Dynamic pricing ‐ The next revolution in RM?

Existing revenue management systems (RMS) base their recommendations on historic observations and do not explicitly consider competition. This means that RMS recommendations often are not appropriate for real‐time competitive situations. Dynamic pricing (DP) is an extension of RMS that dynamically calculates the optimal price, taking into account the airline’s strategy, customer‐specific information and real‐time alternative offerings. By optimizing the contribution within the shopping session, DP has a more current and detailed view of demand and can improve RMS performance. We investigated the performance of DP using two simulators, Altéa Benchmarking Engine and Passenger Origin Destination Simulator and demonstrate that DP can deliver substantial revenue benefits with no modification to existing revenue management (RM) processes. However, the deployment of DP into the airline distribution process will be a challenge, because it affects all shopping and downstream processes, such as ticketing, servicing, revenue accounting, RM and interline settlement, that rely on information from existing fare aggregators. Nevertheless, the potential benefits of DP are so compelling that we believe the effort to bring this technology into practice is warranted.