'Segment of One' and the Evolution of Airline Pricing

     

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Airlines, like e-tailers and virtually all other e-merchandinsing companies, aspire to marketing to a “segment of one,” or highly customized merchandising approaches that account for individual purchase behavior in forming offers and prices. The concept of “segment of one” replaces traditional, broad-based segmentation between “business” and “leisure” and other conventional marketing segmentation schemes. The evolution of the industry from one fare to “segment of one” has taken fifty years, from de-regulation of the airlines in the late 1970’s up to today.  

More Fares/Fees

From [x] to[y]              Airline Industry Innovation

1 -> 2:                          Super Saver (‘70’s)

2 -> 10:                       More Complex Fare Rules (‘80’s)

10 -> 26:                     Leg-based Inventory Controls (‘80’s)

26 -> 100:                  O&D-based Inventory Controls (‘90’s)

100 -> 200+:              Ancillary and Branded Fares (‘00’s, ‘10’s)

…. ->  “one”:                Personalization (2017…)

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The U.S. airline industry was regulated until 1978, and during most of the period prior to deregulation, the U.S. government (the Department of Transportation) required that airlines charge the same fare to all passengers in a city pair. There was a notion that price discrimination (multiple fares for the “same” product) was inappropriate in a regulated marketplace. Deregulation, on the other hand, brought considerable pricing flexibility and after Super Saver fares were introduced, they were quickly followed by other variants of fare rules (including 21, 14, 7, 3, and 1 day advanced purchase restrictions), as well as inventory controls that “bucketed” 26 fare ranges on each flight. The industry fairly quickly evolved from 1 fare to 26 fares per flight.

O&D airline revenue management, introduced by the industry in the ‘90’s, further segmented inventory availability on a flight basis, and availability was not just limited by “bucket” but across all city-pairs associated with a flight – potentially 20 or 30. Potentially, every passenger on a flight into a connecting complex could be paying a different amount.

In 2008, U.S. airlines embraced a new dimension of segmentation that is still currently being explored. Rather than segmenting customers simply based on willingness to pay, new ancillary fees represent variations on the product itself – checked bags or not, assigned seat or not, bigger seat or not – that offer the passenger different buy-up options even with the same base fare. There may be 10 or more combinations of features that customers can opt for in addition to the base product. Each of these, in effect, represent a more granular segmentation process. Not only are there likely to be over 100 base fares on a particular flight but there are 10 or more product variations/combinations across those passengers. Ten passengers on the same flight each of whom is paying $150 may be getting different products.

Effectively, “price” and “product” are now both aligned around customer segments and we are approaching “segment of one,” a combination of product and price that suits each customer’s needs. However, such market segmentation also needs more targeted merchandising. New “choice” doesn’t work well if the options are not communicated well or are not widely available to travelers across channels. Hence, “segment of one” comes with a merchandising requirement that currently is not well developed. 

Branded fares are an increasingly popular way to merchandise a more customized re-bundling of product features. Three or four such bundles help customers navigate the sometimes confusing array of ancillary alternatives and potentially help match the appropriate product/price with individual travelers.

However, “segment of one,” obviously goes beyond three or four branded fares, which represent a new generic menu by offering choices, which are the same for everyone. In the U.S., the large airlines that have introduced branded fares over the past five years – typically three generic choices to begin with – have all recently added a new fare, “Basic Economy,” that has even fewer amenities to appeal to an even more price sensitive market segment that they felt they were missing. Conceptually, airlines may ultimately need to offer twenty or more such re-bundled fares, designed around the needs of different segments.

The concept of “segment of one” thus includes understanding each customer’s needs and instead of presenting generic choices, it offers only the price/product combinations that are most likely to uniquely meet that customer’s needs, and presenting the information relevant to that customer to help him make the optimal choices. Finally, it includes insuring that the customer has access to that information and can select his chosen product mix on whatever channel he prefers.

Airlines will continue their progression toward “segment of one.” Over fifty years they have continually worked to design product/price combinations on a more and more granular basis.  Initially, they focused on varying price and availability across market segments and O&Ds, but in the last decade they have added considerable product flexibility – represented by the growth in ancillary fees - in addition to price. The next phase of “segment of one” includes individualized merchandising: customized messaging, an individual-specific menu of options, and access to all relevant channels. The idea of “segment of one” is an opportunity many airlines are now focused on as the next step in meeting the needs of a diverse set of passengers.


Read more about how branded fares can be used a competitive advantage for airlines.

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