|Bill Kotrba, vice president of Industry Strategy for JDA Software, looks at how to turn price transparency into opportunity by identifying your true competitors.|
Very few developments have changed pricing in the travel industry quite the way the internet has. Offering an unprecedented amount of competitor information, from pricing to services offered, the internet has allowed businesses to run pricing strategies based on what the competition is doing – thereby leading to hugely increased price transparency and stoking the price war fires. Mobile devices have added more fuel to this fire, allowing the lowest prices to instantly find the customer through SMS alerts and various apps.
While such a highly-transparent pricing environment may introduce risks and anxieties about price erosion, it also has its benefits. With intelligent analysis, organisations such as tour operators can turn price information to their advantage in order to maximise their own revenues. One way to maximise profits is to use a combination of sophisticated demand forecasting, price optimisation and revenue management strategies to make pricing decisions based on competitor behaviour. However, in order to take advantage of this, a clear understanding of who you are competing with is needed. Although price transparency is here to stay and travel companies can no longer ignore competitor prices when making decisions, the right factors must be considered or those decisions will be improperly skewed.
Developing a Competitor Set
Identifying your true competitors is not an easy task. Nothing throws more money down the drain than price matching against an organisation that's not really a competitor. Travel operators have to understand which competitors are their true competitors, at what price can they become more competitive, and what price should they charge to make the most profits. This starts with the development of an accurate competitor set which is fundamental if you are going to capitalise on the competitor information available to you. If you fail to identify your true competitors, you will undoubtedly make inappropriate pricing decisions down the line – resulting in lost sales and ultimately reduced profits.
Developing the competitor set in a systematic manner like this can help bypass common mistakes that pricing professionals sometimes make in utilising pricing scores. For example, in the hospitality industry, some economy hotels have been seen to grossly overprice because they were comparing themselves to a luxury hotel down the street simply due to proximity. Travel operators need to ensure they don’t make the same mistake with, for example, budget travel agents pitting themselves against luxury operators.
Coming Up With a Market Reference Price
Traditionally, pricing decisions were almost always based on what customers were willing to pay in the past. Transparency has of course changed all that. As you make these comparisons and begin refining comp sets, you'll often come across a stronger or weaker competitor that still stands as substitutable in the consumers' eyes. These competitors may be better or worse than you in one or more characteristics, attributes that should be considered numerically when coming up with a market reference price. You do this by using what is called strength positioning where you develop a weighting formula that assumes products are substitutable given a fixed and consistent price differential.
For example, in the travel industry there may be several factors that create a differential between two services, for example the time of flights; does the service include airport transfer etc. It is possible to come up with a certain price differential and still evaluate the two competitors. The strength positioning factor allows you to say that competitor X is £50 above your rate and before computing the market reference point for your product you simply adjust that rate down by £50 and then compute your rate so you are on the same scale. Often by doing so you can continue to refine the competitor set for more accurate results, as this will often change the mix of competition.
Strength positioning isn't the only issue that needs to be considered while developing the market reference price. In industries, seasonal changes may also affect the competitor set and therefore the market reference price. In these cases, it is key to analyse price shop trends in order to adjust comp sets on the fly, because by identifying the seasonality of prices it is possible to statistically identify which competitors have the closest pricing strategy to yours. Without making those adjustments, you're likely to come to incorrect pricing conclusions throughout the ebb and flow of the year.
Cleaning Up the Data
While the Internet certainly provides the travel industry with a huge amount of intelligence upon which it can make pricing decisions, it is important not to follow this data blindly. Very often, prices will need to be cleaned up based on a number of factors. For example, there may be holes in the data when there is no availability of a product or service upon which a price comparison site can offer information. In this instance, if you are a travel operator and your competitor ends a popular deal on a certain date, there's nothing to base your pricing on. It therefore pays to have a system that can algorithmically fill in these gaps as accurately as possible.
In other instances, there may be pricing which you don't want to base your decisions upon. These include deep discounts or statistically erratic prices. In those instances, it also pays to have logic built into the system that can scrub that data so it doesn't necessarily skew your results.
Put Market References at the Heart of your Pricing
Identifying your true competitors is not an easy task. There are a lot of contributing factors to consider when making intelligent pricing decisions. Product attributes should be considered in conjunction with price measures for competitor classifications. In addition, the dynamic nature of prices changing over time should be considered to identify competitor sets before making price decisions.
By understanding exactly who your competitors are, you can use the increasingly transparent nature of pricing to your advantage. Companies can no longer run a pricing model without directly having market reference price at heart of it. In short, it’s no longer how much do we charge, but how much do we charge compared to our clearly defined competitors.