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  • Unbundling Enables Discriminant Pricing On Service Attributes Airlines Just Break Even Without Ancillary Fees

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    Airlines have adopted unbundling and ancillary fees as a form of price discrimination to maximize revenue. By separating out optional services and charging different prices, airlines can capture more of the total potential revenue from customers with a range of reservation prices. While this enables airlines to discriminate prices, ancillary fees have also become necessary for airlines to break even on ticket sales alone given rising costs. Unbundling creates additional opportunities for ancillary revenue beyond just ticket sales.

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    Airlines have adopted unbundling and ancillary fees as a form of price discrimination to maximize revenue. By separating out optional services and charging different prices, airlines can capture more of the total potential revenue from customers with a range of reservation prices. While this enables airlines to discriminate prices, ancillary fees have also become necessary for airlines to break even on ticket sales alone given rising costs. Unbundling creates additional opportunities for ancillary revenue beyond just ticket sales.

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    Download as PDF, TXT or read online from Scribd
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    13 views1 page

    Unbundling Enables Discriminant Pricing On Service Attributes Airlines Just Break Even Without Ancillary Fees

    Uploaded by

    nivas_mech
    Airlines have adopted unbundling and ancillary fees as a form of price discrimination to maximize revenue. By separating out optional services and charging different prices, airlines can capture more of the total potential revenue from customers with a range of reservation prices. While this enables airlines to discriminate prices, ancillary fees have also become necessary for airlines to break even on ticket sales alone given rising costs. Unbundling creates additional opportunities for ancillary revenue beyond just ticket sales.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    AirlineMarketingTheEconomicsofUnbundlingandAncillaryFees Unbundlingenablesdiscriminantpricingonserviceattributes Airlinesjustbreakevenwithoutancillaryfees

    Discriminantpricingorproductpricedifferentiationistheunderpinningofrevenuemanagement.Unbundling takesthistoanewlevelanddimension. Asbackground,themaximumamountthatapersoniswillingtospendonaproductorservice,forexample,travel fromAtoBontermsquotedondateCpurchasedDdaysinadvanceofdeparture,iscalledthatperson's reservationprice.Thatperson'sreservationpricecanalsoberepresentedasaprobabilitydistribution(the probabilityofacustomerpurchasingtravelatapriceandsetofterms). IftravelissoldatasinglepriceP,allpotentialcustomerswithareservationpricelessthanPwillnotbuythetravel (resultingindemanddestruction)andtheairlinefailstofullyrealizetherevenueopportunityfromallcustomers withareservationpricehigherthanP,whowouldhavewillinglypaidmore. ThinkingoutloudaboutthedemandcurvefortravelABontermsCandD,thetotalareaunderthecurveisthe maximumamountofrevenuethatcanberealizedifeachpotentialcustomerisfullyexploitedatrespective reservationprices. Achievingthiswouldrequireanearlyinfinitenumberofprices,andisimpractical.Bycontrast,ifasingleprice,P waschosen,withtheassociatednumberofunitssoldbeingN,theareawithinarectangulararea(P,N)represents therevenuethatwouldberealized.Foranygivensingleprice,theareawithinthesinglerectangleissignificantly lessthanthetotalareaunderthedemandcurve. Inrevenuemanagement,numerouspricepointsareofferedtosellthesameservice,differentiatedonterms. Thesedifferentpricesarerationalizedbydifferencesinassociatedtermsandservicesthatthecustomerreceives andpurchasesunder.Thisiscalledmultiplediscriminantpricingorproductpricedifferentiation. Bysummingupproceedsfromdemand(N1,N2,N3,...)atmultipleprices(P1,P2,P3,...)ondifferenttermsand withdifferentfeatures,fillinginmoreboxes,sotospeak,moreoftheareaunderneaththedemandcurveis captured,resultingingreaterrevenuerealization.Customersaredifferentiatedbythepricetheywillpayforthe service. Thesameideaappliestounbundling.Unbundling(theoretically)lowerscosts,can(economically)shiftthedemand curvetoalowerpricepointyieldinghigherdemand,andalsocreatesviaanaddedservicesdimensionthe potentialtorealizeyetfurtherrevenuefromfollowonsalesofancillaryservicesdesiredbytravelers. Unbundlingcreatesanadditionaldimensionofsalesopportunities,checksmoreboxesunderthedemandcurve andrealizesmoreofthetotalpotentialrevenue. R.W.Mann&Company,Inc. PortWashington,NY11050USA February2011

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