge access) extremely expensive. Rather than selling lounge access they might be better off introducing new fare products for off-peak flights and having premium cabin sales to sell seats that would otherwise go unsold, especially on shorthaul flights where premium fares can be extremely high even if there is no demand. Shorthaul premium revenue could be harmed significantly by paid lounge access as a relatively high proportion of the benefits (compared to longhaul) are enjoyed by shorthaul premium passengers on the ground.
 
Ranson Pricing is always available to help airlines find innovative ways of increasing revenue from premium products and services. Contact us today for a no obligation discussion.

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​Soft intelligence & pricing

It is extremely difficult to understand why some customers chose not to buy your products or services. They don’t appear in invoice data so can be lost from the sales history and often have little incentives to complete surveys. “Soft intelligence” can help understand why they chose not to buy.
 
What is soft intelligence?
 
Traditional surveys focus on structured, well-defined questions with measurable and meaningful outcomes. There might be a free text box at the end, almost an afterthought, but the experience is based around capturing specific information from people. Soft intelligence on the other hand is all about the free text and minimal structure.
 
What advantages does soft intelligence have over traditional surveys?
 
Human beings are emotional, taking decisions irrationally in response to unquantifiable feelings so expressing our reasoning may not fit with the rigid framework of a survey. Since soft intelligence focuses entirely on free text it is better suited to capturing the non-linear dynamics of why a person chose to buy or not to buy. Since soft intelligence allows short, one-word answers, it has lower barriers to use for customers who decided not to buy than a survey so is more likely to be completed.
 
Why is soft intelligence helpful for pricing?
 
You can use soft intelligence solutions to quickly understand why people choose to make their buying decisions. In the case of customers who chose not to buy, small contributions like “too expensive”, “better competitor” or “didn’t like the colour” are much more informative than nothing at all and can be aggregated and evaluated just like traditional invoice data and survey responses from customers who did make a purchase.
 
Ranson Pricing can help you determine how to make the best possible use of soft intelligence at your business. Contact us today for a no obligation discussion.

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​Open the world with distressed inventory pricing

Only 5% of all people alive today have ever been on a plane. For flight enthusiasts like Oliver Ranson this is an unfortunate state of affairs that pricing can help put right. At Ranson Pricing we believe that pricing is a force for good as it can allow matching of “distressed inventory” (capacity which would otherwise go unsold) with customers, making products and services like air travel available at a price that more people afford and which reflects the satisfaction they receive.
 
What is true for airlines is also true for other industries. Ranson Pricing has worked with product designers, IT systems vendors, healthcare specialists, marketing gurus, the charitable sector and retailers to help them make the most of the opportunities available to them with the resources they have available today.
 
In every case we recommend that our Clients follow two rules of thumb:
 
(i) If you sell everything you are too cheap
(ii) Don’t be afraid to be simultaneously the cheapest and most expensive in the market.
 
The second of these is the key to opening the world and, in the airline business, getting more people onto planes. In your industry it can help increase sales of whatever excess capacity you have and, for the longer term, product awareness in the market place.
 
When you have inventory, production capacity, knowledge or other saleable assets that would otherwise go unsold it makes sense to offer it at bargain basement prices subject to two constraints:
 
(i) Don’t start a price war – signal to your competitors somehow (i.e do not breach antitrust legislation) that your prices are only for distressed inventory
(ii) As far as possible, make sure that you are not offering the distressed inventory at a time or through a channel that would cause customers who would otherwise pay the full price to pay the lower price instead
(iii) Package your distressed inventory as a distinct product that will not harm the perception of your regular product in the market place.
 
Ranson Pricing is always available to help you sell distressed inventory. Contact us today for a no obligation discussion.

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​What SME CEOs need to know about pricing

Ranson Pricing has recently developed a pricing boot camp for SME CEOs, which we are delivering in partnership with a leadership training organisation. This article is the first of a series of three and covers what pricing is, what it is not, and why it is so powerful. If you are looking to convince your CEO that pricing is worth investing in, these are the things that you will have to tell her.
 
What is pricing?
Pricing is the art and science of selling the right product to the right customer at the right time. The art of pricing involves applying the lessons of history to see more clearly into situations where we are called upon to act. The science of pricing is all about applying the scientific method to tariffs, identifying opportunities and conducting experiments to trial whether they really work.
 
Why is pricing helpful?
Pricing can help businesses increase revenue at (almost) no cost, boosting revenue by 5% to 10% and profitability by potentially much more.
 
Common myths about pricing
Some CEOs can get slightly confused about what pricing is and is not. For the avoidance of doubt pricing is not:
(i) saving money
(ii) something that only works for giant firms
(iii) complicated to implement and manage in practice
(iv) all about buying expensive technology
(v) copying the competition
(vi) only for B2C markets
(vii) so quantitative that you need a degree in maths or the ability to use ten software packages to understand it
(viii) only for firms in technology and digital markets
(ix) something that requires special tools and knowledge which you do not already have
(x) a job for the sales team.
 
How did pricing evolve?
It can be helpful for CEOs to understand where today’s pricing techniques came from and which models can be considered obsolete, vintage and state-of-the-art:
(i) Obsolete cost-plus pricing based on “margins” – Once upon a time it was common practice to set prices based on adding a % margin to an average cost. This approach is troubling because at most businesses a high proportion of costs is fixed so the average cost can be much higher than the marginal cost of producing one extra unit. As a result, a business can lose the opportunity to sell profitably below average cost and some capacity might go to waste as a result. At the other end of the pricing scale, what customers are willing to pay is likely to be quite different to your cost structure, so basing prices on costs might cause some customers to get a deal that is so good your shareholders might regret it.
(ii) Vintage competitor-driven pricing based on matching a competitor, charging more or charging less – Do you and your CEO know who your competitors are? You might have a good idea but do you know for sure? At Ranson Pricing we often find that there is a high degree of ambiguity about who competitors really are and across which market segments they do and do not compete with you. For this reason we recommend using caution when matching, premium pricing or undercutting against a competitor. You should seek to experiment with the market and see what types of pricing initiatives do and do not cause customers to buy from other companies. This will be much more informative than relying on hearsay and opinion and will allow your CEO to take decisions based on facts.
(iii) State-of-the-art behaviour-driven pricing based on evaluation of customer behaviour, customer willingness to pay and how customers value your products and services – It might sound complicated but with a little effort it is not difficult to implement in practice. The challenges involve managing data and performing insightful (note: not necessarily complex) analysis. In many cases it will be possible to use data you already have, such as from invoices. But in some cases you may need to get creative, reaching out to customers directly to help understand what they do and do not value about your product. Coupling the so-called “conjoint analysis” with established research methods which you probably already use will take you most of the way.
(iv) Future “utility”-driven pricing based on the economic concept of utility – Pricing specialists are not yet sure how to incorporate utility in pricing, but it may come at some point in the next ten years or so. CEOs should be ready when it happens as there could be distinct advantages for first-movers.
 
Alternative pricing methodologies
In some cases there may be alternative ways of pricing, although these are more likely to be relevant to enterprise-scale organisations than SMEs. In case your CEO is interested, these are:
(i) Regulator-driven prices (e.g. telecoms, energy) are determined by an external government authority. Operators in such industries do not sit down and take what they are given though, but actively try to influence the regulator.
(ii) Random pricing is a fun idea but although a little randomness may help confuse competitors, you should be careful to avoid confusing customers. Also, random pricing will cause some customers who would have paid more to pay less, and some customers who would have bought normally to be faced with a higher price than they are willing to pay.
 
Two rules of thumb:
If you can convince your CEO that your pricing should follow these two principles then the work to get her on your side is nearly done:
(i) If you sell everything you are too cheap
(ii) Don’t be afraid to be simultaneously the cheapest and most expensive in the market.
 
Coming up next:
Part 2: Pricing for SME CEOs in practice – what human capital and information assets does the CEO need to provide to make sure that your company is on track to price effectively.
Part 3: Pricing for SME CEOs in practice – essential elements of a pricing programme, research, technology and best-practices.
 
Ranson Pricing is always available to provide pricing training relevant to any part of your organisation. Contact us today for a no obligation discussion.

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Using Monte Carlo methods in both B2B & B2C pricing

In the mobster film Casino, smooth operator Ace Rothstein says “the cardinal rule is to keep them playing and to keep them coming back – the longer they play the more they lose, and in the end we get it all”.
 
In games like roulette, dice and slot machines each player’s winnings are subject to the luck of the draw. But since casinos serve many players, profits average out. Monte Carlo methods, named after the famous gambling hub, aggregate similar random effects to model deterministic outcomes and can be extremely effective in pricing.
 
Why consider Monte Carlo methods?
 
Offering goods for sale at a particular price point comes with a certain probability of success for each potential customer. Whatever the price level there will always be some customers who decide to buy and some who do not. In the B2C environment, this means that a certain proportion of a large number of customers can be expected to buy. Monte Carlo methods help determine the price level that optimises profitability given the large number of customers each buying relatively small amounts.
 
In B2B things are slightly different in the sense that each Client will be buying significant amounts of the product in question (B2B markets where end users that are businesses behave like individual consumers are considered B2C for the purposes of this article). But Monte Carlo methods are still helpful for facilitating the management decision of what price to offer in a competitive tender process as they can estimate (a) the probability of success of one particular contract at each price point and (b) optimise revenue over a number of contracts tendered for over the medium to long terms.
 
What are the essential components of a Monte Carlo model?
 
At the heart of a Monte Carlo model is a random number generator (“RNG”). Best practice in this area involves going out to a quiet, dark place to measure atmospheric noise and commercial solutions are available. But don’t forget that Excel has an RNG and in many cases this is probably sufficient.
 
In a pricing context, RNGs can be used to create and evaluate a wide range of scenarios and see how likely it is that each will materialise. Whether you use a hundred, a thousand or a million such scenarios will depend upon the nature of your business, the data you have available and the tools at hand. But at Ranson Pricing we recommend keeping it simple, especially at first, as stakeholders will need convincing of the technique’s merits before further development incorporating more sophisticated statistics is likely to be of value.
 
What does a Monte Carlo model’s output look like?
 
At Ranson Pricing we believe that best practice in B2C Monte Carlo modelling leads to a “cloud” of probabilities showing the chance of achieving particular market shares at each price point.
 
In B2B, Monte Carlo models can be used for short term and long term benefits. In the short term, they can show the probability that a bid will succeed at each individual price point. In the long term they can highlight pricing strategies that optimise profitability across a large number of contracts.
 
Who can use Monte Carlo methods?
 
Monte Carlo methods are applicable to pricing in almost any industry, even (especially!) when this type of method is not common practice. Airlines, hotel operators, other travel service providers, retailers, entertainment venue operators, manufacturers, professional service providers, pharmaceutical developers and software houses all, like Ace Rothstein, have customers who play again and again. Like other techniques in pricing, Monte Carlo methods can help secure and build revenue streams to profitably deliver products and services that only get better over time.
 
Ranson Pricing recently applied Monte Carlo methods to evaluate pricing opportunities for a leading manufacturer of safety-related products. Contact us today for a no obligation discussion.

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​Pricing for party planners

Everyone likes being invited to a party and readers are encouraged to invite our pricing expert Oliver Ranson to their next event! Although events planning is well established there seems to be little consensus on how to price in practice.
 
This article investigates pricing issues relevant for party planners. It covers pricing models, things that events planners can do quickly to boost revenue and longer term opportunities that may require investment.
 
Price levels and mix
 
When you are deciding how much to charge for events there are effectively five options for pricing:
 
“Free” events are likely to encourage attendance. But there are some problems with this pricing model – people attending may not value the event and either leave after a short time or not engage with it’s purpose. In some cases, “free” events may easily become overcrowded and managers may have to turn people away, leaving disappointed customers.
 
“Almost free” pricing for events on the other hand, where entry costs a few Pounds, ensures that people attending do hold some value for the event and both enjoy and engage.
 
The other three options are “low price”, “mid price” and “high price”. Which of these prices to charge will depend on the market segments attending. At some events there may be scope for higher and lower priced tickets, with higher tickets including access to special areas, complimentary food, drink and other activities, or other benefits.
 
It is important to note that all of these options apply to total customer revenue. Ancillaries purchases, which for charity events could include subsequent fundraising, auctions and other elements, may be an important component of revenue and ticket prices should be set bearing this in mind, reaching a level which maximises guest spend from both ticket and ancillary sources.
 
Ticketing and distribution
 
When you are distributing tickets for your event you will need to decide whether they can be bought online, offline or both, and whether they should be sold on paper or electronically. Electronic ticketing may facilitate audit and help save the planet, but paper (possibly with an electronic option) is likely to be more practical in many cases, at least for the foreseeable future.
 
If you do sell tickets through third parties, remember that they will charge commission. To optimise revenue it probably makes sense to have the guest pay the same amount whether or not they buy online or offline if this is possible within local consumer law and a ticket platform’s terms and conditions.
 
Revenue integrity, audit and analysis
 
One overlooked element of ticketing events is the need for revenue integrity – ensuring that everybody who enters holds a valid ticket and that forgeries are not accepted. How you can achieve this in practice will depend on the event in question. Once the event has taken place, using an audit to check whether or not revenue integrity was sound will help you improve this area in the future. Analysing who came and who did not could also provide helpful intelligence for planning future events.
 
Potential long term opportunities
 
As you get better at pricing your events a number of longer term opportunities may present themselves. Research, purchase behaviour analysis and historical information about who attended and who did not may facilitate demand forecasting, no show analysis and overbooking, and opportunities in loyalty and CRM.
 
At Ranson Pricing we love talking about parties. Contact us today for a no obligation discussion.

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​What charities need to know about pricing

Continuous fundraising is a core activity for many charities. They seek donors large and small to provide the funds that help meet their objectives. Some charities have strong brands that facilitate cashflow from small donors but most do not.
 
Planned giving, ad hoc donations, legacies and other channels all generate revenue from small donors, while larger entities commit sometimes substantial sums of money. At Ranson Pricing we believe that the charity sector can potentially benefit a great deal from incorporating pricing best practices in their fundraising efforts.
 
Revenue optimisation in fundraising
 
It may not always be clear what the most profitable strategy for fundraising may be. Whether you are targeting large or small donors, pricing best-practice suggests that charities will benefit from taking a scientific approach, trialling different methods and recording the outcomes to see what works best.
 
One interesting decision that charities have to make is around compiling their donation options into products. At a simple level this could consist of different levels of standardised donations, such as five Pounds, ten Pounds or twenty Pounds. Such a method may encourage some people to contribute more than they might otherwise offer. But the problem with this approach is that large numbers can appear quickly, potentially putting off some people who might be interested in contributing small amounts. To get around this, charities might consider offering value added products and services, such as ‘free’ t-shirts, memberships of a scheme, a name on a bench or a range of other options bounded only by the charity’s creativity.
 
Best practice in charity retail arms
 
Many charities operate a retail arm, selling goods donated by members of the public to raise revenue. Charity retail managers may receive large number of donations, some of which could be potentially quite valuable and others might be unsellable. Take a look at our May 2014 article Unlocking Your Inner Retailer for some inspiration on how to make the most of retailing opportunities.
 
Making the most of commercial subsidiary opportunities
 
Ranson Pricing understands that charities cannot operate activities that are intended to make a profit. But there is no reason why subsidiary organisations owned by the charity cannot generate surpluses that the charity can receive like a dividend and re-invest in it’s core activities.
 
When it comes to pricing for this subsidiary, much will depend on the nature of the business. But like all businesses they will need to have a robust pricing toolbox available. This will need to include an understanding of who their competitors are, how their customers behave, a suite of products developed with revenue optimisation in mind, in-house knowledge of how to price in practice and trial-improvement processes that continually develop revenue.
 
It might be helpful for charity managers who have limited experience running commercial organisations to receive training in best practices and seek a manager from a profit-focussed environment.
 
Ranson Pricing is always happy to work with a charities seeking to improve it’s revenue stream at special fees that we do not make available to commercial organisations. Contact us today for a no obligation discussion.

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​Revenue optimisation in airline lounges

Airline passengers lucky enough to hold tickets valid for travel in first and business class cabins are often invited to use a lounge space at an airport. These facilities normally offer a quiet space, comfy chairs and some food and drink.
 
But premium cabin airline tickets are expensive and the demographic using them may have high disposable income, making them an attractive target for marketers. The benefits, best practices and appropriate words of caution of commercialising the lounge space are covered in this article.
 
The benefits
Passengers in airline lounges are probably more likely than average to be affluent and both willing and able to spend their money on high-end products. British Airways reported a few years ago that the average lounge passenger, of which there were 252k each month, spends 52 minutes in their facilities, which was double that of any other area in the airport.
 
Accordingly airlines can potentially present a robust case to other businesses looking to promote their products to affluent market segments. Since such businesses will pay the airline for space that would otherwise not raise revenue there is great potential for premium lounges to become profit centres in their own right.
 
Available channels
Lounge space can be commercialised through the following channels:
 
(i) digital or non-digital posters
(ii) screen savers
(iii) drop boxes, which allow passengers to potentially win a prize if they put their business cards in and accept that they will be added to a mailing list - these are excellent for data capture
(iv) Table tops – placing material such as magazines, brochures or items of interest on table tops for passengers to view and even take with them could be a good mechanism for some businesses to make use of the lounge footfall
(vi) Interactive screens offering experiences
(vii) Experiential zones where passengers can experience a particular product or service for themselves
(viii) Manned promotions, such as a cocktail bar
(ix) Product showcase, such as a particular brand of beer in tap
(x) Sponsored wi-fi – since many passengers will want to access the Internet this could be extremely high profile advertising for the customer.
 
Best practices
 
Avoid clutter. It cannot be emphasised enough that less is more when it comes to lounge commercialisation. Placing too many points of commercial interface around will detract from the overall experience and could risk putting your valuable first and business class customers off from flying with you next time, harming seat factor and revenue.
 
Be cautious about selling space to other airlines and brands strongly associated with your competitors.
 
Static posters should be placed in high traffic areas but you should conduct research into whether passengers moving quickly (e.g. near the entrance) or lingering (e.g. in sitting areas) offer the most attention. Static sign space can then be priced on this basis
 
Digital posters are priced in minutes per hour and care should be taken to ensure that digital signs in prime spaces (identified in a similar way to static posters) are charged for at higher rates than others. You can either offer all advertisers the same number of minutes per hour or offer longer and shorter slots with your own product being shown to fill any gaps. Since longer segments are more likely to attract full attention it is possible that longer segments should be charged at a higher per minute rate. There is potential to benefit from research into the optimal amount of time to show digital adverts for and also to incorporate (and charge for) value added services such as real time information updating.
 
Remember to leave space for promoting your own airline.
 
As with digital posters, screen savers can either rotate or have permanent displays. Pricing is slightly more complex than for static digital posters because screen savers will be turned off by passengers when they use the equipment. You will need to conduct research into how often and for how long the computers are used for to develop the revenue optimal package.
 
Do not make wi-fi logon too onerous. There is nothing worse than having to sit through an advert when you are busy and just want to check e-mail. Avoid alienating your passengers by placing the advert in a prominent but non-imposing place.
 
Words of caution
Passengers are already exposed to lots of advertising in their day-to-day lives. They will probably be annoyed if they are subject to too much advertising in what is marketed as a relaxing space. No amount of lounge revenue can make up for even a small proportion of lost premium cabin sales.
 
There are also some practical issues:
 
(i) Avoid light overspill from stands to maintain lounge ambience
(ii) Avoid anything that makes sound (unless it is in a special soundproof room)
(iii) Do not make it impossible to use a lounge feature without seeing advertising first.
 
Ranson Pricing’s Pricing Expert Oliver Ranson has helped airlines design their lounge spaces and regularly uses facilities operated by a variety of airlines. Ideas about how to make the lounge spaces better are always at the front of his mind. Contact us today for a no obligation discussion.

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Some myths about pricing​

When our Pricing Expert Oliver Ranson tells his friends about what he does for a living they often tell him what they imagine his work is all about. But surprisingly there seems to be a bit of a gap between how Oliver sees pricing and how his friends do. Eight things in particular seem to be common myths and they are the subject of this article.
 
Myth 1 – pricing is all about SAVING MONEY
 
Over the past 30 years CFOs have made tremendous efforts to streamline their organisations, running efficiently and increasing profits through either careful cost optimisation (good) or vigorous cost-cutting (probably bad). As a result the idea that the only way to increase profits is to cut costs seems to be ingrained in society. If pricing increases profits it must also cut costs. But this is not true – sound pricing increases revenue with minimal impact on costs. As a result pricing is a great force for good in business. The proceeds can be re-invested in new and improved good and services that secure the business's future or returned to shareholders as dividends. And they can also be used to make the company a better place to work, with higher compensation, rewards and incentives for staff and other luxuries like first and business class travel for everyone.
 
Myth 2 – pricing requires expensive technology
 
There are plenty of companies out there who make a living by selling over-priced and over-specified IT platforms. Ranson Pricing is not one of them. There is a role for technology in pricing, but it needs to be carefully tailored to a company’s specific requirements to work well and must not be biased by excessive ‘influencing’ using pre-existing but incorrect thoughts and ideas. Simple models developed on Excel, pricing team empowerment and sound organisational design can unlock 80% to 90% of the value of effective pricing without needing to spend a penny on ‘optimisation’.
 
Myth 3 – pricing only works for giant firms
 
You don’t have to be an airline or a supermarket to invest in your pricing. Every business sets a price, and every business can increase revenue if they can capture a higher proportion of their customers’ willingness to pay.
 
Myth 4 – pricing is ‘impossible’
 
Pricing does require effort, and some of the concepts and changes required can be quite scary for some businesses. But there are plenty of companies out there increasing their revenue with minimal cost impact, so you can too!
 
Myth 5 – pricing is only relevant in B2C markets
 
Our article about B2B pricing from May 2015 outlines a five-step process to help you price effectively for your B2B market segments.
 
Myth 6 – pricing is only required by technology and digital firms
 
Certainly not – modern pricing based on customer behaviour and willingness to pay was invented by the airlines and the supermarkets, and later developed by other travel companies and entertainment venues. Technology and digital can certainly find a lot of value when investing in their pricing, but your business certainly can too!
 
Myth 7 – pricing is so tough that you need a degree in maths to understand it
 
Pricing decisions need to be taken on the basis of facts and data. Sometimes tough calls about when to increase or reduce prices need to be made and optimisation technology, when implemented well, can be a great help. But at Ranson Pricing we believe that a robust understanding of your customers and competitors, combined with common sense and a passion for the work, is the most important qualification for the pricing team – quantitative skills, if required, can be developed through training the right person. Check out our article from June 2016 examining the six skill sets you need in your pricing team.
 
Myth 8 – pricing is a job for the sales team
 
Quite where pricing sits within an organisation is an open question for most companies. It can sit by itself with a certain amount of scale, but for small businesses and even most large ones it probably makes sense to bundle the work within another part of the organisation. However at Ranson Pricing we caution particularly against having the same people handle both pricing and sales as experience suggests that sales’ passion for volume can easily dominate any passion for yield. Both the right yield and the right volume are required for successful pricing – if you sell everything you are too cheap and if are too expensive you sell nothing.
 
Ranson Pricing is always available to help you implement initiatives and build an organisation tailored to your individual pricing needs. Contact us today for a no obligation discussion.

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​Are airlines ready for NDC?

From a pricing perspective airlines are retailers – they sell a large amount of distinct but individually homogeneous products to many customers. But unlike retailers airlines have spent their pricing focus on optimisation and distribution. To make the most of IATA’s New Distribution Capability (“NDC”) this will need to change…
 
What are airlines doing well?
 
Many airlines deploy their GDS and revenue management specialists in NDC work. The teams are often highly skilled in GDS management, revenue optimisation, demand forecasting and systems development. So when an airline uses NDC you can be sure that it will work technically.
 
Why do airlines need to change?
 
Unfortunately at the operating level many airlines seem to think of NDC as a technical challenge, something that must work flawlessly like confirming a reservation or issuing a ticket. Unfortunately this is of limited value in itself, as the products that must eventually be sold through NDC need to be defined and priced. At Ranson Pricing we often see airlines not focussing enough on the product and pricing definition.
 
Where do airlines need to go?
 
Airlines need to think more like retailers.
 
How are airlines going to get there?
 
Study our May 2014 article “unlocking your inner retailer” to understand how to think and act like a retailer. These are the key points:
 
Lesson 1: offer a wide range of products which you know from research and analysis that customers will really want to buy
 
Lesson 2: don’t be afraid to be simultaneously the cheapest and most expensive in the market
 
Lesson 3: bundle products and services effectively to appeal to different market segments
 
Lesson 4: develop your own distinctive and branded range of products to occupy a clear position in the market place
 
Lesson 5: reward loyalty to track your customers’ spending habits and behaviour.
 
Airlines already have a large amount of the skills, information and initiative they need to make NDC work. The missing ingredient for now seems to be the management exercises that must pull all these together to take the commercial departments out of their comfort zones.
 
Ranson Pricing is always available to help airlines make the most of the new distribution channel. Contact us today for a no obligation discussion.

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​Pricing strategies on RMS Titanic

In 1997 the world went Titanic mad as James Cameron’s epic blockbuster hit the silver screens. Much historical information about Titanic is widely available, including everything from deck plans (or, in airline speak, LOPAs!) to passenger lists and menus. What can these tell us about how White Star (the operator) set their pricing strategy and how do these compare with airlines today?
 
Multiple markets served
Titanic, along with her long-lived sister ship Olympic (1911-1935) and short-lived sister Britannic (1915-1916), were designed to operate from Southampton to New York via Cherbourg and Queenstown (now Cobh). On the return there was no stop in Ireland and Titanic would have dropped off passengers at Plymouth, Cherbourg and Southampton.
 
Southampton and Plymouth served the wealthy United Kingdom markets, which then as now had close business and social ties with the east coast of the United States. Ireland seems to have been largely a source of immigrant traffic and 91.9% passengers embarking at Queenstown travelled in Third Class. Cherbourg on the other hand was a bit of a mixed bag with tourists and business travellers as well as emigrant flows from France and elsewhere, some of whom from as far afield as Turkey and the Levant. 52.8% of passengers embarking at Cherbourg travelled in First Class, 9.6% in Second and 37.6% in Third. Just like smart airlines today, the White Star Line knew that there was money to be made away from the economy cabin.
 
It is probably something of a myth that all the Third Class passengers were poor and destitute – tired and huddled masses yearning to be free and seeking the cheapest fare would most likely have gone on other ships, although some would have been aboard Titanic as in many cases tickets were valid for Third Class passage by the first available steamer. Just like smart airlines today, White Star served many different market segments in each service class.
 
Working the demand curve – classes of service
Titanic and her sisters offered three classes of accommodation – First, Second and Third. Although cabins were relatively homogeneous in the lower two classes, First seemed to offer a variety of options at increasing price points. Titanic’s accommodations worked along a demand curve like this:
 
Third Class = 2, 4, 6 and 8-bed cabins at one-way fares from around £7 1s (GBP 629.50 in 2015) per person, comparable to economy class fares today
 
Second Class = 2 and 4-bed cabins at one-way fares from around £10 10s (GBP 937.50 in 2015) per person, comparable to premium economy class fares today
 
First Class basic = 1, 2 and 3-bed cabins at one-way fares from £25 11s (GBP 2,281.00 in 2015) per person, comparable to business class fares today – inside cabins on E deck (the lowest deck offering First Class accommodation) were the cheapest and outside cabins on A deck (one of the highest decks with the best views) more expensive (£56 18s (GBP 5,081.00 in 2015)).
 
First Class suites = larger, more luxurious apartments on B and C decks, sleeping up to three people and often sold as pairs at one-way fares from approximately GBP 200 (GBP 17,860 in 2015) – note that these are fares for a whole room sleeping up to three people and there were not really many compartments of this standard available, even in First Class – it is something of a myth that everybody travelling in Titanic’s First Class accommodation sailed in luxury.
 
First Class parlour suites = the most luxurious accommodations, offering sitting rooms, bathrooms and, in two cases, private promenade decks – these were extremely expensive even by international First Class air travel standards and off-peak fares were GBP 512 6s 7d (GBP 45,750.00 in 2015).
 
During the summer season fares were higher. Then as now April was probably something of a shoulder season and there may have been lower fares at certain times of the year. Note that fares are one-way but effectively included a week’s accommodation, food and drink.
 
Just like smart airlines today, White Star offered a differentiated core product to extract higher portions of passenger willingness to pay than might otherwise have been achieved.
 
(Sources: fares data from Encyclopedia Titanica, inflation calculator operated by Measuring Worth)
 
Ancillaries
White Star did not have a shiny new NDC product to play with, but they found other ways of profiting from their customers. Of course there were bars, souvenirs from the barber’s shop and the chance to send a telegram, but there were two quite subtle revenue opportunities that Ranson Pricing is impressed with.
 
An expensive a la carte restaurant offered high quality meals for an additional price. Regular meals in the dining saloon were included in a passenger’s fare but despite myths about Titanic being a floating palace catering was probably hotel buffet standard, good but not great and produced efficiently in high volume. The a la carte restaurant on the other hand was apparently remarkable, with one passenger speaking about eating fresh strawberries (in 1912, in the middle of the north Atlantic, in April). From the pricing strategy perspective it can be no co-incidence that the a la carte restaurant was located on B deck, close to the most expensive accommodation and hence the passengers with highest willingness and ability to pay.
 
Promotional literature focused heavily on a gym, squash court, Turkish bath and swimming pool. These were probably something of a novelty in 1912 and it is interesting to note that while most of these facilities were located low down on F and G deck, the gym was on the boat deck, the highest of all. Why were they separated? Most likely because by making the gym a beautiful, light and airy space passengers would be attracted to take a look, at which point they could be sold tickets to use the baths and racquet court – clever stuff!
 
Ranson Pricing is always available to help you make the most of customer behaviour analytics when developing new products and services. Contact us today for a no obligation discussion.

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Why we don't want to compete with big consulting firms

Understanding who your competitors are is one of the key skills in pricing strategy. At Ranson Pricing we certainly have competitors, although some of our friends seem to think that these must be the big consulting firms. Because we know our product we can say for sure that in fact nothing could be further from the truth.
 
Our product is different
 
Big consulting firms offer access to a large amount of experience across different topics. Work on the details of pricing strategy is often something that is left to junior generalists. At Ranson Pricing we focus exclusively on pricing and revenue management and our Pricing Expert has more than a decade of experience helping businesses like yours find as many revenue opportunities as possible. Would you prefer to have an expert helping you with pricing rather than a junior generalist? If so, choose Ranson Pricing.
 
Sometimes there is more value in doing things slowly
 
Big consulting firms will happily deploy large teams to your business in return for enormous fees. But sometimes they complete work so quickly (because of the enormous fees) that your team may not be able to absorb all the benefits or really learn everything that will benefit their work once the consultants have left. In the end, when you do a quick project with a large firm you will inevitably have to engage them again and pay even more.
 
At Ranson Pricing our approach is different. It might take our Pricing Expert Oliver Ranson three months to complete a project that a team of six people could complete in one month, but at the end of the process your team will be better equipped to handle pricing in the long term. At Ranson Pricing we pride ourselves on our ability to get things right first time and touch things only once. Would you prefer to do a consulting project only once rather than three times? If so, choose Ranson Pricing.
 
We only handle one project at a time
 
When you engage a large firm the Partner who sells you the work will most likely be busy with many projects at once. Now these people are generally extremely smart and knowledgeable but they are also human. If they are not giving you all their focus, can you really be sure that all the key issues relevant to your business are being addressed? If you want a guarantee that your consultant is paying 100% of his attention to your project, choose Ranson Pricing.
 
Ranson Pricing is always available to help you use product definition exercises to identify who your competitors are and understand how they think, including how they see your pricing strategy. Contact us today for a no obligation discussion.

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Developing business cases for airline buy-on-board

Once upon a time airline passengers whizzed across oceans eating gourmet cuisine and drinking the finest wines available to humanity. Apparently. Ranson Pricing is not convinced that airline catering was ever really that good. But we know for sure that many airlines continue to offer a “fully bundled” service that includes food and drink and we wonder if this is really a product that today’s travellers want.
 
Airlines operate in a wide range of markets across the world and serve passengers with a huge range of tastes, experiences and expectations. The most important distinction between flights is probably the so-called “stage length”, or the distance travelled (and hence the time taken).
 
On extremely short flights with less than 60 minutes in the air meals are clearly not “required” as passengers will soon be on the ground and can either eat at home or visit a restaurant. Many such flights will take place away from typical meal times so a large number of passengers will not be hungry. But nevertheless some people may be looking for something to eat and in some cases a quite substantial meal, especially when their trip on the aeroplane is the only time they have to eat during the day. The challenge for airlines is understanding when and how to satisfy the needs of their different segments.
 
Back in the last century BA and BMI waged breakfast wars, offering substantial breakfasts involving egg, bacon, sausages, mushrooms and other morning delights to business travellers. This made sense because such travellers were getting up early and heading for a day of activity. BA continues to offer a full breakfast on flights from London to Scotland and, in their premium cabin, elsewhere in Europe.
 
The longer the flight though the more opportunities there are for airlines to play with their service. On longhaul flights substantial food options are probably compulsory as passengers will need to eat, but this need not mean that they be either all the same or free.
 
Airlines seeking to evaluate their catering have a number of options:
 
(a) Do not offer food and drink at all, offering substantial cost savings and elimination of operational complexities at the risk of either leaving ancillary revenue opportunities on the table, damaging consumer perceptions of the brand and/or leaving some seats unsold as passengers who value the catering travel with other operators.
 
(b) Offer some things for free and other things at a charge, for example a free bar but paid-for food. This option gives all passengers a standard product but gives others a wider set of options should they so desire.
 
(c) Offer a standard product for free and a premium product at an extra charge. Air France for example offers all their longhaul economy cabin passengers a meal but also has a selection of premium meals available for an extra charge, provided that a passenger buys the product before a flight. It would also be possible to offer a more premium product as buy-on-board (airlines that offer alcoholic drinks at a price and soft drinks for free are a good example) but airlines will need to carefully forecast demand and balance wastage costs (and incremental fuel burn) against revenue opportunities.
 
(d) Offer customers a fully-bundled service with all products loaded on the aircraft available without any extra charges. This approach will leave ancillary revenue on the table, but will reduce complexities in billing and payment (particularly as society moves increasingly cashless). With this approach there is a risk that some people working for airline finance departments will begin to see catering as a pure cost centre and under-account for catering’s impact on brand perception and repeat business. It is also possible that the range of products offered may be more limited than in other options, leaving some passengers disappointed even if their meal was “free” and feeling that they would rather have had the chance to pay extra for something better.
 
Any airline which decides to offer catering at all should bear in mind that they will need to offer customers a product they want to consume at a price they are willing to pay. This will be based on consumer behaviour studies, price sensitivity and feasibility in product delivery. Remember that margin matters more than costs as such but also that airlines seeking to expand their catering options will have a number of other costs. There may be a cost base implication from larger and heavier fixed galley configurations than might otherwise be achieved, procurement, maintenance and storage of the necessary electrical and non-electrical equipment, the same for both serving equipment and rotable/disposable items such as plates, cutlery, packaging and other items, fuel burn from carriage and also the opportunity cost of using the space occupied by the most-likely larger plinths and monuments as saleable seating space.
 
Airlines should also note that as well as the chance that incremental seats may not always be sold, at the lower end of the demand curve (especially on shorthaul) marginal costs such as boarding cards, bag tags, cost of sale etc… might be significant so the value of a seat instead of a galley monument may be a lower than usual proportion of revenue.
 
The business case for buy-on-board is not necessarily clear-cut at realisable price points but there is still one final point to consider. If current food on shorthaul flights is not appreciated and simply thrown away it can be safely removed and the resulting anticipated cost savings can be used to do the research and development required to create a new, world-leading buy-on-board product.
 
Ranson Pricing is always available to help you make the most of opportunities in the ancillary revenue space. Contact us today for a no obligation discussion.

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The differences between Pricing & Operational Research

Pricing is the art of selling the right product to the right customer at the right time and Operational Research (“OR”) is the application of advanced analytical methods to help make better decisions. The two disciplines have much in common, but because they also have some important differences there are seven important distinctions that companies looking to build organisations with Pricing and Operational Research practices will need to bear in mind.
 
OR specialists apply analytical and statistical techniques to reach the solution to a business challenge that is as close to perfect, or “optimal” in OR terms, as possible. Some Pricing problems, particularly those involving an optimisation problem, can happily be solved by applying OR.
 
But some other Pricing issues are much more strategic in nature, particularly when organisations are seeking to understand their customer base and it’s behaviour, gain insight into the competitive environment and use business intelligence to carefully specify the available options, clarify plans and define and then reach objectives.
 
There are four key similarities between the skills required to make a successful Pricing specialist and a successful OR specialist. These are:
 
(a) Both apply measurable and meaningful quantitative and qualitative information to reach a recommendation
(b) Both are at home working closely with other teams and stakeholders, delivering on projects that ideally can be carried forward by those others without further assistance
(c) Both apply analytical techniques to justify recommendations, define objective criteria for determining whether or not an initiative will have been a success and help other stakeholders understand whether or not a successful outcome has been realised in the end
(d) Both focus on translating information into actionable, achievable decisions (or at least a clear guide that will steer another decision maker into taking the recommended actions).
  
On the other hand there are seven important differences between the two disciplines. These are:
 
(a) Pricing, particularly strategic Pricing, often applies more “informal” methods – since Pricing decisions involve many stakeholders, including people with non-technical backgrounds, it is frequently necessary to use methods that are easier for boards and decision makers to digest, and such methods may be less analytically rigorous than those used in OR and not valid for “optimisation” purposes
(b) Pricing often involves more qualitative information, such as how customer perception of a product or brand can impact a product’s competitive positioning
(c) Pricing often involves “smaller” data (really large data sets with a certain amount of aggregation already performed) while OR specialists commonly apply their analysis to “raw” data
(d) Pricing specialists typically do not use statistical tools like SAS while OR specialists will not typically use pricing software from the various specialist vendors
(e) Pricing specialists may be more inclined to recommend testing analysis through real-world trial and improvement exercises than OR specialists
(f) Pricing specialists may be more inclined to spend time evaluating options, opportunities and unmeasurable elements, as well as focussing on the human dimensions to project planning, than OR specialists may be
(g) Pricing specialists tend to specialise in Pricing, while OR specialists tend to operate across a wider range of projects, leading to OR specialists not quite having the same depth of experience as the Pricing experts.
 
Both disciplines bring distinct products to the table and organisations need to think carefully about how they structure their Pricing teams and other organisations to make the most of what both groups of specialists have to offer.
 
Ranson Pricing is always available to help organisations make the most of the resources actually available to them. Contact us today for a no obligation discussion.

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Three pricing challenges for commercial banks

Commercial banks have much in common with retailers, airlines, entertainment venues and the other businesses that have successfully applied Ranson Pricing’s style of pricing strategy. They have a large number of customers, each of whom have different willingness to pay, buying a large number of relatively standard products that can be distinguished by observable characteristics, such as a mortgage that can be repaid over 10, 15 or 20 years. Financial institutions will need to overcome three types of challenges to make the most of the pricing opportunities – structural, regulatory and product.
 
Structural challenges – different types of prices
 
When we visit the supermarket we are invited to pay GBP 5.00 for a steak or GBP 7.00 for a premium steak, and either GBP 1.00 for own-brand biscuits or GBP 1.50 for branded biscuits. Everything is priced in whole Pounds, Dollars or Dinars. But in financial services fees can be fixed (e.g. GBP 6.00 to use an overdraft facility in one month) or proportional (e.g. 3.9% for a two-year personal loan). To add even more complexity insurance products are priced actuarially, where an actuary sets a minimum price, bearing in mind the expected risks of the policy in question.
 
Both fixed and proportional fees have disadvantages when it comes to alignment with willingness to pay. A customer who goes GBP 5.00 into their overdraft for one day might be aggrieved to face a GBP 6.00 fee for this and banks who do not refund the fee when the customer complains will lose goodwill. On the other hand, a customer who goes GBP 10,000 into their overdraft for a week might not be too worried about the GBP 6.00 fee. But interest rates on the other hand are not perfect either. Banks no doubt have costs of supplying overdraft facilities and when a customer goes a few Pounds into the red for a day or two the bank’s set up costs of permitting the overdraft will not be recovered by the penny or two in interest that will result.
 
When it comes to actuarially set prices for insurance, banks will need to think carefully about whether or not they can safely bundle these products with credit cards, loans, mortgages etc… below the price that the actuary has permitted.
 
Regulatory prices – there may be a consumer backlash against ‘complexity’
 
While airline tickets, cinema seats and chocolate biscuits are luxuries, banking is an essential utility for most people. If banks decide to increase complexity in pricing through loyalty programmes, bundling, product differentiation and promotion, they must be careful to make sure that they do not cause regulators to strike down harshly and set pricing in the industry back many years. Ranson Pricing recommends one-step-at-a-time exercises based on trial and improvement – over many years, gradual improvements will all add up to significant results but hopefully consumers will not be too alarmed in the process.
 
Product definition
 
Banks offer solutions for people who want to store money and people who want to borrow money. On the storage side, in these days of low interest rates banks will find it increasingly hard to compete with non-financial asset classes such as real estate, art and other capital assets. Some savers might even decide to enjoy a leisure preference, travel and entertainment rather than saving. Banks will have to consider these ‘competitors’ when setting prices for savings products and a thorough understanding of customer preferences through direct research and ‘revealed preference’ experiments will be required.
 
One solution might be found on the borrowing side, where enterprising banks might offer financing for consumers to purchase items that they would not otherwise be able to afford but which are expected to provide a strong return. Buy-to-let mortgages are probably a prime example of such a practice, but there may be other opportunities and Ranson Pricing will be happy to undertake the necessary work to identify them.
 
Ranson Pricing is not yet sure how banks will resolve these challenges, but we are certainly willing to step up to the plate and work with financial institutions to find solutions. We are sure though that the best outcomes will be found through applying sound research, considered strategies and careful management of innovative initiatives through trial and improvement.
 
Ranson Pricing is always available to understand trends and patterns in pricing across a wide variety of regulated and unregulated industries. Contact us today for a no obligation discussion.

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Excel is still the most important pricing tool (apart from people)

When companies are looking to become ever more data-driven in pricing and other areas it makes sense to invest in technology to help your people retrieve, manipulate and evaluate all your information. It is tempting to get caught up in slick advertising and sales pitches from wealthy platform vendors. But while new technology can be a good investment, the benefits may not be entirely realised unless your people have an unusually firm command of Excel. This is because there are three dimensions to becoming a data-driven pricing organisation, and they all rely on Excel basics more than the sophisticated analytics that require special tools.
 
The first step is to make sure that people are comfortable using, interpreting and analysing data. Critically, they need to be able to use data to make things happen in the real world. Sometimes reluctant senior stakeholders and people in other teams need to be persuaded to buy-in to a pricing team’s ideas too. Excel is a great tool for achieving both parts of this step because it is easy to use, easy to transfer to other computers and most people are already familiar at least with the basics.
 
The second step is to think a little more closely about how the data will be used. You will need to consider the distinction between data owners, data super-users and data end-users – for each person in the team, pick any one or two (you cannot have all three). Data owners will probably not find Excel a sufficient tool for many of their purposes as they probably use database tools. But data storage is not really pricing work. Data owners may find Excel helpful though for communicating their own insights and analysis, which can help teams down-stream including pricing.
 
When it comes to data super- and end-users, there are three uses for your company’s information – optimisation, analysis and decision-making. Optimisation uses data and a selection of algorithms to maximise revenue, requiring special tools. But both analysis and decision-making are perhaps better done in Excel rather than other tools because high-level aggregation by various indicators is all that is required. Data owners and super-users will probably participate in the optimisation process, interacting directly with a source to feed the optimiser. But data super-users and end-users create the insights required for analysis and decision-making, even if they might not ultimately take the decision themselves.
 
The third dimension to becoming a data-driven pricing organisation is technology procurement. Because Excel is so much cheaper than other tools and so much more likely to be already installed on your organisation’s computers it is a tool that you can use immediately. So often in pricing, it is important to act quickly, and if you can find value from immediately getting to work rather than going through a lengthy procurement process Excel could be worth much more than alternative platforms.
 
When it comes to buying other tools, remember that it has to make things happen in the real world. Complication, over-specification and feature creep can be expensive. If you do need pricing tools other than Excel, Ranson Pricing recommends RFI-ing the vendors (stating your objectives and financial constraints) to have them tell you your solution for free.
 
Ranson Pricing is always available to help you identify the right pricing tools for your organisation. We are not affiliated with any IT vendors and can accordingly provide neutral, bespoke advice tailored exactly to the needs of your organisation. Contact us today for a no obligation discussion.

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Price escalators - the part of pricing many people forget about

We live in a world where inflation is a fact of life. Our suppliers increase their prices, shrinking our margins, and our customers enjoy increases in the nominal value of their income, increasing their willingness to pay. But there seem to be few organisations out there which use a ‘price escalator’ to slowly but surely increase their price levels. There are four good reasons why you should do this.
 
Small increases add up over time
 
If you increase your prices by 1% every six months, then after five years your prices will be 10.5% higher than if you had not changed the prices at all. During those years you will enjoy the benefits of slightly higher revenues, which can be reinvested in your products, services and pricing processes to secure a prosperous future for your business.
 
Small changes are less likely to be noticed by competitors
 
Imagine bumping your prices up by 10.5% at once. Your competitors and customers would surely notice and most likely the competitor would be able to hoover up business as a result. By increasing prices slowly but surely, your actions will help to instil market discipline in both competitors and customers.
 
Small changes are less costly to correct if things do not go according to plan
 
If you had to raise prices by 10.5% all at once and things did not work out, it could be very costly for your business in terms of lost revenue, brand damage and customer trust. But if you increase prices by just 1% at a time, if things do not work out then you can change things back with no harm done.
 
Small changes can be applied across your product range and tailored accordingly
 
You can also happily leave a price increase in some products while removing it from others. Products might include bundles of different items as well as goods and services sold individually. So the price escalation method is extremely flexible.
 
Ranson Pricing is always available to help you plan your price changes. Contact us today for a no obligation discussion.

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Do you have all six pricing skill sets in your team?

Pricing teams need a wide range of skills to function effectively. At Ranson Pricing we believe that pricing is not all about developing complex software, solving tough maths problems and performing complex pieces of analysis. This work has it’s place, but it is important not to neglect the ‘softer’ pricing skills. In this article we explore the six pricing skill sets that you should have in your team.
 
Operational pricing
 
It is always necessary to have in place a process for continual monitoring of how markets change. As competitors adjust their prices and customers change their behaviour some form of response is often vital. To handle this, there should be people on your team who are able to work quickly and in real-time to address operational issues as and when they arise. Sometimes these skills are hard to combine with the other elements that we describe below so be cautious to ensure that individuals do not have too many different types of task to do.
 
Pricing strategy
 
The strategy side of pricing is all about ensuring that the tools, processes and technology available meets your organisation’s requirements, and people operating in this part of pricing will need to be able to secure agreement with sometimes reluctant stakeholders to make sure that your pricing reflects your company’s wider objectives.
 
Technology & systems development in pricing
 
Pricing analysis is complex and it is likely that you use special technology to complete your projects. Accordingly your team should be able to engage with people who develop and manage this type of technology while at the same time ensuring that data owners supply information that the technologies can use to create the insights necessary for your team to make their pricing decisions.
 
Pricing & revenue integrity
 
Are there any holes in your pricing strategy that enterprising customers can take advantage of? Your pricing and revenue integrity people will look for these and take what actions they can, be they based in technology, incentives or contracts, to reduce the risk.
 
Pricing data management
 
At Ranson Pricing one of our brand values is taking decisions on the basis of facts (the others are attention to every detail and clarity in decision-making). In your organisation it is vital that pricing decisions are based on the facts and so it is important to have people on your team who are able to analyse, audit, evaluate and generally manage data. Note that the people doing the analysis and evaluation may not necessarily be the same people as the data managers and auditors.
 
Loyalty, ancillary revenue, CRM & e-commerce
 
Whilst loyalty, ancillary revenue, CRM and e-commerce do not always sit within a pricing team, having links with these areas is extremely valuable. Since these areas have insights and analysis in common with pricing there may be organisational efficiencies in performing analysis and research studies once across groups rather than several times individually. There may also be potential to implement special prices for distribution through these channels. Having people who know about these areas in your pricing team will ensure that you can have all the facts to hand.
 
Ranson Pricing is always available to help you structure your pricing team. Contact us today for a no obligation discussion.

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​Are you ready for the next downturn?

Economic history shows that from time to time economies enter a period of shrinking, either relatively as the rate of economic growth falls or absolutely when average incomes decline. These periods present a series of interesting challenges for pricing specialists as they try to ensure that customers still choose products they are pleased to consume at a price that reflects the value they receive.
 
The pricing challenges during an economic downturn are more or less the same as during periods of growth, but they need to be considered in a slightly different way.
 
Studying history is still worthwhile
 
At Ranson Pricing our creed is to apply the lessons of history to see more clearly into situations where we are called to act. When pricing in downturns, look to the past for inspiration. Ask yourself questions about what happened during the last economic contraction. For example, did customers change their product mix, what happened to your share of volumes and revenue, how did average spend change and did customers buy products in larger or smaller transactions? Use these lessons to formulate hypotheses about what might happen this time and roll out trial-improvement initiatives to test whether or not conditions are similar this time round. If conditions are similar, this will give you good ammunition to take to other stakeholders seeking aggressive pricing initiatives that you might not be comfortable with.
 
Be cautious of the competitors and do not enter a price war
 
Not all companies address their pricing calmly and conservatively and some may be tempted to discount heavily in response to “market conditions”, whatever that may be. At Ranson Pricing we recommend caution. Remember the effort that you put into building your brand and developing quality products during the good times and apply primary research, data mining and trial-improvement exercises as usual when considering discounts.
 
Customers may change the mix of products they buy
 
During a downturn your customers may feel the need to save money and might change the mix of products they buy. This might involve trading down a level or two of quality (e.g. from supermarket premium to standard, or from standard to value) or between substitute products (e.g. from steak to chicken). The pricing opportunities here revolve around bundling, CRM and loyalty. You will need to incorporate pricing and other commercial initiatives that are flexible enough to accommodate changes at the individual consumer basis. As always in pricing, do your research, formulate a strategy, roll it out and see how it performs to make a start. Remember that you do not necessarily need to get it right first time and that your first move does not need to be your last, and then you will be well placed to price effectively during the next downturn.
 
Ranson Pricing is always available to help you understand changes in market conditions and the optimal pricing response. Contact us today for a no obligation discussion.

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Pricing's magic number

As human beings it seems that we tend to think about numbers logarithmically. Base ten (10, 100, 1,000 etc…) is popular because we have ten fingers on our hands. But when it comes to financial matters a look at many currencies indicates that the preferred pattern of thought is 1, 2, 5, 10, 20, 50, 100 etc…, which is a sequence approximately equal to the cube root of ten raised to various powers.
 
We can see this because if we define the cube root of 10 as a number ‘c’, then c^0 = 1, c^1 = 2.15, c^2 = 4.64, c^3 = 10, c^4 = 21.54, c^5 = 46.42, c^6 = 100 and so on.
 
At Ranson Pricing we wonder whether or not this cube root of ten is a magic number in pricing and whether or not there are any lessons that can be drawn.
 
Will consumers be more likely to buy a higher priced product if the price is closer to a power of the magic number than a lower priced competitor?
 
Sometimes people can be a little irrational. Retailers know this and use techniques of ‘retail geography’, red tags and other methods to position certain products at eye level. But might it be the case that pricing could be important too. Might a customer be more likely to buy a product priced at GBP 20.00 (close to a power of the magic number) than GBP 17.99? Any volunteers – let us know?!
 
Is precision to the magic number more profitable than penny-level discounts?
 
We have written before about the end of 99p pricing. The magic number could help us think about two opportunities to price slightly differently.
 
First it might be worthwhile, especially for items priced at low numbers like consumer goods, to price exactly at the 1-2-5-10-… points. For items priced at high numbers on the other hand like airline tickets there might be scope to price exactly at a power of a magic number. For example, a business class ticket on a long flight could be priced at GBP 2,154.43 (c^10) or GBP 4,641.59 (c^11).
 
As always in pricing, trial and improvement is a necessary step to take when examining whether or not ideas really work in practice. If you do try out ‘magic number’ based pricing, please let us know how you get on.
 
Ranson Pricing is always available to help you understand trends and patterns in customer behaviour. Contact us today for a no obligation discussion.

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Pricing and data science

It seems fashionable these days to talk about “data science” when discussing application of quantitative techniques to commercial challenges. What data science is may not be clear at first – it might be statistics, operations research or even consulting. At Ranson Pricing we believe that data science is simply old-fashioned common sense applied to large data sets to facilitate decision-making.
 
In this article we outline what data science means for pricing in a little more detail, explain why the topic is so substantial that no one individual is likely to be able to master everything, evaluate how to incorporate data science specialists in your pricing team and set out the links to traditional consulting.
 
Pricing has always been a data science
Pricing is the art of selling the right product to the right customer at the right time. Each of those elements is measurable, so pricing decisions have been driven by facts for many years. But the nature of the information in use does seem to have changed in recent years, as powerful portable computers and high speed access to large data sets has opened up opportunities to conduct pieces of analysis that were not possible before.
 
However at Ranson Pricing we caution that whilst analysis should always be robust and rigorous, it does not always need to be complex. A table of regression results with discussion of R-squared and heteroskedasticity rarely leads to a different conclusion than could be seen from a well presented chart and table. And since pricing analysis is intended to facilitate decisions, the results should be presented in a way that makes it easy for busy non-specialists to quickly understand and support those decisions.
 
Data science is vast in scope so nobody can claim to master everything
At Ranson Pricing we think that the following skills are part of a data scientist’s repertoire:
 
(i) analysing and evaluating data
(ii) translating data into compelling stories to help decision-makers understand what the data really represents
(iii) evaluating how outcomes might have changed had circumstances been different
(iv) extracting information from a data source
(v) validating that information is complete and accurate, and that conclusions are meaningful
(vi) deliver appropriate recommendations on the basis of available information
(vii) persuade stakeholders to adopt the recommendations.
 
Together these seven competences can represent a vast array of skills. Everything from statistics and econometrics through to salesmanship and story telling is included. As such it is unlikely that any one individual will encompass all the necessary skills.
 
We also note that none of the skills necessarily involve complexity, although in the right circumstances they can. We caution against seeking a team of data scientists made up entirely of people with strong coding and analytical skills as the ability to sell initiatives to reluctant stakeholders is also critical.
 
It is easy to slot data scientists into your pricing team
A career in pricing presents great opportunities for data scientists. There are a two different ways to incorporate them in pricing, either attached to specific teams or as a group of internal consultants.
 
Consultants are data scientists too
Traditional management consulting often involves the application of a small amount of data to help solve a problem. To achieve this all seven of the competences outlined above are required. Accordingly we think that consultants are data scientists too.
 
Ranson Pricing is always available to help you make the most of the quantitative and qualitative information available when making management decisions in pricing and other related areas. Contact us today for a no obligation discussion.

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Using war games to make the right pricing decisions

In the armed services and defence ministries around the world it is common practice to act out military scenarios as “war games” to understand how the planners’ own commanders and forces, and those of their enemies, may react in certain circumstances. The insights are used to understand what strategies and tactics may and may not work well in real life, should the need arise.
 
At Ranson Pricing we hope and pray that the war games enacted on our behalf work to keep the peace, just as they are intended. But we also see an opportunity for businesses to use similar exercises to boost their commercial performance. In this article we explain what you need to do to run effective pricing war games.
 
A game needs rules, at least two teams and a referee
One good way of staging a pricing war game is to set two teams of pricing specialists against each other and see what they do, and how they react to each other’s moves, in certain circumstances. A set of rules should be determined in advance (e.g. prices cannot be below zero, it is not possible to sell more than 1,000 units, transport costs are USD 10 per mile etc…) and an impartial referee should be appointed to ensure that those rules are obeyed.
 
It may be necessary to replay the game several times with different teams
Just because an outcome is observed once does not necessarily mean that it should be considered the final outcome of the game. Repeating the game several times, possibly with different teams, will help you understand how likely it is that an outcome will occur, not a certainty. Changing the initial scenarios to understand the sensitivity of results is also important as real life is hard to predict and what you are faced with may be different to what you have gamed. But by playing several different types of game it will be easier to read the situation in hand and take an informed decision about how to react.
 
Documenting results is critical
As with most initiatives in pricing, it is just as important to record the results of gaming exercises as it is to trial and improvement exercises. Recording the results provides a point of reference for future managers and also acts to internalise the knowledge learnt in the person writing them down.
 
Ranson Pricing is always available to help you plan pricing strategies and conduct exercises to understand how your competitors might react. Contact us today for a no obligation discussion.

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Incorporating the value of premium travel in pricing

At many airlines the revenue management team enjoy staff travel benefits. The pricing specialists, demand forecasters, inventory managers, systems developers and their families can holiday around the world in first and business class, provided that the seats are not sold to paying customers. Duty travel is conducted under similar arrangements.
 
But there is one unfortunate consequence of this great employee perk. The team will never need to actually pay the market price for a ticket themselves and accordingly may not appreciate it’s true value. At Ranson Pricing we reckon that this is a shame since we believe that first and business class air travel is one of the most valuable commodities in the world, not because of it’s frills, bells and whistles, but because of the intangibles.
 
Premium travel buys time
 
A passenger taking a flight in business class is able to use their time more productively on the plane, but they also get to use their time more productively on the ground at either end. Before departure, passengers can spend more time working, or with their friends and family because less recovery time is required at the other end. After landing, passengers can either proceed straight into meetings or holiday activities with relatively ease so less rest time is required. At Ranson Pricing our pricing expert Oliver Ranson finds that business class travel secures half a day of activity per time zone crossed and first class travel secures an extra half day on top of that.
 
Premium travel buys peace of mind
 
Passengers looking forward to their trip in business or first class will either enjoy the last few days of their holiday that much more or will be able to focus on their business activities without the worry of knowing that they have to endure a long flight in economy. Perhaps this all adds up to several hours or days (depending on the individual) of valuable extra time available.
 
How to price premium travel
 
Fundamentally, premium travel pricing all comes down to valuing the intangibles of time and peace of mind. But it must also consider the willingness and ability to pay of different market segments, bearing in mind capacity constraints.
 
For a business traveller, how much is time worth? It will partly depend on the company in question’s cash flow, but for established corporate entities Ranson Pricing would expect a professional person to add at least a thousand Pounds of value per day and most likely a good deal more. If they were not, then given the costs of recruitment, management, support, office space and the staff member’s salary the company would probably be better off not employing them!
 
At a thousand Pounds per day and half a day of productivity per time zone crossed, for a trip from London to New York (five hours time difference) it would be worth paying GBP 2,500 each way for the company to pay to upgrade the employee from economy to business class.
 
For leisure travel though pricing must be a little different since most professional people on professional salaries (on which they pay tax) would struggle to pay an extra GBP 2,500 each way for a flight to New York. But that does not mean that the airline cannot offer leisure seats in this cabin, suitably fenced of course.
 
The way to do this is charge a reasonable but relatively small premium over the prevailing premium economy fare. Something that people will be able to afford if they choose, but which is expensive enough that the cabin will not sell out immediately. Accordingly an airline with a strong premium pricing strategy will probably be simultaneously the cheapest and most expensive carrier in the market.
 
Ranson Pricing is always available to help you understand how to price first and business class tickets. Contact us today for a no obligation discussion.

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Karl Marx, Revenue Manager

When our pricing expert Oliver Ranson was at LSE some his fellow students were followers of the famous philosopher Karl Marx. After graduation they either decided to become stock brokers or work as ‘trade representatives’ for countries whose governments seem to work quite a bit differently from our friends operating authorities in the UK.
 
But maybe they should have become pricing strategy professionals instead. After all, Marx wrote “from each according to his ability, to each according to his need” and to Ranson Pricing’s ears that sounds just like working down a demand curve to offer different products to different market segments based on their willingness and ability to pay.
 
At Ranson Pricing we believe that pricing strategy is a fundamentally good thing. When done well it allows many consumers to buy products that they would not otherwise be able to afford through sales, promotions and tactical initiatives. And it also ensures that businesses sell their stock at sustainable yields through capturing higher yield from customers with substantial willingness to pay when otherwise vigorous market forces might shake out incentives to innovate. All in all, sound pricing strategy secures the cash flow which promotes long term investment in jobs, technical progress and any investment that a firm might make in promoting what they perceive to be good works in wider society.
 
To do that pricing strategy well you can follow the maxim “from each according to his ability to pay, to each a sustainable and profitable mix of products according to his need”.
 
Ranson Pricing is always available to help you understand the benefits of applying pricing strategy techniques. Contact us today for a no obligation discussion.

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Avoiding common pricing technology pitfalls through effective RFI

It is all too easy to say that the solution to pricing challenges is simply “technology”. Progress can be so fast that it takes a dedicated specialist to even keep up with the frontier of progress, let alone see what may lie beyond. As a result, many businesses struggle to purchase the right pricing tools and specify systems that will represent the best possible value for money for their business.
 
Common traps include buying software that addresses problems faced at other companies but not your own, using processes that are aligned with markets you do not serve and applying technology that is so complex even it’s own vendors do not understand it. Taking a few actions during the earliest stages of procurement – the Request for Information (“RFI”) stage – can help resolve these challenges.
 
What is an RFI and how does it relate to buying pricing technology?
 
At many businesses, formal tendering is used to buy software and technology platforms. Such a process normally involves a Request for Proposal (“RFP”) or Request for Tender (“RFT”), a technical evaluation of these proposals and a financial evaluation. Preferred suppliers will either be selected on the basis of their financial proposal or then invited to make their Best and Final Offer (“BAFO”).
 
It is common for buyers using these processes to require approval from the board or a budget before such a tender can be issued. RFI is used before such an approval or budget is achieved to collect the information from prospective vendors that pricing specialists can use to structure their tenders and make sure that they are issuing a tender to buy the right products.
 
What information should an RFI for pricing technology contain?
 
Broadly speaking there are two approaches. The first, prescriptive option is for a company to specify it’s technological requirements and then ask vendors what products and services they offer that may satisfy this criteria. The problem with adopting this approach is that unless your business has access to full-time revenue technology specialists, it is unlikely that there will be a good match between what the technology vendor can offer and the requirements you have specified. If the vendor provides a bespoke solution then it is likely to be expensive and represent poor value for money.
 
The second, collaboration-based approach is to use the RFI stage to explain clearly to the vendor what your challenges are and ask for their explanation of how they would help you solve them. Your vendor is likely then to offer you solutions that you may not otherwise have thought of.
 
What makes a good RFI?
 
Ranson Pricing believes that writing a good RFI is all about communicating your pricing challenges and then letting the technology vendor explain how they would solve them using the collaboration-based approach. In order to do this you will need a sound understanding of what those challenges are (based on customer behaviour), your product positioning against competitors and all the other elements of pricing strategy, which Ranson Pricing has spoken of in other articles.
 
Ultimately, a good RFI will lead to your company buying (through the rest of the procurement process) the technology it needs at fair value for money. Accordingly it is well worth investing time and effort even at this early stage to get it right.
 
Ranson Pricing is always available to help you with procurement of pricing technology. Because we are not affiliated with any vendor our advice is neutral and will be tailored to your specific circumstances. Contact us today for a no obligation discussion.

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Defining customer archetypes

A customer archetype is a typical example of somebody who buys your products and services. They can be defined on the basis of several indicators, such as demographics, the purpose for which they use your products, their buying behaviour, the means of payment they use to complete their transactions or any one of a number of other indicators.
 
Identifying and specifying these archetypes can be extremely helpful for the pricing process because they provide a clear, communicable idea about who your customers are that other stakeholders can quickly and easily understand. In this article Ranson Pricing explains how to conduct a customer archetype definition exercise at your business.
 
Primary research
 
The first step is to reach out directly to your customers and potential customers using tried and tested market research techniques. Surveys and questionnaires should be drafted in such a way that the results are measurable and meaningful, and care should be taken to ensure that the mix of respondents is representative of the market.
 
There are plenty of companies out there who will distribute your surveys and questionnaires. But developing the questions and answer options that will facilitate your analysis of how different parts of the market value different attributes of your project is a role for the pricing department.
 
Internal data mining
 
Once your primary research programme is under way, it makes sense to take a look at the data you already have regarding your customers and their behaviour. Statistical techniques can be used to correlate the relationships between different characteristics of your customers, the products they buy and how they make their purchase. As well as providing insights that can be used for pricing decisions, analysis of your internal data also acts as a good means of evaluating the information received from primary research.
 
You should ask yourself whether or not the primary research matches what you would expect from analysis of your historical customers. If the match is not strong that is not necessarily a bad thing because it is possible that the research has identified segments that you are not serving at the moment.
 
Direct observation

One of the most under-used pricing techniques is to actually spend time out on the shop floor, on the plane, in the airport terminal or in whichever other environment your customers can be found. Simply sitting still, observing the customers and noting who they are, what they seem to be doing and whether or not they look like they are having a good time can help your pricing team reconcile their data and analysis with reality.

Using the archetypes to inform pricing decisions
 
Once you have a good understanding of who your typical customers are the next step is to set down a clear understanding of what product bundles each will buy. From there, benchmarking and trial-improvement techniques in the real world can be used to find a price level that will optimise your revenue stream.
 
Ranson Pricing is always available to help you understand how to translate your customers’ behaviour into profitable revenue initiatives. Contact us today for a no obligation discussion.

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There has never been a better time to abandon full-content agreements

Travel service providers have historically been beholden to their global distribution system (“GDS”) partners through full-content agreements. These represent a rebate on fees in exchange for the airline, hotel or other operator offering every one of their products and services through a particular distribution channel.
 
Unfortunately for the travel providers, such agreements limit their scope to innovate in pricing, distribution and market segmentation in the medium to long term, severely constraining revenue growth opportunities. Human nature being what it is, finance directors find it hard to give up certain revenue today for potentially greater revenue tomorrow, but there are three good reasons to think that there has never been a better time to abandon these old-fashioned agreements.
 
Established distribution platforms can be used in new ways
 
Most airline, hotel and other travel service operators use internet booking engines to allow their passengers and guests to book directly through their web site. Most of the time these tools are based on GDS distribution.
 
But special rates can offered through the web site and there may be value in distributing them selectively. This value arises from the chance to trial and improve initiatives based on a user’s characteristics (such as geographic location or history of searches) or confirmed behaviour (through loyalty programme membership for example).
 
Such initiatives would not normally, in Ranson Pricing’s view, be the pernicious and short-sighted attempts to increase revenue through increasing prices in line with previous searches that we sometimes read about on our favourite Internet bulletin boards. Rather we would recommend trying to inspire the customer to book a special trip using targeted promotions or direct their custom to a less busy flight or hotel through price incentives.
 
New technology creates alternative distribution channels
 
Ranson Pricing’s friends in the technology sector always surprise us with the new things that they are talking about. We are not technologists ourselves, but sometimes it seems to us that new technology could be a real boon to pricing professionals seeking to segment their markets in different ways. Augmented reality (see our September 2015 article) is one example.
 
Rigorous customer behaviour analysis presents new opportunities
 
As organisations develop new tools and techniques for analysing customer behaviour it makes sense to put this analysis to use, designing new products and services that reward customers in different ways depending on their willingness and ability to pay.
 
Ranson Pricing is always available to help you understand whether or not any rebate from your distributors still longer represents good value and convince your finance director of the case for any change. Contact us today for a no obligation discussion.

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Why every airline needs a revenue entrepreneur

Pricing and revenue management is well established at many airlines. The department will closely align itself with tried and tested methods of distribution and sales, as well as industry standards and practices as defined by IATA resolutions. But such ingredients are not enough for an airline to consider itself a leader in this field.
 
Applying systems and technology to demand forecasting and data management augment the standard activities, adding a good few percentage points to revenue and bringing an airline up to standard practice. But to go beyond this level and achieve something more, guaranteeing long-term profitability, one more element is required – the revenue entrepreneur.
 
What are revenue entrepreneurs?
 
Revenue entrepreneurs at an airline are individuals in the commercial team who possess three critical attributes. First, they actively seek commercial opportunities where there might be scope to increase revenue, even if their competitors or the industry in general are not looking in those directions at the moment and especially when their managers have not explicitly told them to do so. Second, they have some appetite for risk and can evaluate the chance of a new initiative being profitable. And finally they have the ability to convince the carrier’s leadership team that their recommendations, even if they involve some risk, are worth pursuing.
 
These individuals will often be found operating in the commercial department, but there is scope for them to make a difference in other areas too, such as product and service development (enterprising people by their nature usually love developing new products!), cost optimisation (people with entrepreneurial skills are often good at finding new, more efficient ways of doing things) and potentially almost every other area of operations.
 
Why do airlines need revenue entrepreneurs?
 
Systems, tools and technology in revenue management have helped airlines achieve low levels of (long-term) profitability and sustainability for many years. But as these methods become standard practice there is a risk that what profit there is to be found could be eroded away. Also, the profit margins typically achieved are lower than other industries, limiting incentives for those enterprises in the private sector who are not airline enthusiasts to invest.
 
With good revenue entrepreneurs on board, airlines can keep ahead of the game and adopt initiatives that can push their profitability that little bit higher to industry leading levels.
 
Where can airlines find their revenue entrepreneurs?
 
In Ranson Pricing’s experience airlines tend to attract people who are passionate about what they do. It is likely that there are already people in your team who, with the freedom to pursue some of their own projects and with access to the leadership team to sell their initiatives, could quickly add value beyond what you ever thought possible.
 
Try allowing team members who might be interested to work on their own initiatives one day of the week and be prepared for them to move on to manage their project full-time if their idea is really good. Openness, praise for innovation and organisational flexibility are the keys to success for airlines that believe that helping their most enterprising employees reach the limits of their potential is in their own best interests.
 
Ranson Pricing is always available to help you build an airline where enterprising individuals can flourish. Contact us today for a no obligation discussion.

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Rapid reaction pricing - handle with care

Pricing and data technology has made it possible for pricing professionals to crunch large amounts of information and post the changes to pricing it suggests almost instantaneously. Making a rapid reaction to market developments is often seen as a compulsory element of pricing strategy and seems to be highly prized in the commercial world generally, especially now the so-called ‘big data’ has become fashionable.

But Ranson Pricing is cautious. Aggressive tactics using dynamic pricing have their place, but there are three good reasons why it may not always be the right thing to do. These will help pricing professionals who find themselves under pressure to act but have a gut feeling that this would be the wrong thing to do.

The data and analysis may not be perfect

It is likely that the data and analysis being applied is not perfect. Taking a little extra time to get these right is often well worth the assurance that a business will not be propagating a price war. When price changes are automatic the risk of an error being extremely costly is even higher. A sound pricing strategy will firstly act to minimise the risk of these events occurring and secondly seek to implement damage limitation if and when things do go wrong.

Customers may react unfavourably

When consumers see prices go up as they complete their purchase or down after it has been made there is a real risk that the business in question may find it loses the trust of that customer and her friends, damaging future revenue. It is also possible that consumers may make the effort to learn when and where your prices are lower, resulting in them yielding a lower proportion of their willingness to pay.

Limiting tension in the operational pricing team may facilitate other, more profitable initiatives

Pricing strategy is not just limited to the day to day process of setting price levels. Product mix, loyalty, CRM, market research and ancillary opportunities are all part of the pricing toolbox and should be subject to due care and attention. Conducting this work is likely to be much easier when the team do not have to constantly monitor and react to competitor changes.

Ranson Pricing is always available to help you set a pricing strategy with space for both rapid and considered reactions. Contact us today for a no obligation discussion.

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Pricing checklist for SME

SMEs and the largest corporations in the world have an important thing in common – they both have revenue and they both have costs. The two traditional paths to profitability are “saving money” and “growing sales” but these both have their disadvantages. Optimising a cost base may have quality of service implications and sales initiatives can be costly themselves at both development and delivery stages.

But there is a third way to profitability – more effective pricing increases revenue at almost zero cost. This paper outlines a practical checklist which SMEs can use to keep an eye on their pricing and make sure that they are capturing as much value as possible.

Understanding who your competitors really are

It is not always the case that the ‘obvious’ competitor is the one you need to pay the most attention to and it common for businesses to find that the most important competitor is the one they have been overlooking. It is worthwhile finding a way to evaluate market conditions empirically and monitor how they change over time.

Things to do
i) List all the markets you serve by product type and geography and indicate their importance to your business
ii) Evaluate which competitors are strong in each market, using as many measurable indicators as you can think of
iii) Compare the evaluation to commonly held beliefs at your business – is the match perfect?
iv) Document the results and record how the competitive environment changes over time – communicate the findings to colleagues.

Studying what your customers value

Finding out what your customers actually value can help you price more effectively through assigning higher prices to products and services that offer higher value across different market segments.

Things to do
i) Understand your historical sales, including where they came from, the time of year and the length of time between purchase and delivery
ii) Conduct a survey to collect information about customer preferences – these days surveying is cheap using online tools, but it is important to make sure you are asking measurable and meaningful questions
iii) Break down your product into each of it’s constituent elements including means of payment, time of purchase, means of delivery and any other relevant element you can think of
iv) Use the historical sales and survey information to evaluate which types of customers will be buying each product mix – these are your market segments
v) Document the results and communicate the findings to colleagues.

Building a diverse product portfolio

It is unlikely that each customer buys exactly the same service from you. Understanding your product portfolio will show you how to translate what each customer values into either higher revenue or incremental sales. The product portfolio can include the products and services you sell as well as bundles of different products and initiatives to encourage loyalty.

Things to do
i) Create different bundles to appeal to different segments – if you have some products or services in your portfolio that customers value but are not costly to produce, consider bundling them with other products to give marginal customers an incentive to buy
ii) Encourage people to give you repeat business through creating incentives for loyalty – as a bonus, giving customers the chance to see that you are you are a reliable and high quality supplier will encourage them to tell their friends about you
iii) Document what you did and ensure that the revenue and cost impact of changes to the product and service mix actually purchased are incorporated into your management information.

Facilitating understanding among all staff

Building a consensus among all staff that pricing is the engine of revenue growth is a critical component of a successful pricing strategy.

Things to do
i) Regularly communicate the results of your pricing work to all your colleagues so that they feel part of the process
ii) Encourage their feedback and take action where necessary, communicating when the feedback resulted in a successful initiative
iii) Emphasise profitability rather than utilisation, cost or revenue alone – make sure that your staff understand that sometimes making a sale is just not worthwhile.

Understanding how successful your initiatives are

Using measurable and meaningful criteria to determine how successful your pricing and other commercial initiatives are will help facilitate decision-making in the future.

Things to do
i) Set a profit-based criteria for success or failure when you try a new pricing initiative
ii) Measure the pricing’s performance by evaluating the revenue uplift from higher prices or revenue dilution from lower prices, the cost or benefit of market share changes, and the revenue and cost impact of any changes to the sold product mix.

Ranson Pricing is always available to help you price in the SME environment. We can also put you in touch with our great partner mad4digital Limited, who help SMEs realise their marketing ambitions through web design, PPC (pay-per-click) advertising, SEO (search-engine optimisation), display retargeting and more. You can either visit their site at mad4digital.com or we can introduce you personally. Contact us today for a no obligation discussion.

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Packaging, packing & pricing

A trip to the supermarket is always exciting field work for the pricing strategy specialist. The retailers have put up plenty of products for people to buy, all at different price points. Ranson Pricing has commented before about unlocking your inner retailer. But sometimes it is easy to overlook an important element of the supermarket experience – product packaging and packing.

It is easy to imagine that packaging is all about branding, advertising and attracting a customer’s attention to a particular point on a busy shelf. But this is not necessarily all there is to it. Ranson Pricing has identified three ways in which product packaging and packing can be used to achieve pricing objectives.

Packaging can communicate price promotions directly

If you manufacture a product and would like to promote it through price means, there may be a good chance to put relevant information on the packaging for consumers to see. Real-world examples that we have seen include ‘25% extra free’ on a crisp packet or ‘3 for £4’ on a carton of fruit juice. This type of message can also facilitate promotion analysis if you can control where stock with bannered packaging is distributed. In particular, you can compare the sales performance at outlets that historically seem similar in cases with and without the special message on the packaging.

Packaging can boost consumption without changing the size of the contents

Once upon a time, Sainsbury’s fruit juice cartons had five little windows in the side, each corresponding to approximately one glass. But a few months ago the supermarket reduced the number of windows to four and positioned the highest one slightly further down. This is interesting because it is likely that as a result at least some customers will fill their glass that little bit more and only take four glasses from a carton. These individuals may then buy more apple juice than they did before, boosting the supermarket’s revenue.

Effective packing can control access to the most popular varieties

When our Pricing Expert Oliver Ranson enjoys a box of ‘Celebrations’ chocolates his favourite is the Malteser. Funnily enough there are only normally two or three of these in the packet. Other chocolate types have five, six or even seven pieces. Oliver strongly suspects that market research has shown Malteser to be the most popular piece and that the manufacturers deliberately limit the numbers in one packet so that some consumers will need to buy more than one box to have enough Malteser pieces to go around their group.

Ranson Pricing is always available to help you understand how to make the most out of pricing opportunities through product packaging. Contact us today for a no obligation discussion.

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Why are there no jokes about pricing?

A Google search for jokes about accountants, doctors or lawyers yields pages and pages of entertaining results (caution: reading too many of these can be hazardous to your other activities). But beyond a few points about the price of petrol and a few Dilbert strips (examples here and here) from some years ago there seems to be little about pricing.

Which is surprising, because every company in the world has to set prices. It cannot be because pricing is perceived to be complex or dull, because if that were the case there would be no jokes about actuaries or economists, of which there are plenty. So Ranson Pricing has identified three reasons why pricing may not attract attention from the humourists.

Topics for humour in pricing are ‘in jokes’

Many of the accountant, doctor or lawyer jokes are funny because they are about how people have used these services or common perceptions (stereotypes, even) about these professions. Perhaps the world of pricing has plenty of source material but people who are not in the practice are not aware of them.

Material ripe for jokes might include pricing analysts never actually buying the product they evaluate at the published price, such as analysts at an airline pricing a first or business class seat. It might also include topics that are quite subtle, such as the discrepancy between a pricing professional’s tendency to emphasise yield and a sales professional’s tendency to emphasise volume. And surely there would be great potential for somebody to write jokes about a company that seeks to control some relatively small costs (pricing analyst pay for example, which is a whole new topic for another time) and as a result foregoes a much larger amount of revenue.

(Note: I do not claim that the above are funny in themselves, just that a humourist could probably make some good jokes about them!)

To all intents and purposes, these are ‘in jokes’ which people outside pricing would not be aware of and perhaps that is why they do not attract attention from the funny people.

People do not find pricing funny because they do not understand it

Pricing can be difficult for consumers to understand at times, and to some extent it is surprising that there are not many jokes about this. There can also be a large amount of quantitative analysis, and perhaps jokes about this tend to be written with other industries in mind as there do seem to be plenty of jokes about data and statistics in general.

But it may be possible that if pricing’s complexity causes people not to understand it, humourists may find that their markets prefer jokes about other topics instead.

People attach pricing issues to specific industries rather than as a discipline itself

Petrol prices have been high for some years now and everybody feels this in the wallet, so perhaps it is not surprising that cartoonists have published pictures of petrol station boards quoting unleaded at a price of ‘arm’ and diesel at ‘leg’. But petrol prices tend to be set by taxation and international affairs rather than mechanisms familiar to pricing professionals.

In travel for another example, cartoonists do seem to have latched on to the idea of passengers needing to pay for ancillary services, getting off the plane for example (boom, tish!).

Perhaps the pricing profession can learn from the absence of jokes

Increasing emphasis on the role pricing plays in your organisation, both to internal employees and in external announcements, will cause more people to understand how it is a field they should be directing their attention to. Perhaps when humourists start creating more jokes about pricing that will be a sign that the industry is maturing.

Ranson Pricing is always available to help you with pricing PR. Contact us today for a no obligation discussion.

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The case against promoting your sales

As customers we often see our favourite shops, airlines and entertainment venues posting big red banners in their window or on their web site with ‘SALE’ prominently displayed in enormous letters. This practice is so often seen that it might be easy to think that it is the obvious and only thing to do when you are having a sale.

Surely telling your customers all about the sale will be the only way to make it pay? At Ranson Pricing we say not necessarily! Although the big red banners have their place, there are four good reasons not to put them up all the time.

Competitor response

It is well known that businesses often use software to monitor their competitors’ prices. But the process in place can vary across operations. Avoiding red banner-style promotion might stop competitors doing the same, even if they lower their prices to match you. There might also be a little extra time before the competitor response hits too, especially when software does not monitor all price changes continuously. This matters because potential customers might hear about competitor sales before they hear about yours, eventually buying from the competitor without even walking through your door or seeing your attractive prices at all. As a result, avoiding red banners can improve market share during sale periods and help sell inventory that would otherwise be spoiled.

Quality concerns

Customers, visitors or passengers valuing quality over price may be put off by a sale. In a shop, they might think that the only products available will be of lower quality than usual and so not come in at all. For venues, an event with such obviously cheap ticket prices might not be very good and so not worth attending. An extreme example would be airline passengers thinking that an airline is so desperate for passengers that it will be going out of business soon, leaving them without the flights they paid for.

Value for money

There might be some customers who feel that because they got a good deal from you under apparently normal conditions, they will think that you offer good value for money as a matter of course and be more likely to visit your shop or site in the future. They might even tell all their friends and family about how surprised they were to see your low prices, inspiring more people to consider buying from you and driving revenue growth all year round.

Measuring red banner value

Offering a sale without explicitly promoting the attractive prices offers an opportunity to gauge just how effective red banner-style marketing really is against lower prices themselves. This need not be an all-or-nothing decision since some segments and markets may be more responsive than others. Businesses who conduct trials of sales without promotion will come to understand when and where (if at all) this type of pricing and marketing yields a good return by itself and accordingly allocate budgets more effectively, boosting profitability over the medium to long term.

Red banners still have their place, just not all the time

It is likely that some segments at some times of the year will be so responsive to red banner marketing that it is worth doing some of the time. But avoiding their use all the time will help you understand more about your customers behave, strengthening the foundations for all your pricing and marketing decisions.

Ranson Pricing is always available to help you understand how to effectively promote your sales. Contact us today for a no obligation discussion.

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How a plane ticket can 'go viral'

On 8th July 2015 British Airways filed business class fares from Germany to Hong Kong for approximately EUR 1,400 (GBP 1,000, USD 1,600). With heavy competition on this route from the middle-east-three (Emirates, Etihad and Qatar Airways) this might not look like headline news. But as a good fare it was widely reported across flying enthusiast groups on social media.

Lots of people appeared to be buying these tickets, including several personally known to our Pricing Expert Oliver Ranson. If ever a plane ticket can ‘go viral’ (as the technology people have it) this was that time. Five things about this deal made it a little special and important for pricing strategy professionals to know about.

Special ticket conditions acted to create a market where none existed before

Free stopovers in London were permitted in both directions. This meant that people based in the UK could buy a weekend break in Germany and then ‘stopover’ in London for days, weeks or months before taking the long, comfy flight to Hong Kong. Essentially there were two or three trips involved for the price of one.

The new market did not cannibalise revenue from existing markets

Passengers originating in Germany and buying the fare would have been unlikely to take a stopover, taking a connecting flight at Heathrow immediately after arriving. And passengers based in London and wanting to take a ‘normal’ trip to Hong Kong would be unlikely to bother flying to Germany and back when they could take a one-stop flight on another carrier for only a few hundred Pounds more.

The new market caused people to buy tickets when they would otherwise not have flown at all

The comments on social media, together with the comments of Oliver’s own personal friends who bought tickets, suggest that passengers buying a weekend break in Germany and a flight to Hong Kong would not otherwise have flown at all. Fares booked into the lowest inventory class and capacity controls were no doubt in effect, so as a result BA sold seats that would otherwise have been spoiled and every passenger buying the ticket was doing so at close to 100% margins.

The new market caused people to buy other BA tickets at the same time

UK based passengers who wanted to take advantage of the ex-Germany fares needed to get to Germany first. No doubt many of them booked tickets on BA, either generating sales in this market at regular fares or reducing BA’s Avios (airmiles) liability in the process. Quite possibly BA Holidays were able to sell some hotel rooms in Germany too, earning some commission.

Social media discussion was critical to success

Had it not been for social media, it is unlikely that the tickets would have been sold in the volumes that they were. Social media facilitated the quick spread of news about the fare product to the people who really wanted to hear about it.

Were BA really smart or really lucky?

Only BA’s pricing and revenue management people will know whether or not the lessons drawn in this article were in line with their intentions. But the case does present some interesting ideas about the innovative use of social media in pricing strategy, which will no doubt become an increasingly valuable sales channel in years to come.

How is this relevant for me?

Essentially, BA used social media (intentionally or not) to create markets where none existed before and sell inventory that would otherwise have been wasted. With a little brainstorming, it is likely that similar initiatives can be successful in your business. Finally, it is worth mentioning that initiatives like this limit the ability of competitors to respond because non-price mechanisms are a key component of the appeal to customers.

Ranson Pricing is always available to help you develop pricing strategies for social media distribution. Contact us today for a no obligation discussion.

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Umbrellas and randomised pricing

When it is raining in London, Piccadilly’s shopkeepers make sure that they have plenty of small umbrellas for sale. Anybody caught out will be inclined to stop and buy one. Inspection reveals some interesting prices for although four or five brolly models may be available, there can be ten or eleven prices!

This is because people in a hurry may simply grab the first umbrella they see in the category they want rather than taking the time to look through what else is available. They are clearly willing to pay for convenience – a perfect example of second-degree price discrimination!

The shopkeepers on Piccadilly seem to practice their umbrella pricing by adding a few Pounds to some units of each model while leaving the prices of others as normal. Of course the higher priced units are positioned at eye level and the rain encourages people to hurry. When it is not raining, customers can be seen choosing carefully.

There are four reasons to investigate incorporating randomised pricing in your business.

Competitors find it harder to respond

In markets where competitors continually monitor prices and react accordingly, introducing a small random element that varies by customer can make it much harder for them to implement their own pricing strategies and direct more resources than they might otherwise to simply understanding how your pricing operates, taking away some of their ability to compete with you through other means.

Some customers voluntarily pay a small increment rather than incurring search costs

Randomised pricing works well for umbrellas because people in a hurry want to avoid the rain. Before the rain starts people can be seen spending time looking through the brollies to find the lower priced ones. One group of customers is incurring search costs and the other group is sometimes paying a higher price in return for lower search costs. It is likely that in your industry too some people will voluntarily pay a few Pounds or Dollars more to save some time. Standard segmentation and trial-improvement techniques can help show how to identify the different groups.

Enriched data sources facilitate analysis

Understanding whether or not a marginal Pound or Dollar actually impacts demand will facilitate understanding about whether or not small price changes will be profitable across all pricing analysis, whether or not randomised pricing is involved.

For industries with legacy distribution technology, randomised pricing give an exciting new incentive to invest in alternative methods

Legacy distribution technology like the global distribution systems used so frequently by airlines, hotels and other travel service providers are not likely to be providing the facility to offer randomised pricing any time soon. When there may be a business case to trial and implement the ideas outlined in this article it will be necessary to incorporate them into alternative distribution channels, which will no doubt frequently be based on mobile technology.

Ranson Pricing is always available to help you understand how randomised pricing strategies can benefit your business. Contact us today for a no obligation discussion.

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A brand new distribution channel - are you ready to price in augmented reality?

Augmented reality (“AR”) involves a customer pointing their smartphone at your logo, shop, restaurant, cinema, advert, magazine, aircraft, web site or any appropriate surface which you have configured appropriately and find related content delivered directly to their screen.

Of course this does not happen automatically and you need to develop and submit the content for web hosting first. But to all intents and purposes it is an entirely new distribution channel, based on neither traditional shops or traditional web sites. The pricing implications could be enormous.

People can buy products simply by seeing your advertising or logo

If you place an advertisement in the newspaper that is recognised by an AR scanning app and the reader sees a logo indicating that AR content is available, then that reader can potentially be taken immediately to a facility where they can find out more or even purchase your products.

People buying in the AR environment may have different willingness to pay

If a person is buying your product in such a manner, it is not clear whether or not they have higher willingness to pay than people purchasing through traditional retail or e-commerce outlets. As always, Ranson Pricing recommends conducting a series of trial and improvement exercises to determine exactly how the demand curve lies. With the technology currently in it’s infancy and not widely adopted by retailers, offering discounts to people buying through AR would be sure to distinguish your product in the market place, especially among young, technically savvy customers.

Offering products through AR can help serve untapped markets

If you would like to increase your market penetration among early technology adopters, using AR to offer products and services will be an innovative way to do this. Another untapped market could be enthusiasts. For example, distributing AR surfaces to social media groups and specialist websites may help capture incremental revenue from these customers while regular, non-enthusiast customers remain buying at the regular prices.

Distributors may be slow to respond

Large corporate distributors who inhibit pricing innovation, global distribution systems for example, are likely to lag behind companies investing in these innovative opportunities. For airlines shackled under full content agreements (as an example) pricing in AR could be an opportunity to break free and enter a new world of limitless pricing opportunities.

Ranson Pricing is always available to help you develop pricing strategies for distributing in augmented reality or any other environment. Contact us today for a no obligation discussion. We can also connect you with an awesome design agency who specialise in making your augmented reality visions an actual reality.

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Pricing & organisational structures

Where should pricing sit within an organisation? It might be in marketing, revenue management, sales or even on it’s own. Each business will have unique requirements and an organisational structure should be designed to help align pricing with wider strategic objectives, not forgetting that pricing people tend to be skilled in general quantitative analysis and can help other teams boost their performance too.

Ranson Pricing has identified five key issues relevant to pricing’s position in a larger organisation. They each come with their own set of costs and benefits which reorganisation exercises will need to take account of. There is also an important risk management element to ameliorate the cost of employees retiring, resigning or being redeployed elsewhere in your company.

1. Pricing involvement with corporate planning and demand forecasting

Elementary economics teaches that price is the outcome of interacting supply and demand. Whether or not pricing specialists should influence each of these is an interesting question. Ranson Pricing recommends that although it is always wise that your pricing specialists be involved with both the organisation’s strategic requirements should be considered carefully when deciding whether to internalise planning and/or forecasting in a single job description with pricing. Here are three reasons why:

Are the skills necessary for success in your company’s pricing closely aligned with those necessary for success in the planning and forecasting? Tactical pricing initiatives and short term (< 1 year) demand forecasting are quite closely aligned. The ability to respond to market changes is a key skill for both pricers and forecasters and individuals who can do well in one of these roles may well be able to do well in the other. On the other hand, pricing strategy and long term planning are also closely aligned so organisations with each qualified person doing a bit of these can also be successful.

You need some pricing experts. It is likely that your business will need pricing specialists to handle operational matters and strategy concerns. Especially on the operational side, not everybody needs to be an expert. But it is important to ensure that all pricing specialists are able to develop skills in line with their expectations and ambitions. For individuals on the strategy side or seeking to move there from operations it is likely that a demand forecasting and planning component of their role could hinder their opportunities to add value through purer strategic analysis.

What is the risk of pricing specialists moving to other jobs? People retire, resign or move to other places in an organisation. That is a fact of life and a well-planned organisational structure should minimise the cost of these changes. For this reason, it is unwise to have a large number of key skills exclusively practiced to one particular individual and accordingly it is worthwhile having pricing specialists, planners and forecasters at least engaging with one another if not actually all doing similar jobs.

In businesses with an established revenue management practice it is likely that pricing specialists are involved to some extent in demand forecasting exercises. If this is the case, then organisational structures from the past may heavily influence the way things are done today, even if new alternatives may present better solutions to key issues currently at hand. If this is the case at your business, it might be worth taking some time to think carefully about whether or not your organisational structure is making the most of the human capital you have available.

2. Pricing people and the sales process

Pricing as a discipline largely seeks to maximise revenue to a whole company whilst sales teams, provided that the company is not small, tend to thrive at the individual market or product level. This is an important distinction because the two objectives are not necessarily closely aligned, especially when capacity is constrained.

For example, an international airline’s sales team in Europe may find themselves unable to sell seats at ‘normal’ fares in light of extremely high demand from passengers buying high fare return tickets to Europe from Africa. In this case a pricing specialist would normally seek to disregard the European team’s sales target on the grounds that the traffic from Europe is simply not worth having compared with the higher value flows from Africa.

For another example, a cinema group operating several multiplexes in London might prefer to let one multiplex operate at lower profitability in order to avoid revenue cannibalisation at the high profile west end screens. In this case the pricing team would normally seek to maximise the revenue from all the screens available rather than help specific teams meet their individual targets.

Accordingly Ranson Pricing does not recommend that pricing people participate directly in the sales process. Pricing skills can however be extremely valuable when seeking to direct colleagues in the sales force to gaps in the market or new ways of packaging the same product. So indirect participation in sales and advice to the teams in the field is likely to be a good use of pricing specialists' expertise.

3. How to use pricing specialists as internal consultants

One of the key skills of the pricing specialist is an ability to distil underlying stories about how customer archetypes are behaving from complex market dynamics. At many businesses such insights are essential elements of strategy in other areas. For example a data-driven approach to product development requires extensive use of customer focus groups to establish which product elements are valued and which are not. Pricing specialists could in this case be used as internal consultants to help a development team implement or refine this approach and others like it.

It is likely that a pricing specialist or two would make a helpful addition to any strategy working groups or internal consulting teams that you already have in place. If you do not currently use your human capital in such a way then perhaps approaching an enterprising pricing specialist could be a good way of getting it off the ground! Whether or not the pricing specialist should move permanently to the internal consulting team or mix it with existing pricing responsibilities would depend on the circumstances in question.

4. Accommodating data scientists & technology specialists

At Ranson Pricing we believe that it is essential that tariffs be set on the basis of facts and analysis. Studying data and using it to tell compelling stories that explain why stakeholders should support particular pricing initiatives is a pricing specialist’s daily bread. Inevitably there must be a role for data scientists and technology specialists in the pricing process.

But we caution against these experts being too closely involved as too much intensive statistics may cause other stakeholders to ignore the pricing team’s work because they feel it is ‘too hard’. It is also possible that a focus on data science and IT could lead to key initiatives that emphasise the art of pricing being missed.

Accordingly an organisation should think carefully about whether or not data scientists and technology specialists fit right into the pricing team or whether they should be positioned as internal consultants who can provide their valuable insights into the pricing process when required and without disrupting the art of pricing.

5. Sharing is caring

It is likely that your pricing specialists have a lot more to offer your business than through pricing work alone. Ranson Pricing expects that companies seeking to drive their revenue through analysis will operate increasingly with teams of analysts acting as internal consultants. Whatever organisational structure you eventually adopt we recommend that you be sure to incorporate pricing into the process of setting group strategy and helping each part of the organisation meet it’s individual objectives.

Ranson Pricing is always available to help you understand the costs & benefits of reorganising your pricing team. Contact us today for a no obligation discussion.

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How is B2B pricing distinct from B2C?

When a business sells their products in a B2B environment the pricing challenges may not be entirely the same as if a customer was buying single units. Since a corporate Client might buy many more units than one single customer there is scope for negotiation and Client procurement departments who do not actually use your product themselves can influence the decision-making.

But all too often this can lead to a worrying situation where pricing is simply considered a tool to seal the deal and is not designed to either address the Client’s actual needs over the medium to long term or facilitate revenue growth at your business. We have identified three key issues and a five-step process to help you price effectively for your B2B market segments.

1. Pricing decisions must still be made on the basis of analysis

Just as in the B2C environment, Ranson Pricing recommends that B2B pricing be accomplished on the basis of analysing the facts. These can include:

The competitive environment: Whether or not requests for your products and services are formally tendered it is important to remember that you are likely to have competitors for the contract. Being aware of precisely who your competitors are and measuring how they change over time is just as important in B2B pricing as in B2C. The exact balance of competition will depend on the bundle of products and services that your Client actually needs, so techniques of competitive benchmarking that are similar to what you would use in B2C can also work well in B2B. Imagining your Client as a group of single customers is a good way to facilitate the competitive benchmarking process.

Your history dealing with similar contracts: It can be helpful referring to past deals with similar and less-similar Clients when considering the right set of prices in a B2B environment. Just as you might use historical data regarding proclivity to buy under a B2C model, it makes sense to apply the lessons of history to find the B2B tariffs that are both likely to be attractive enough to the Client to win the contract and likely to support your own objectives for revenue growth.

Existing deals with the Client: When you already have a contract with a prospective B2B Client it makes sense to evaluate that contract’s performance in respect of the bundle of services actually used over the life of the agreement and compare that to expectations and points discussed in the tendering or negotiations stage of that contract coming into effect.

2. The key to success in B2B pricing is well-defined ownership of the pricing process

Just as in the B2C environment, B2B pricing must not simply be considered a lever to pull to win a deal. Accordingly it is important to ensure that the pricing process is owned and operated by a team who have the interests of your whole business at heart and not just business development within a particular geographic region or product range.

3. B2B pricing offers unique opportunities to evaluate customer willingness to pay

It might reasonably be argued that B2B pricing is a bit easier than B2C pricing. This is because the Client’s nature as an entity larger than a single customer means that your pricing and sales teams may have more insight into their willingness to pay. These insights can come from several sources:

Company accounts: In many markets it is likely that your Client is required by law to file accounts in the public domain – you can use these to see how profitable they are and how their expenses are balanced across different areas of the business, which might help you evaluate the extent to which your products will boost the Client’s profitability. Ranson Pricing recommends collecting and analysing the accounts of key Clients and prospective Clients over many years.

Press reports: Specialist trade publications and the general press may interview managers and executives from your Clients and prospects. Keeping an eye on these news sources might give you that little bit of extra information that gives the ammunition you need to know regarding the Client’s price sensitivity.

Tailoring value added services. It is possible that a Client may find specific services valuable even if they cost you only a small amount to provide. In these cases, offering such services on a complimentary or good-deal basis to support a higher price point for the core contract may be preferable to cutting headline prices to achieve a quick win, especially when there is a prospect of repeat business.

4. Ranson Pricing’s five-step process to pricing successfully in a B2B environment

Step 1 – do your research: Understand everything you can about the Client’s business, including their accounts and statements in the public domain.

Step 2 – understand what you need to achieve: Evaluate the extent to which each deal is really ‘essential’ for your business development and be happy to lose some deals because if you sell everything then you are too cheap.

Step 3 – develop a valuable contract for a fair price: use your understanding of the Client’s requirements and the competitive environment to create a compelling contract that emphasises good overall value for the Client rather than a low headline price.

Step 4 – negotiation on the basis of total value rather than price alone: Take your contract to the Client with a view to being a dependable and high quality vendor.

Step 5 – document your results and use the lessons from this negotiation to inform the next: Write a simple, easy to understand report about each negotiation, regardless of it’s success or failure, in such a way that it can be analysed and reviewed over time to help meet your business’s revenue objectives in the medium and long term.

Ranson Pricing is always available to help you address your B2B pricing challenges. Contact us today for a no obligation discussion.

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Doubling-up on loyalty

Loyalty schemes, which reward customers for making purchases, have been an important ingredient of pricing strategy for many years. But now that there are so many loyalty scheme operators there is a risk that a ‘simple’ model rewarding all customers equally might not be enough. In order to make a loyalty scheme distinctive there might be opportunities to cause valuable customers to believe that your loyalty scheme is the most worthwhile of them all. Ranson Pricing has identified three of these, which operate both directly and indirectly.

1. More points per transaction for regular customers

Airlines and hotels have for many years offered a ‘tiered’ loyalty programme, where high-spending customers or regular users are rewarded proportionally more for their spend than customers spreading their purchases around a range of suppliers. The Gold or Platinum frequent flyer card is not only seen as a status-symbol in some circles, but can also be extremely valuable if an air mileage bonus allows a family to either travel in a higher class of service or take a second set of nearly-free holiday flights.

Operators seeking to implement such a tier-based system will find that there is a trade-off between offering rewards on a transactional basis (where higher spend in one instance results in more loyalty points being awarded) or a regularity basis (where high frequency users are rewarded, even when making small transactions).

A tier-based loyalty programme need not be confined to travel operators. For example, retailers could make it easier to jump to higher tiers for customers either visiting more frequently, spending large amounts more often or buying higher value products. Entertainment operators could offer customers buying ‘prime’ seats at a film or concert faster promotion too.

2. More bonus awards to regulars

Even if loyalty operators do not adopt a formally tiered system, there are still opportunities for them to reward higher spending or more frequent users.

The first of these is to give more awards to regular users or high spenders than others. For example, a supermarket giving out vouchers for money off or bonus reward points may give more or higher value coupons to the customers they wish to incentivise the most. Turning loyalty on it’s head, this idea could also be used to encourage first-time or irregular visitors to come to the shop more.

3. Competition

A second opportunity for loyalty schemes that are not tiered is to hold no-cost competitions to give customers an opportunity to boost their points. Ranson Pricing is absolutely committed to fair and open competitions. But we believe that provided that the top prizes are accessible with equal odds to all, a loyalty operator can legitimately guarantee higher prizes for their most valuable customers. 

For example, a supermarket might guarantee to award at least GBP 1 in value of points following a GBP 20 spend. But for customers who have spent GBP 2,000 in the past twelve months or visited more than 100 times they might guarantee to award at least GBP 5 in value of points. Such guarantees may or may not be advertised, but if an operator tells a customer about their high guarantee in advance then that customer may feel more valued, become more loyal to the business and offer a higher proportion of their spend in return.

Balancing incentives

There is an important strategic dilemma for loyalty operators seeking to encourage their most valuable customers to keep spending in their shop. This is whether or not to offer rewards based on the size of individual transactions, total spend over a long period of time, the number of visits or a hybrid of any of these. As is our normal practice, we recommend taking such decisions on the basis of robust and rigorous analysis.

Ranson Pricing is always available to help you understand how to develop and configure your loyalty schemes. Contact us today for a no obligation discussion.

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It's cold outside, so why can't I buy a coat?

The maximum temperature in London today is forecast to be 12 degrees Celsius. Although Jack Frost may be jetting off to the southern hemisphere, it cannot really be said that weather is actually warm. Yet when Ranson Pricing’s in-house Pricing Expert Oliver Ranson was walking by his favourite clothes shops the other day he was interested to note that shorts were available for sale but coats were not. At Ranson Pricing we have carefully considered this apparent paradox and think that we have come up with a pricing-related explanation.

This is that clothes shops’ most valuable market segments may care enough about their display of fashion to pay a premium to plan ahead, buying shorts before the weather gets warm and coats before it gets cold. Which leads on to that old chestnut of how pricing links to product development, in this case that fashion is a different product to simple clothing.

In other words, it's all about market segmentation!

There may be some other examples of products that could be considered much more than what they seem. Flights are about much more than carriage through the air and hotels are about much more than a comfortable bed. Both of these products facilitate greater things, be they a family holiday, an important business deal or a chance to explore the world.

Even the basic food and drink products sold on the high street might be part of something more if they cause friends and families to enjoy a memorable meal together.

Fortunately it is easy to find out how your customers are inspired by your products through standard surveys and customer research, as well as through evaluating any data that you might already have in house. But it is important that the insights gathered can be used for effective pricing strategy and marketers may need to work closely with pricing specialists during the development process to ensure that this is the case.

Ranson Pricing is always available to help you understand your customer preferences more effectively. Contact us today for a no obligation discussion.

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Is the end of 99p pricing coming?

For almost as long as currency has been decimalised in the UK businesses have been quoting their prices as one penny less than the next full Pound. So instead of £6.00 they would charge £5.99. The logic has always been that customers are inclined to analyse the cost of an item based on the first digit. But Ranson Pricing has noticed that more and more businesses seem to be moving to a ‘cleaner’ set of prices with a zero or five at the end. We have identified five reasons why this might be the case.

Customers pay using card rather than cash
Now that plastic is such a common payment mechanism there is less risk of money not reaching the till. Under 99p pricing models, shop staff had to open the till to give customers their change, but plastic removes this requirement.

New incentives to purchase increase perceived value
Many retailers now offer loyalty schemes that provide points in accordance with the number of whole Pounds spent. Accordingly customers may prefer items that are pennies more expensive if it allows them to reach their points target without spending Pounds on extra items. Furthermore, if retailers offer ‘challenges’ (for example to spend £30 per shop), saving some items to purchase later may incentivise customers to visit the shop more and more times, improving the retailer’s market share.

Closer analysis of willingness to pay
Clean, complete data and statistical techniques now allow retailers to estimate their elasticity of demand more precisely than ever before. If their analysis suggests that the optimum price is £5.27, it may be better to set a price of £5.25 or £5.30 rather than £4.99 or £5.49.

Consumer backlash against ‘complex’ pricing
Ranson Pricing has noticed an increasing amount of unsettlement against aggressive pricing practices, particularly for ‘essentials’ in the supermarkets. A clear Pound is an easy to understand price and some reluctant shoppers might even prefer to pay £1 than £0.99 because it is ‘simple’.

Bundling opportunities inspire consumers more than subtle prices
Retailers are now starting to offer many products in bundles. Good examples would be paints and brushes, coffee and milk, and rail tickets with buffet vouchers. These bundles may inspire consumers more than subtle prices. For example, consumers may prefer to buy a pot of paint and a brush for £3.00 rather than paint for £1.49 and a brush for £1.49 (total = £2.98). Multi-buys may have a similar effect.

As always, it makes sense to trial & improve initiatives
Businesses seeking to move away from the 99p pricing model should be sure to mitigate risk through implementing their changes in a phased manner with plenty of trial & improvement exercises.

Imagine if all your customers gave you a penny more – it could add up to a substantial sum of money after several years!

Ranson Pricing is always available to help businesses understand the costs and benefits of adjusting their pricing models, as well as helping with the implementation and ongoing management. Contact us today for a no obligation discussion.

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Simon Cowell the pricing strategy expert

In an episode of the X-Factor last year the media mogul Simon Cowell offered his Mini as a prize in a competition. No doubt he realised that the yields from his share of the entry fees would exceed the price when selling the car in the second hand market. It looks to us that Simon Cowell understands a key driver of pricing strategy decisions – he understands how to make the most from different sales channels.

In your business, the prices appropriate to different sales channels may vary in accordance with the market segments that they serve. Understanding the willingness to pay of each is an important pricing strategy challenge and there are three key issues to consider.

Three-step process to understanding market segments & distribution channels
Ranson Pricing’s three-step process applies to cross-channel pricing in a similar way to the ancillary revenues process. See this earlier article for more information. The first step is to conduct fundamental research using well-known survey methods, (not forgetting to ensure that results are both measurable and meaningful). With survey data in-hand, take a look at your internal data to validate the survey results and formulate hypotheses about how you would expect cross-channel pricing initiatives to perform. Finally, roll them out in a cautious manner, measuring the results and expanding them to other markets and products if the prove a success.

Different segments may migrate to new channels over time
It is possible that over time some of your market segments could migrate to new channels and each group could have different buying habits. Pricing teams will need to understand the position of each to serve each customer with the right price. For example, early adopters of a particular feature in a mobile phone app may be characterised by higher or lower willingness to pay than people who start using that feature some years later.

Translate the data into competing stories to convince other stakeholders
Channel management is often assigned to people outside the pricing group, who they may think differently to your pricing specialists. If this is the case, Ranson Pricing recommends translating the data into compelling stories that colleagues can easily understand rather than presenting a rigorous statistical evaluation. Ranson Pricing finds stories that refer to families of four, retired couples and groups of students particularly effective.

Ranson Pricing is always available to help you price across the different sales channels available to you. Contact us today for a no obligation discussion.

For the avoidance of doubt, Ranson Pricing is in no way associated with Simon Cowell or the X-Factor - we merely draw conclusions from information in the public domain!

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What are the next three big things in pricing?

The pricing industry has been going through something of a revolution in recent years, with companies investing a great deal of time and technology in their pricing processes. Businesses with a robust understanding of their customer behaviour and a strong culture of using hypothesis-driven analysis to implement initiatives through trial and improvement techniques are now faced with the challenge of what to do next.

On the technology side, increasingly sophisticated ‘big data’ analysis and demand forecasting techniques will look like attractive ways of spending millions of dollars. But as ever, Ranson Pricing recommends a cautious and pragmatic approach to technology investment that is always accompanied by investment in the art of pricing.

We believe that there are three avenues down which your business can take pricing strategy. These are:

i) Building on your existing loyalty initiatives to develop special, individually targeted incentives for customers in a way entirely distinct from traditional CRM
ii) Creating means of giving customers an option to either purchase a good or buy more at a special price on a subsequent visit to your shop
iii) Experimenting with different ownership models.

Boosting value through consumer clubs

Traditionally, retailers offered promotions and tactical initiatives to boost sales of inventory that would otherwise go unsold. Another way of looking at this is that they segmented the market through causing some customers to pay a ‘full price’ higher than what the market would otherwise bear. However some consumers may find these tactics confusing or overbearing, causing them to shop elsewhere. Accordingly retailers seeking to develop their pricing practice beyond the traditional model face an important challenge of causing customers to feel that their pricing model has become simpler and easier to understand whilst still maintaining their ability to charge different prices based on individual willingness to pay.

At Ranson Pricing, our vision statement is ‘a different price for every customer’ and we believe that one way which is likely to prove effective for businesses seeking to realise this vision is through using their existing loyalty schemes to launch a series of targeted, value-added clubs that cause customers to feel that they receive the best value possible on the goods and services that they want to buy.

For example, such clubs could take a form where consumers have an opportunity to choose which products they would like to receive a personalised promotion on, and then have the point-of-sale automatically gives them a discount when they have swiped their membership card.

Individual retailers will face interesting challenges to decide which of the possible models they should adopt, including:

i) Should membership be free? Ranson Pricing considers that in almost all cases at least a basic level of membership should be free, but for some businesses, especially those selling luxury goods, a sense of ‘exclusivity’ through membership fees may be potentially valuable
ii) Should there be tiers of membership offering either more generous promotions on specific goods and/or access to promotions across a wider range of product categories, and if so should customers move through the tiers through increasing spend, membership fees or some other mechanism?
iii) Should membership be limited to specific individuals, for example customers who live within a specific range of a shop or members of a particular trade or profession?

There are a number of other challenges for retailers to overcome, including:

i) qualifying the integrity of the programme to ensure that customers only achieve access to the desired number of deals
ii) communicating the proposal simply and efficiently so that consumers buy-in to the new schemes
iii) creating and adjusting internal processes to cause product development, inventory control and both performance and competitive analysis to align with the new programme.

Options to purchase

Traditionally goods are sold to consumers on a transactional basis with a retailer’s offer being buy it at the price quoted or not at all. Ranson Pricing believes that the data and insights now exist to allow suppliers to offer new price products that give customers options to purchase. These could potentially take a number of forms, including:

i) do not buy today, but for a small fee guarantee today’s price for tomorrow – useful in sectors like travel where services are perishable and prices can change quickly
ii) buy today, buy more at a reduced price tomorrow – useful in sectors selling non-perishable goods (e.g. paint) or for subscription services where a user is unsure about their requirements to repeatedly subscribe (e.g. online dating)
iii) buy today and for a small fee buy a replacement if you need it at a discount – useful for products which can easily be lost or damaged (e.g. single gloves or high-heeled shoes), but this type of approach may require adjustments to manufacturing processes and the costs of this will need to be balanced against commercial benefits.

New ownership models

Where goods or services are non-perishable it can make sense to rent out rather than sell. Such a model increases profitability through ensuring that a particular unit can be utilised to a high degree whilst consumers enjoy their use for less than they would pay for ownership. The DIY industry is an early adopter of such a model.

As with all other pricing strategy initiatives it is essential to evaluate customer willingness to pay to set rental prices effectively. By it’s nature, the rental concept should provide sufficient volume of transactions to quickly evaluate whether or not goods or services for rent are selling out quickly or slowly. Your pricing team should be able to use this information to effectively determine whether rental prices should rise, fall or stay at their current level.

Ranson Pricing is available to help your business move to any of these new models, or to help you get the ground work in place for future initiatives. Contact us today for a no obligation discussion.

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What happened when Waitrose came to town?

Although Ranson Pricing is able to operate worldwide, our permanent base is in central London. Around the area that our Pricing Expert Oliver Ranson hangs out there have for many years been two supermarkets – a substantial Sainsbury’s selling all the food products that you would expect from any large supermarket and a local Tesco selling a smaller range of goods with emphasis on pre-prepared products for busy professionals.

A few months back a Waitrose also opened, right over the road from Tesco and just a few doors down from Sainsbury’s. At Ranson Pricing we were extremely interested to see how this would pan out for the existing operators and local consumers. As it turned out, nothing much seemed to change at either Sainsbury’s or Tesco yet plenty of Waitrose bags were being carried around. We noticed three reasons why this was the case.

Waitrose did not enter the market with aggressive promotions

In fact, they did not seem to enter with any promotions at all. This ensured that other local operators did not need to cut their prices to maintain their market share and encouraged the price discipline which ultimately benefits consumers through creating more product choice. When your business is entering new markets or responding to new competitors it makes sense to follow price discipline yourself.

Waitrose differentiated their products from the existing operators in small but significant ways

Waitrose bakery products appeared somewhat larger than those available at Sainsbury’s and Tesco, whilst meat and fish products appeared somewhat smaller. Furthermore, there were sweets entirely distinct from those treats available at either competitor. Although Waitrose was selling essentially the same products as the other operators their products were nevertheless distinguished. When your business is entering new markets or responding to new competitors, see how your product is distinct from the other guy’s and bear that in mind when setting your prices.

The new Waitrose captured shoppers who would otherwise visit their other branches nearby

Conscious that data is not the plural of anecdote, Ranson Pricing notes that many of our friends and associates who shop at the new local Waitrose had previously visited other branches of Waitrose nearby. Waitrose enhanced customer engagement among existing customers by opening their new shop, the benefits of which no doubt ameliorates any need to capture market share from other local operators.

In your business, you can apply similar logic to help avoid price wars, enter new markets effectively and protect your market share from new entrants.

i) Show your customers and the competitors that you are not wishing to enter a price war by maintaining price discipline
ii) Ensure that your product is distinctive in at least a small way – communicate and understand this distinction among both your customers and colleagues clearly
iii) Don’t worry too much about a small, temporary loss of market share as in pricing there is always a bit of give-and-take and no doubt your future initiatives to the market will make up the difference.

Ranson Pricing is available to help you enter new markets or establish your price response to new competitors. Contact us today for a no obligation discussion.

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Great insights from our Clients

This year there have been three things we learnt from Client engagements that we just have to share:

Sometimes you have to think creatively to realise who the competition are

Your primary competitors may not be active in some of the markets you serve or even what most people would consider your industry. For example, a cinema operator who benchmarks their prices against other cinemas and theatres may be missing part of the picture because their product represents only one part of a customer’s basket of entertainment activities. Activities competing with cinemas include but are not limited to shopping, dining out, travel (e.g. weekend breaks), music, reading, sports and video games.

When Ranson Pricing was discussing benchmarking techniques with one of our associates we together determined this three-step process to competitive definition:

Step 1 – brainstorming: It is worthwhile gathering people from inside your company with a broad range of expertise to define products and services that could be competitors.
Step 2 – understanding the market’s perspective: Conduct primary research among customers with a variety of purchasing habits to determine how they consume and spend on the types of the products and services identified in step 1.
Step 3 – measurement: Based on steps 1 and 2, define a weighting for the extent to which different types of product and service, including your own, compete with your offering. Such a weighting can be used to effectively position your product in the market place through product scoring methods.

At Ranson Pricing we incorporate the wide-competition idea into market share analysis by advocating an approach that considers the share of a customer’s disposable income and time that an operator captures rather than simply the classical market share of volume and revenue for one specific good or service.

It can be valuable to use pricing peaks and troughs to spread work over the year

Demand often appears in peaks and troughs. It makes sense to use this to your advantage by planning ahead so that your strategic analysis and product development takes place in the troughs, leaving the peaks free to implement ad hoc tactics and address operational issues. When Ranson Pricing was helping one of our partners plan how best to deploy their available resources we together identified the peaks and troughs of their demand curve and set down a plan for conducting work through the year.

Sometimes what you might think is your weakest area can actually be one of the strongest

Do you have issues with data management? Or understanding the basics of market segmentation? Then there is a good chance that your knowledge of the issues could have caused you to build a better practice than you might have thought.

When Ranson Pricing was conducting a gap analysis for one of our colleagues we found that their existing work had already caused them to understand most of the key issues of what they believed to be their biggest problem. Much more concerning were the unknown unknowns. Ranson Pricing’s analysis helped the organisation understand exactly what these were and how they could be addressed within the constraints of time, personnel and in-house expertise.

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Unlocking your inner retailer

For pricing strategy enthusiasts a trip to the supermarket can be a piece of exciting and informative fieldwork instead of just another regular domestic task. Across the world supermarkets seem to have a remarkable toolbox of techniques to cause consumers to voluntarily pay a higher share of their weekly spend than they might otherwise offer.

Some of their techniques involve elements of placement, branding, packaging and colour. What child can resist the brightly coloured packets of sweets at the tills? But the supermarkets also seem keen on pricing strategy initiatives and in this article we shall explore what these are and how to incorporate the lessons in your industry.

Lesson 1: Offer a wide range of products

Oliver Ranson, our Pricing Expert, has a fondness for chocolate biscuits. His local supermarket is quite canny and the chocolate biscuits are positioned just next to a display of other chocolate items. Sometimes Oliver is tempted and the supermarket earns a small revenue premium as a result... An economist might describe this as taking advantage of Oliver’s “revealed preferences”.

Yet at the same time as Oliver buys his chocolate biscuits there is no doubt another shopper carefully choosing from the supermarket’s selection of cheese. The supermarket has plenty of products and almost everybody will find something they want to buy there. Whatever your industry, offering a wide range of products is a critical element of pricing strategy. It allows you to capture as wide a range of customers as possible and cause those customers to direct a high proportion of their spend to your products and services. It might even be said that some shoppers will be happy to pay a small premium for convenience and this is another reason to offer a wide product range.

Lesson 2: Don’t be afraid to be simultaneously the cheapest and most expensive in the market.

When Oliver buys his chocolate biscuits there is always a selection to choose from. The cheapest are normally the supermarket’s own ‘economy’ product, with their ‘standard’ product approximately double the price. The branded biscuits are usually more expensive than the supermarket’s standard product but are sometimes promoted to be slightly cheaper. Finally there are normally a few boxes or tins of luxury biscuits at a high price.

In the interests of “research” in preparation for this article Oliver has evaluated all the different chocolate biscuits on offer… He found each of them surprisingly different, showing that the supermarket employs strong product differentiation. Across chocolate biscuits alone, Oliver’s supermarket is offering a wide range of products that appeal to all price points. In your industry why not try the same thing, using some spare capacity to create some higher or lower priced products than you would normally sell and see how they perform.

Lesson 3: Bundle products & services effectively to appeal to different market segments

The supermarket has told Oliver on several occasions that if he buys chocolate biscuits a discount is available on another item that from time to time appears in Oliver’s trolley. This is a fine way of causing Oliver to direct each of his shopping visits to the shop in question, boosting the supermarket’s market share and, for some segments, giving the supermarket an opportunity to charge a small premium for convenience. Bundling products and services in your industry is likely to have similar results, capturing share, segmenting the market and extracting the revenue premiums that result.

Lesson 4: Develop your own distinctive and branded range of products to occupy a clear position in the market place

Supermarkets typically prepare and package tangible products and since this type of initiative is both common across all industries and not really a pricing strategy related issue we shall not explore it in detail here. However it is worth mentioning that it is also possible to brand tariffs and prices themselves, which can be a useful opportunity to distinguish an otherwise hard to differentiate product.

Across many of the lessons above the key to success is product differentiation. In our recent comment on ancillary revenues we noted how product development is an integral part of the pricing process and each of these cases are founded on similar principles.

Lesson 5: Reward loyalty to track your customers’ spending habits and behaviour

Oliver is a member of the supermarket’s loyalty scheme and achieves approximately 4% of his annual spend back in return benefits. The supermarket regularly gives Oliver coupons offering discounts or bonus loyalty points to encourage him to purchase items that he regularly buys in the shop. There seems to be a high correlation between products that Oliver normally buys and the vouchers offered, suggesting that the supermarket is doing a good job of tracking Oliver’s purchases and understanding what he does and does not like.

The supermarket also seems to promote it’s own brand by sometimes offering Oliver benefits only if he purchases the supermarket’s own-brand items. Oliver is also encouraged to spend more money in the shop by vouchers offering a cash discount or bonus loyalty points if a certain spend threshold is reached.

In summary, the supermarket is using the understanding of customer behaviour generated through the loyalty scheme to achieve three things:

i) encourage customers to conduct as many of their regular shopping trips as possible in the shop
ii) direct customer spend towards preferred brands and products
iii) cause customers to spend more in the shop than they otherwise might.

Is your loyalty programme achieving the same?

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The any-time-but-January sale

In January cynical retailers shift items that in preceding months have been purposefully marked up and placed at the back of the shop to trick customers into believing that they are receiving a great deal. At Ranson Pricing we consider this approach somewhat unethical as it acts to punish fundamental elements of psychology rather than extract revenue streams from product attributes that consumers find valuable.

There are however plenty of opportunities to implement tactical promotion initiatives to reward rather than punish specific market segments and in this article we shall show you what they are and how they can be used to develop a more positive promotion strategy.

There are essentially three categories of promotions and tactical initiatives that businesses selling goods and services can use to boost revenue. These are:

i) discounting to sell inventory that would otherwise go unsold;
ii) product bundling to increase spend at relatively low average cost; and
iii) development initiatives that give existing and new customers a new reason to buy a product or service.

Appealing to segments with lower willingness to pay than might otherwise purchase

Where you can identify inventory that would otherwise go unsold, it can make sense to offer discounts and encourage spend from market segments who would not otherwise purchase your product. Judging when the risk of revenue dilution from customers who would have purchased anyway is minimised can be tricky, but as with so many pricing initiatives the key to success lies in the analysis of data and conducting experiments.

Providing more value to existing segments

Across product ranges where your marginal costs are low, you can boost traffic through your retail space through bundling the low marginal cost products with other products or services. When applied at the right time this may cause some of your customers to increase both their spend and engagement with your brand.

Capturing new sources of revenue

Try giving existing and new customers a new reason to buy a product or service by implementing a program of product development. A classic example of this is when chocolate producers introduce “snow” themed white chocolate products in the winter season. These types of initiatives cause customers to engage or re-engage with a brand, which will most likely boost spend both at the time of sale and in the future.

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A different price for every customer

At Ranson Pricing our vision statement is ‘a different price for every customer’. We believe that at some point in the future, when two customers walk into a particular shop at the same time the prices presented to one will not necessarily be the same as those presented to the other.

Quite how this will all work is not clear and no doubt it would be easy to present an article full of buzzwords about ‘clouds’, ‘devices’ and ‘social media’. These will surely have their roles to play, but they are all quite young phenomena and will go through much evolution over the coming years.

A more mature segment of the pricing industry that will surely contribute to a different price for every customer is the concept of loyalty, which allows companies to understand a large amount of information about their customers. In this article we explore exactly what this information is and how it can be used effectively.

Correlation yields information

Customers joining a loyalty scheme voluntarily part with three categories of information about themselves to avail the benefits. These are:

i) personal information such as their demographic data and place of residence
ii) the opportunity for the loyalty scheme operator to track their purchases and analyse their buying behaviour
iii) the opportunity for the loyalty scheme operator to contact them for research purposes.

The rich veins of information gathered can be extremely useful for the pricing process. Finding correlations between pieces of this information can help you understand who your customers are and why they consume your products and services. This analysis will go a long way towards completing a market segmentation exercise. In order to understand why this is the case it is useful to look at questions which analysis conducted on loyalty data can help answer. These include:

Q1: who are your customers?

It may be informative to understand trends, patterns and correlation between repeated purchase of your products and demographic data, customer hometowns and socio-economic status. For example you might find that customers resident in one market behave differently to locals when visiting other markets. As a result it may be possible to fine-tune your pricing initiatives to effectively discriminate between visitors and residents in a particular geographic region.

Q2: Why are your customers consuming your products and services?

If your customers are making repeated purchases of your product or service then it might be informative to understand why they are making their purchase. At a simple level there may be a distinction between business and leisure purchases. But this alone is of limited use. An extensive scenario evaluation exercise deriving reasons for purchase at an intuitive level and then testing them statistically may add much more value.

Q3: How are your customers buying your products and services?

Your customers may make purchases through a variety of sales channels, may pay all at once or by installment and may pay using cash, credit or some other mechanism. There may be opportunities to develop tariffs exclusive to one particular sales channel.

Q4: Why are your consumers buying from you and not your competitors?

Understanding your customers’ beliefs about your quality positioning in the market place can be extremely informative. In particular there may be opportunities to charge premium prices to customers buying for quality alone and there may also be a chance to sell inventory that would otherwise go unsold to more price sensitive customers.

Data informs tariff design

Analysis of loyalty data should yield an excellent understanding of your market segments. The next step is to determine which features of a tariff are appropriate to each sector. As measurement of each customer’s unique behavioural characteristics becomes more refined and each sector becomes very small it is quite conceivable to imagine a world where each customer is offered a different price.

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Popcorn, please! Essential elements of ancillary revenue

At the Academy Awards in Los Angeles this year we saw 12 Years A Slave win the Oscar for best picture and Alfonso Cuarón, the man behind Gravity, take the prize for best director. According to boxofficemojo.com the former has so far taken more than USD 171 million at the box office and the latter in excess of USD 714 million (at 17th March 2014).

These revenue figures are of course extremely large. But it is important to remember that they only represent part of the picture. All cinemas seem to offer a wide range of popular ancillary products and services. These can include food and beverage products, membership of film clubs and souvenirs. Accordingly the true revenue contribution of these blockbuster films to cinemas worldwide may be much more than just the box office takings.

Judging by how popular concession stands seem to be as part of a night out at the movies, cinemas seem to have their ancillary product development well under control. In this article we explore the process for implementing a strong ancillary revenue product in your industry.

Ancillary revenue development follows a cycle

The cycle to the left shows the necessary steps to develop an effective ancillary revenue programme. There are five stages to follow, each of which is explored in some more detail in this article.

Stage 1 – understand market segments

Understanding how customers are segmented among your products and markets is the first step to take when looking at ancillary revenue development. In particular, it is only through understanding your customers’ motivators for buying and using your product that you can evaluate which ancillary products and services are likely to be successful.

Two sources of information are useful here:

i) Mining your data and performing statistical analysis, which is no doubt familiar ground for your pricing specialists
ii) direct research from your customers, remembering that the information must be collected in such a way that responses are measurable and meaningful.

Research of this nature is not necessarily always scientific or statistical. Instead it requires formulation of a wide range of scenarios at an intuitive level. Accordingly this work is not always a comfortable experience for pricing teams. There may be management challenges to overcome to ensure that the right balance is reached between scientific and intuitive analysis.
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Stage 2 – product decomposition

This phase is all about breaking out:

i) every possible component of a product that customers may consider valuable
ii) every possible means of purchase for the product, including sales channel choice, payment by installment and whether or not cash or credit is used.

Once again, this type of work may not always be familiar ground for pricing specialists and there may be management challenges to overcome to ensure that pricing science is balanced with sound economic intuition. Combining the above information on product decomposition with the results of the research stage will allow you to effectively identify which segments may purchase ancillaries at specific price points.

Stage 3 – product design using conjoint analysis

Now that you have an excellent understanding of your market segments and the ancillaries that they are likely to buy the next step is to determine which features are likely to combine to create a good ancillary product. This is classic conjoint analysis and should be familiar territory for your pricing team. At the same time your product development team will be designing and developing the physical product. Based on the pricing team’s analysis the costs of product development can be understood in context of the demand and potential revenue stream, which will facilitate the securing of an appropriate budget.

Stage 4 – implementation through trial & improvement

The use of research, product decomposition and conjoint analysis in the previous three phases will strongly inform implementation through facilitating trial design. When your product is ready to go to market you can evaluate how variations in discount, opacity and product discount perform through standard behavioural analysis. After some time you will have a clear understanding of how to fine tune your ancillaries in specific markets. All that is now left to do is keep everything in order and up to date with market trends, which is what the next phase is all about.

Stage 5 – managing your assets

Now that you have implemented your ancillary revenue products it is important to continually monitor their performance and quality standards. These issues may not at first glance seem typical areas of expertise for the pricing team. But they are nevertheless highly relevant since they are classic product positioning indicators. When this need arises it is time to begin the cycle again at the research phase.

Beware bad product design

Ancillary revenue development is much more about product design than statistics and science. Be aware that sub-par product design can be covered up with ‘difficult’ statistics and ‘impressive’ analysis, so organisations genuinely seeking a sound ancillary strategy should be sure to have effective management controls in place to balance pricing science with economic intuition.

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In the Wild West of pricing, the law is a funny thing

Famous Wild West cowboy and gunman Billy the Kid remarked “It wasn’t a long while since I was a law – funny thing the law”. He was observing that before becoming the ruthless outlaw we know today he had served as a Deputy US Marshal, warranted to uphold the law.

There are one or two “laws” in pricing strategy that help organisations following them develop a sound pricing practice. And practicing pricing strategy today can sometimes be a bit like prospecting on the frontier, looking for new opportunities and pushing the boundaries of established practice. But Billy the Kid was certainly right that the law and rules in general are funny things. The adage “rules are for the guidance of wise men and the obedience of fools” sometimes applies in pricing and it is important for businesses to know when they should bend or break pricing laws.

The first law of pricing: If we sell everything we are too cheap

Selling out is a sound indicator that prices were too low. Our experience at Ranson Pricing suggests that when companies sell between 85% and 90% of their inventory they are striking the right balance between achieving volume and holding back enough capacity for the customers with highest willingness to pay.

Empty shelves can suggest that there may have been some customers who paid much less than they were willing to. They also might indicate that customers willing to pay relatively large sums for the product in question were unable to buy. We believe that the price of a product and the associated conditions of purchase (such as the time that a product or service may be bought at that particular price) is the best lever to achieve optimum sales volumes. But there may be times when breaking this law can help drive revenue performance.

Breaking the first law: use your knowledge of the purchase cycle to drive sales of unsold capacity

The challenge for pricing strategy professionals following the if we sell everything we are too cheap logic is that there may be times where customers who would not otherwise buy can be induced to purchase through special offers without impacting (or at least fully compensating for) guaranteed sales. The key ingredients of a pricing strategy to effectively break the first law are:

i) Spend time acting under the first law to gather the data you need to understand the purchase cycle:
It may be inadvisable to break the first law until you have sufficient data to establish how to do so effectively. So when launching a new product or entering a new market Ranson Pricing often recommends an approach that is not too aggressive while testing customer response.

ii) Understanding customer behaviour in the purchase cycle:
Evaluate your data to find out when your highest value customers are shopping, when your lower value customers are shopping and when the customers who eventually buy elsewhere are shopping. If there is a time when customers who do not currently buy are shopping and only a low proportion of regular customers are shopping then this would be a great time to discount heavily and sell excess inventory.

iii) Don’t be afraid to occasionally be the cheapest in the market even if you have a premium product:
Conventional pricing theory suggests that premium products should be sold for higher prices. But when excess capacity can be sold in excess of marginal cost and without heavily diluting revenue from existing customers the revenue generated can have a significant impact on profitability. Be careful not to get into a price war though – targeting offers to individual customers or offering the lowest prices for only a short time can help avoid these.

iv) Monitor changes to customer behaviour:
Be careful that not too many of your existing customers change their buying behaviour to purchase at a time when they would pay less than otherwise. Combining data from a loyalty scheme with customer proclivity analysis can be helpful to monitor whether or not this occurs. It may also be inadvisable to make it too easy for customers to predict when the cheapest deal can be found. Inevitably a balance will have to be found between selling off-peak and revenue dilution from changes to buying habits.

The second law of pricing: take decisions based on robust and rigorous analysis

Many pricing decisions are, rightly, taken only following extensive analysis and evaluation of data. “Scientific” techniques and expensive IT platforms are often employed to apply a standard technique to optimise a business’s revenue flow. But it is important to remember that taking the same road again and again and basing analysis entirely on history does not explore new and exciting opportunities. For this reason Ranson Pricing sometimes recommends conducting carefully considered experiments to gauge market reaction and revenue impact from initiatives outside normal experiences.

Breaking the second law: experimentation creates new and exciting data points

Pricing strategy professionals taking a truly scientific approach use their data and intuition to form a hypothesis about that which is unknown and then conduct an experiment to see whether or not the hypothesis was correct. Having conducted the experiment the data generated can be used to inform future pricing strategy decisions.

The key ingredients for a successful pricing experiment are:

i) A good reason to conduct the experiment:
There are many reasons to think that a good opportunity may be ready for exploration. Perhaps colleagues from the field might be mentioning new and exciting segments appearing due to growth and development in a specific market. Or new capacity may allow your organisation to serve customers that were not served before. When these changes appear it makes sense to understand how they may potentially impact your revenue performance and whether you have very much or very little data the time could be right to experiment.

ii) A clear and measurable idea about what constitutes a success and what does not:
A pricing experiment measures whether or not new initiatives boost revenue. Quite how it does so will depend on the specific circumstances, but an intuitive understanding of how the new initiative would deliver higher revenue should be worked out as part of the experiment design process. The next step is to develop a series of benchmarks across similar markets and revenue streams to compare the results of the experiment with and formulate measurable and objective criteria for success (higher profits than current) and failure (lower profits than current). As with any business process securing buy-in and agreement between relevant stakeholders on this validation process before the experiment has begun is essential.

iii) Willingness to use the results in future decision making:
If the experiment is a success and the pricing initiative being tested generates a profit then it makes sense to use this information to make the case for rolling out similar initiatives when circumstances permit in the future. If the experiment is not a success on the other hand it may be costly to go ahead and roll out the initiative elsewhere. Accordingly the risk of taking such experiments can pay off directly when an initiative is profitable and indirectly through creating the business case for and against similar initiatives in the future.

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What if Ryanair ran a hotel?

Ryanair CEO Michael O’Leary apparently once said “if drink sales fall off, we get the pilots to engineer a bit of turbulence – that usually spikes sales”. In jest or not, his airline seems to be expert at encouraging their customers to voluntarily part with more money, either through smart policy development or simply taking advantage of customer behaviour trends from specific market segments.

It is interesting to speculate on what initiatives Ryanair might adopt to boost revenue if they were to enter the hotel market. Although “Ryanhotel” would almost surely be a budget operation with few frills some of the things they would put in place could have repercussions throughout the hotel and lodging industry.

Ancillary services: expect customers to make additional payments at the time of booking

Ryanhotel would recognise that many guests purchase food and drink, Internet access or other ancillaries. Such purchases would be likely to be seasonal and depend upon the type of property (e.g. resorts would probably see guests more likely to dine on site). Although some ancillaries might be packaged and sold at the time of booking specific market segments may make purchases separately. We can be sure that Ryanhotel would be experimenting with their packaging and pricing options to find the best options for each market and property. Furthermore, if guests were expected to spend enough on these extra services then Ryanhotel might even be willing to give away rooms for free.

Low cost does not mean low price: don’t be afraid to charge a fortune if you can

Sometimes Ryanair is the most expensive airline in the market, especially when passengers are considering taking baggage or buying food and drink onboard. They are certainly a low-cost carrier but that does not necessarily mean that they have to be low fare too. Similarly, Ryanhotel would not be afraid to charge a higher price than competitors if conditions were right. For example, their hotel might be closer to an airport, railway station or conference venue or their competitors might be fully booked. In these circumstances, it would make sense for Ryanhotel to charge a fortune if that is what customers were willing to pay.

Make it easy to capture customer spend: offer and highlight services many people are willing to pay extra for

Any guest at a Ryanhotel would easily find opportunities to spend money. Interior design would cleverly direct guests to the bar, restaurant or shop. Most likely there would be no expensive minibar but rather a shop selling a range of familiar goods that Ryanhotel are sure their customers would want to buy.

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Moving away from the market price

A job advert proudly stating “salary: competitive” probably means “salary: OK but a bit disappointing”. In the same way companies basing their pricing entirely on competitive analysis will experience lacklustre revenue performance.

Pile high and sell cheap works in some cases but in industries where revenue management principles apply it is essential to move beyond the “market price” approach to something better.

Moving to a willingness to pay approach: Three pricing strategy models

The chart to the right shows how companies seeking to optimise their pricing can move between three pricing models to boost revenue first by basing their pricing on so-called proclivity (behaviour) analysis and then adopting a utility-driven approach.

Businesses traditionally set prices based on how they perceived their product to be positioned in the market, represented by the red “Benchmark” model in the chart. There are three possible outcomes to this approach:

i) Premium price when one product is considered better than another
ii) Match a competitors price when products are considered the same
iii) Undercut when one product considered not as good another.

Whilst easy to implement this method does not lead to effective market segmentation and the associated benefits. But thanks to progress and investment in business intelligence, loyalty schemes and IT equipment firms now enjoy deeper understanding of how their customers buy a product than ever before. Standard practice now involves behaviour-driven pricing.

Under this approach, represented by the orange “Behaviour” model in the chart, organisations conduct so-called conjoint analysis to determine attributes of a product that customers value and then set different price levels on the basis of measurable indicators of these attributes. Examples include time of purchase, quantity bought, sales channel and product standard. Once these indicators have been identified companies can trial various initiatives to calibrate their pricing strategy to market behaviour.

But neither the “Benchmark” or the “Behaviour” models are particularly good at indicating what specific customers are willing to pay for a particular product or service. As a result there will be many customers who pay much less than they might otherwise do, representing an economic loss to the business. To achieve further revenue boosts beyond the behaviour-driven models, pricing practices need to adopt more advanced utility-driven pricing, represented by the green “Utility” model in the chart.

Reach deep into a customer’s wallet: Key elements of utility-based pricing

“Utility” is a bit of an abstract concept and is difficult to measure directly. But valuable insights can be gained with the aid of three ingredients:

i) A “utility function”
ii) A “risk-adjustment” factor
iii) Analysis of company data.

The utility functions are a series of mathematical models proposed by economists to indicate how buyers set preference between specific goods and services. In a utility-driven pricing model each such model needs to be risk adjusted to account for the fact that a consumer may not actually find that the product or service meets their needs.

Both utility functions and risk-adjustment factors can be calibrated through analysis of company data and setting in place a series of trials to gauge market reaction, just as would be done when a company moves between the Benchmark and Behaviour approaches.

Changing the market: Companies should not be afraid to take the lead

Organisations setting prices under the “Benchmark” model where this is the market practice may almost by definition find it extremely hard to see the case for moving to the “Behaviour” and “Utility” models. In order to secure buy-in from relevant stakeholders Ranson Pricing recommends a step-by-step approach, putting in place small initiatives and monitoring the revenue impact to show reluctant stakeholders that experimenting with pricing initiatives helps them meet their own revenue objectives.

Organisational hurdles: Moving between the models can be difficult

Moving between any of the three models is a difficult process for many organisations. Standard practice, existing skillsets and inertia in the face of change present significant obstacles to overcome. Ranson Pricing perceives three interlinked opportunities to jump over these hurdles: organisational, strategic and human capital.

The first opportunity is for companies to adopt organisational structures that recognise the role of pricing in an organisation. Pricing must no longer be a subsidiary of marketing or sales but a standalone commercial unit. The second opportunity is for companies to focus on pricing at the strategic level. Where the executive management team are focussed on pricing strategy, the company’s management have a strong incentive to ensure that their own initiatives complement those of the pricing department.

Finally, pricing must be seen as a profession in it’s own right. The organisation must recruit, motivate, retain and promote talented pricing specialists with incentives to match their contribution. Ranson Pricing would be surprised if at an organisation with a mature pricing practice top analysts were compensated any less than top sales professionals.

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Is pricing an art or a science? Three things revenue managers must know

It seems to be fashionable these days for pricing strategy and revenue management professionals to call themselves “scientists”. But is pricing really a science or is it more of an art? Ranson Pricing believes that it has a little bit in common with both. We caution against an especially strong emphasis on science due to the old adage “to blind with science”, which refers to cases where one person deliberately confuses another with a sequence of complex words and facts.

Key issue 1: The scientific method is easily applied to pricing strategy

The classical scientific method formulates, tests and modifies hypotheses. Measurable and objective criteria, experiment and observation are the cornerstones of this approach. This is certainly a sound approach for pricing professionals to take for three reasons:

i) Pricing initiatives can be tailored to each individual market’s requirements and a hypothesis-driven approach establishes clear criteria to determine whether or not a particular initiative was a success
ii) Deep diving into data and rigorous analysis can help identify trends, patterns and opportunities to boost revenue that would otherwise not be visible
iii) Observation and measurement of market changes in response to pricing initiatives informs future business cases and helps convince stakeholders to buy-in.

So pricing strategy clearly has some common elements with science, or at least the scientific method.

Key issue 2: Selecting the initiatives to test and performing the experiments is more of an art

Whilst rigorous analysis can help identify potential opportunities and the costs and benefits of each, determining precisely the right path to follow remains firmly in the realm of the management decision and is much more of an art than a science. Budget and capacity constraints, economies of scale and a business’ existing capabilities also need to be accounted for when determining the right path to follow and there inevitably comes a point where judgement rather than analysis comes into play. Pricing specialists must bear these issues in mind when developing their strategies, and this is clearly much more of an art than a science.

Key issue 3: Analysis needs to be presented to non-specialists to achieve consensus

Sound pricing is much more about delivering commercial results than academic concepts. Pricing strategists must operate with non-specialists and make convincing cases to secure their support. When it comes to pricing strategy, consensus is extremely worthwhile. Accordingly a key skill for pricing professionals is the ability to set out their business cases, experiments and discoveries in terms that are easily understood across the business yet convincing. And this is clearly much more of an art than a science.

Physicist Ernest Rutherford famously said that “an alleged scientific discovery has no merit unless it can be explained to a barmaid”. Perhaps the best indicator of whether or not a pricing strategy is truly brilliant is when customers paying a premium understand and even agree with it!

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Off the rails? Pricing strategy for UK railways

Last month the Department for Transport in London (DfT) published Rail Fares and Ticketing: Next Steps. According to this document the government are seeking to blend the best elements of market forces with the best elements of regulation to “give passengers a better, more modern and more flexible deal on fares”. Fine sentiments, and many elements of the DfT’s strategy are commendable. But Ranson Pricing believes that the DfT falls short in several regards and it will take a bit more work to get rail pricing in the UK fully on track.

Advance fares: A great success with opportunities to improve

The DfT rightly note that Advance fares, which offer passengers booking one day or more ahead of travel and for a specific service the opportunity to enjoy a significant discount on the more flexible tickets, have been a great success. Some operators, typically those operating longer routes, offer a wide range of these fares. In addition to increasing the volume of discretionary journeys and allowing some passengers to pay less for their rail travel the Advance fares allow operators to effectively spread demand across journeys and classes of service (first and standard) to manage passenger flow and minimise overcrowding.

The DfT state that they are considering allowing operators to sell Advance tickets up to between ten and fifteen minutes prior to departure. Currently these fares can only be purchased up to 23:59 the day before. Ranson Pricing welcomes these initiatives and has identified some further opportunities to expand and liberalise the Advance structure.

Opportunity: Flexibility to change and cancel

Currently Advance fares can be changed for a penalty of GBP 10.00 plus the difference in fare for the new journey. No refund is issued if the passenger decides not to travel. Ranson Pricing believes that there may be scope for operators to offer a variety of flexibility options with some tickets offering very little flexibility and others offering much more. These need not necessarily be under the same model as airlines, with higher fares offering progressively more flexibility. For example, whatever the fare level passengers might be given the option for a surcharge (which could vary by the price of the fare purchased) to pay a premium for right to change or refund.

The key challenge in this field will be communication to the market, as DfT consider that passengers do not fully understand the current fare structure. However at Ranson Pricing we believe that this should be achievable and it would be unfair to cause some passengers to lose out on a potential benefit simply because it is more complex than the current arrangements.

Flexible tickets: Price caps may be unsustainable in the medium to long term

DfT has welcomed an initiative from train operators to cap prices for standard class journeys at GBP 250 each way. Ranson Pricing is concerned that although these fares will not currently affect the vast majority of passengers it is possible that political pressure to maintain price caps could lead to economic inefficiencies in the medium to long term.

Season tickets: Some opportunities are not explored

DfT recognise that the existing ticketing and fares arrangements for commuters, which rely on a variety of season ticket options, do not necessarily reflect modern working practices. They acknowledge that there is no cost-free way to adjust the options but at the same time are keen to ensure that no commuters have to pay more for their season tickets. Ranson Pricing believes that an approach that does not cause some passengers to pay more for their season tickets is misguided and will neither alleviate overcrowding or offer value for money. We consider that the DfT should consider permitting a variety of season tickets in respect of refundability, offering customers who may need to stop travelling on their season tickets options that cost more and a discount to those who do not.

Penalties: Regulations are outdated and unreasonably punitive in trivial cases

Under the current regulations and byelaws passengers can suffer unreasonable penalties for minor changes to journeys. For example, a passenger holding a non-flexible first class Advance ticket from London King’s Cross to Durham (254 miles, 53 chains) who gets off at Doncaster instead (232 miles, 50 chains on the same train) could be required to pay for an entirely new ticket from London to Doncaster. The passenger could have paid between GBP 44.50 and GBP 188.65 for their ticket to Durham. But the entirely new ticket the passenger must purchase at Darlington would be GBP 205.00 in addition to the fare already paid.

If the passenger had originally purchased a ticket to Darlington then they would have paid between GBP 44.00 and GBP 186.70, marginally less than the original fare paid. Refusal to pay for the new ticket could result in the passenger getting a criminal record for being unable to show a valid ticket on demand. In case the passenger stayed on the train to Durham when holding a ticket to Darlington the penalty would only be a ticket from Darlington to Durham at GBP 10.40. So passengers alighting earlier than their ticket validity are penalised a great deal more than passengers alighting later, which is clearly unfair.

Accordingly Ranson Pricing believes that the existing regulations and byelaws covering penalties, which date largely from a time before Advance tickets were introduced, are out-dated and need to be reformed. Such reforms would be fully aligned with the DfT’s stated objective to avoid “squeezing more revenue out of regulated fares” and could only benefit passengers.

Potential solutions include:

i) Collecting the difference in fare between that already paid and the price of a new ticket, perhaps plus the standard change penalty, currently GBP 10.00
ii) Introducing a fixed surcharge, perhaps based on a zone system to keep it simple, for passengers alighting early – the surcharge could potentially vary by time of day.

Obscure routes: Opportunities to cut revenue loss from abuse

There are many wonderful towns and villages in the UK with railway stations and some inspectors may not be familiar with all of them. On busy services it might be difficult to confirm ticket validity of less familiar origins and destinations whilst still checking all tickets, particularly when such tickets are valid on multiple operators and routes. It is possible that some passengers might take advantage of this loophole and successfully travel using theoretically invalid tickets. Rail operators may incur a revenue loss as a result.

Accordingly Ranson Pricing recommends that the ticketing name of each railway station should incorporate an easy to recognise indicator. Such an indicator could be a county code or a standard zone listed after the name of the station.

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You wait all this time and three come along at once

It is well known among Londoners that when you wait a long time for a bus three will arrive at once.

The problem, called “platooning”, is caused when a small delay at one stop creates time for more passengers to gather at stops down the road. Since passenger boarding takes a large amount of time the first bus spends longer picking up traffic than the second and third, who eventually catch up.

Airlines have been waiting many years to make good profits as intense price competition makes this industry one of the hardest in which to make a strong return. Along the way they have embraced e-commerce and adopted ancillary models but these alone have not been enough to drive significant profitability improvements.

But just like the proverbial bus, three new pricing opportunities have come along that promise to provide a strong boost to revenue for airlines that adopt them. But unlike passengers waiting for a bus, airlines can jump on all three at once.

The opportunities are summarised in the chart above.

Opportunity 1: proclivity analysis, using analytical techniques to identify regular trends and patterns in buying behaviour.

Airlines have been forecasting demand in order to understand trends and patterns in buying behaviour for years. But such analysis can be taken further in the pricing field to answer three important questions:

i) How should I segment my market? 
ii) When should I have a sale? 
iii) Which distribution channels should I use?

Market segmentation is certainly not new in the travel industry and traditional advance purchase or change penalty controls achieve segmentation nicely. But where proclivity analysis comes in handy is to tailor the controls to fit nicely to each individual market. The trick is to adopt a hypothesis-driven approach, testing a variety of controls over time and a number of distribution channels to evaluate their impact on your revenue performance.

Sales certainly are not a new phenomenon either. But proclivity analysis can be extremely helpful when determining whether or not a sale has been a success and if the sales themselves alter customer behaviour. This in turn informs the airline’s entire promotion strategy. Similar techniques of behaviour analysis can also help an airline determine which distribution channels each of its pricing products are best suited to.

At Ranson Pricing we believe strongly in the effectiveness of proclivity analysis on airline revenue. Contact us to find out more.

Opportunity 2: frequent flyer programme-driven pricing (FFP, a loyalty scheme)

Texas International Airlines launched their frequent flyer programme in 1979, offering passengers the opportunity to earn and burn airmiles. Nowadays almost all major carriers offer their own loyalty schemes. As a consequence airlines have been able to acquire a large amount of data on the purchasing and flying habits of individual members. Airlines can potentially use this data to develop personalised promotional fares for their members.

Ranson Pricing identifies three categories of scheme members for pricing purposes:

i) High frequency flyers
ii) Regular passengers
iii) The long tail

High frequency flyers are those who take many trips over a short period of time. Their itineraries may be similar or widely varied and the airline should have good data that can be used to tailor pricing products accordingly. Regular passengers fly on the airline over many years but may take only one or two trips a year. Once again the airline should have plenty of good data that they can use to tailor personalised pricing products.

The long tail represents those FFP members who have not taken many flights with the airline but who nevertheless are members of the loyalty programme. Traditional pricing mechanisms including sales and promotions may remain the best mechanisms for serving these individuals.

At Ranson Pricing we believe that developing tailored pricing products through proclivity analysis on FFP data can potentially be extremely valuable to airlines. Contact us to find out more.

The one hindrance may be the distribution market. But depending on individual circumstances airlines may well find strong cases for abandoning full content agreements in light of the opportunities analysis on FFP data presents. For extremely bold carriers, there is a third opportunity to grasp that promises to deliver vaster revenue increments than ever before. This is alternative distribution.

Opportunity 3: alternative distribution

Mobile technology has glued many passengers to their phone screens. But printing boarding cards to the screen may be only the beginning of the airline mobile revolution. There may be great potential for airlines to provide more services including sales directly through mobile channels, potentially entirely bypassing traditional distribution providers.

For carriers who may not want to take the risk of abandoning GDS yet there are possibilities for airlines to shift towards opaque pricing models through third parties. This allows an airline to avoid incentivising their direct competitors to cut fares in response.

At Ranson Pricing we believe that both approaches present extremely interesting opportunities to airlines. What is right for one airline though may not necessarily be right for all. Contact us to find out more.

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Are you over-dependent on pricing technology? Take our test to find out...

Technology vendors are keen to offer complex and expensive IT systems to address pricing challenges. It is easy to get drawn in to these charismatic initiatives without knowing whether or not you are effectively balancing other aspects of your organisation’s pricing performance against the technology’s requirements.

Ranson Pricing has created a short quiz to help determine how well you have balanced your pricing strategy and your pricing technology.

Resource allocation

Question 1
What proportion of your management time do you devote to your pricing and revenue technology challenges compared to strategy and operations?
a) much more
b) about the same
c) much less

Question 2
What proportion of your wage bill do you devote to your pricing and revenue technology specialists compared to strategy and operations?
a) much less
b) much more 
c) about the same

Question 3
What proportion of your consulting and technology spend do you devote to your pricing and revenue technology specialists compared to strategy and operations?
a) about the same
b) much more
c) much less

Question 4
What proportion of your pricing specialists spend relatively more of their time using pricing technology rather than building their own models?
a) much more
b) about the same
c) much less

Planning

Question 5
Are you more inclined to offer promotions:
a) when demand materialised is less than demand forecast?
b) in accordance with a pre-determined strategy based on customer behaviour analysis?
c) a roughly even mixture of the two above?

Question 6
Are you more inclined to experiment with your pricing:
a) through adjusting availability of each inventory class?
b) through adjusting the restrictions associated with each pricing product?
c) a roughly even mixture of the two above?

Question 7
Do you institutionalise knowledge primarily:
a) as part of a demand-optimisation tool?
b) as part of a bespoke pricing strategy tool?
c) a roughly even mixture of the two above?

The next question is in the right hand column

Knowledge diffusion

Question 8
To what extent do other pricing stakeholders in your organisation (e.g. Sales & Marketing) understand how prices are determined?
a) a great deal
b) somewhat
c) not at all

Question 9
How much training is required to use your organisation’s pricing technology?
a) more than a week
b) between three and five days
c) between one and two days

Tools & analysis

Question 10
What proportion of your pricing tools and analytical techniques are developed in-house?
a) more than 50%
b) more than 25%
c) less than 25%

Scoring guide

Question 1
a) +9 points, b) +3 points, c) 0 points
Question 2
a) 0 points, b) +6 points, c) +3 points
Question 3
a) +5 points, b) +10 points, c) 0 points

Question 4
a) +5 points, b) +3 points, c) 0 points
Question 5
a) +5 points, b) 0 points, c) +2 points
Question 6
a) +5 points, b) 0 points, c) +3 points

Question 7
a) +5 points, b) 0 points, c) +4 points
Question 8
a) 0 points, b) +1 point, c) +5 points
Question 9
a) +5 points, b) +1 point, c) 0 points

Question 10
a) 0 points, b) +2 points, c) +5 points

How did you score?
36 or more: diverting some more resources to strategy might be worthwhile
15 to 35: it looks like you have a good balance of technology and strategy
14 or less: diverting some more resources to technology might be worthwhile

For organisations who would like to divert more resources to pricing strategy or who would like to refine or validate their current approach, Ranson Pricing is able to apply the analytical techniques in our Pricing Strategy Toolbox. To find out more, please explore our site or contact us.

For organisations who would like to increase their focus on technology Ranson Pricing is available to advise on choosing the right technology vendor. We are not affiliated with any IT companies and are able to offer a truly independent perspective. Contact us to find out more.

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Media Centre

Broadcast, print media & public speaking

Broadcast:
Our Pricing Expert Oliver Ranson enjoys broadcasting. He is camera and microphone savvy, and willing to do what it takes to get your recording right. Oliver has experience in both live and pre-recorded broadcasting. Highlights of his experience include:
BBC One - Rip Off Britain - airline pricing comments, 20th January 2017
BBC One - Rip Off Britain - airline overbooking comments, 3rd January 2018

Contact us to arrange for Oliver to broadcast for you

Print media:
Our Pricing Expert Oliver Ranson is available to write about pricing and related matters for your magazine or journal. He regularly contributes to leading airline industry publication Aircraft Interiors International. You can read his articles here:
Insight 8: Optimise waste to find cash for product investment: part 2
Insight 7: Optimise waste to find cash for product investment: part 1
Insight 6: Plan ahead to save money in galley loading
Insight 5: First class thinking
Insight 4: Passenger profiling: digging into your data
Insight 3: Demand concepts that influence your LOPA
Insight 2: Making the icing on the cake even sweeter
Insight 1: Revenue managers: the product designer's new BFF

Contact us to arrange for Oliver to write for you

Public speaking:
Our Pricing Expert Oliver Ranson is an experienced public speaker, using props and avoiding slides wherever possible. For extra excitement and audience engagement, Oliver's props are sometimes edible! Oliver looks forward to speaking about pricing at your event.

Contact us to arrange for Oliver to speak for you

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Copyright Ranson Pricing Limited 2018