Airline pricing and behavioural economics — a match made in heaven

People make hundreds of decisions every day, ranging from what they’ll eat for breakfast to what the next stage in their careers may be. It’s hardly possible to apply the same level of rational thought to every single one.

Despite this apparent irrationality, there is one certainty: that people’s irrationality is both predictable and systematic. In other words, whilst it is not possible to predict behaviour with absolute certainty, organisations and institutions are able to help form people’s decisions by understanding how choices are made and designing solutions around them.

Retail businesses have deployed behavioural economics for years now, as has the hospitality industry, to influence the purchase decisions their customers make. Whether they know it or not, it is taking the airline industry a little while to catch up.

In an age of limitless choice — thanks to advances in digital technology — decision making has become even more difficult. Today, there is a vast range of online booking options to choose from, giving people more choice than they have ever had before. Not only is this likely to decrease the speed at which somebody makes a purchase decision, it is likely to increase their chances of choosing a competitor product when they do.

Despite that, with a combination of minor cognitive techniques and sophisticated data analysis, airlines have an opportunity to drive large-scale revenue growthand improve customer experience. Sounds a little too good to be true, right?

So, how?

Well, the travel industry is already employing a number of principles of human psychology. Price comparison sites are a great example of the principle of thepath of least resistance. This behaviour is fascinating because of the fact that people simply decide to make no decision at all. In this case, ranking by the lowest price outweighs all other factors in the typical decision making process, such as carrier brand or route in the typical purchase decision making process. Essentially, the algorithm decides for you.

Another such technique that has been used to great effect by the travel industry — particularly hotel chains — is known as relativity. This is the idea that we are often unaware of the value of particular products or services, so we look to other similar products in an effort to provide context.

This, when combined with the concept of the path of least resistance, provides an extremely powerful situation in which airlines can impact purchasing decisions and increase conversion. It is an environment where we, as designers, can build the decision environment with relatively tight control. In other words, we are able to influence what decisions are tougher and what decisions are easier for people to make.

Now, all of this is fascinating but where is the bigger opportunity? That presents itself when you are able to overlay key principles of behavioural economics with advances in big data and data analytics, where one of the most exciting advances has been improvements in dynamic pricing. Through such pricing, many airlines now use advanced analytics to display unique rates for every passenger that runs a search through their booking system.

(If this isn’t the case for your airline, something is seriously wrong).

These prices are based on an increasingly complex spectrum of calculations using data gathered over days, weeks and months prior to that moment, in order to generate the perfect price for that customer. In other words, how much that customer is willing to pay for that particular seat reservation, before they have even seen the prices on offer.

And the data points for this are extensive: has this person flown with us before? Is the trip personal or corporate? Has this person complained extensively about us on Twitter? Does this person hold elite status with competitor airlines and what route do they usually fly with them? Is this customer points driven and should we offer to boost their base points earning? Does this customer have enough loyalty points on their accounts and credit cards? If not, this is a cash purchase, so raise the price! Alternatively, if they choose the ‘Price in Points’ box, make the cash purchase look far more appealing.

You get the picture.

But what is vital to understand here, is that this data can provide a fundamental foundation for the implementation of behavioural economics. Say this data shows us that the dates this customer is searching is their wedding anniversary and every year they look to purchase a ticket in an upper class cabin but never go through with it. Instead, they settle for a number of what they perceive to be more valuable additional purchases such as treats in duty free and spa days at their final destination. What opportunity does this present the airline?

Well, to put it frankly, a huge one.

It’s clear that this customer goes to huge lengths to make this a special trip every year. Using advanced analytics to trawl through data sets will highlight exactly what additional purchases that customer completes to make it so special and demonstrates that they are willing to pay more than their other annual holidays to improve the experience.

As soon as this customer begins their search with this airline, the system should kick into over-drive, to devise and create the perfect package for this customer based on everything it knows. The same system should also create a number of other prices to provide context to that perfect price — not only an economy ticket that is relatively close in price to the business class one but a frighteningly high first class ticket too, making the business seat seem like fantastic value.

As for behavioural economics? By creating an environment that not only presentsrationality in pricing but creates the path of least resistance, the airline industry can actively encourage that individual to purchase in a particular way to much greater effect.

In this scenario, the lowest priced ticket is irrelevant. Thanks to human irrationality, the only defining factor is the perceived value of the business class ticket in comparison to the next available options.

The airline has come away with a higher gross margin from that customer and that customer comes away with an unforgettable anniversary experience at a price they were more than happy to pay, perhaps with a complimentary massage at the airport lounge too if the airline is feeling generous.

Both of these practices offer huge opportunities alone but the real power presents itself when an airline is able to act on both and at scale, to improve the customer experience and drive revenue growth.


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