e-Commerce Challenges to Traditional Revenue Management Brenda Barnes Vice President, Revenue Management Delta Air Lines
More information and control in the hands of consumers Customer driven interaction Expanded reach and research capabilities Transparent pricing/inventory Proliferation of channels More products, more complex segmentation Dynamic pricing… products on demand…targeted offerings More “under the radar” activities Shortened product life cycles Faster development time required Adaptability of systems critical What Will the Future Hold?
Expected Growth in e-Commerce Projected Industry On-Line Travel Sales Source: Forrester Research On-line travel is projected to represent over 30% of total industry sales by 2003
Distribution Economics • Distribution Costs Today: • Agency Commissions • CRS fees • Credit Card Fees • Res/Sales Costs Good Future Bad Future Total Revenue If managed properly, e-Commerce will reduce distribution costs as a percentage of total revenue, while simultaneously increasing total revenues
Revenue Fragmentation Channel Management Complexity Data Aggregation/Richness/Availability Systems Integration Passenger Valuation Issues Managing the Transition Attracting and Retaining Talent e-Commerce Creates Challenges and Opportunities For RM
RES CRS T2 xyz.com abc.com tpb.com etc DELTA CUSTOMERS Revenue Fragmentation Delta-air Priceline TRADITIONAL CHANNELS 92% of Revenue - 2000 70% of Revenue - 2003 EMERGING CHANNELS 8% of Revenue - 2000 30% of Revenue - 2003 RM strategic and operational complexity increases dramatically as revenue fragments across multiple channels
Proliferation of channels and fragmentation of revenue increases RM complexity Filing/managing fares/inventory in new channels Integration of strategies across channels Managing constrained resources Balancing new vs. traditional channel focus Fragmentation Challenge
Yesterday ... Today ... Delta-air Priceline Small biz T2 Pricing Segmentation Traditional Segmentation Techniques Are Becoming Inadequate/Obsolete Advance Purchase? Minimum Stay? Flexible on flight time? Flexible on airline? Extremely price sensitive, non brand loyal Price sensitive, last minute traveler Price sensitive, brand loyal Price sensitive business traveler Traditional business traveler OK No way!
RM must play a critical role in designing/managing internet programs in order to maximize benefits/minimize risks Risks of inadequate RM support and involvement are substantial with potential long term implications Internet activities must be integrated with overall strategy to manage transition risks and capture opportunities Channel Management Risks / Opportunities The Priceline.com Model - Significant operating revenue - Minimal dilution - Share shift/traffic capture - Billions of $ warrant value - Missed participation opportunity ($) - Huge dilution potential - Non-optimizing/destabilizing pricing structure (manual/costly) - Significant incremental revenue - Minimum revenue dilution - Optimal cost savings - Limited impact on primary business Leaders RM Resources - Limited/missed opportunities - Major revenue dilution potential - Dilution of cost savings benefits - Major distraction from primary business Followers
Revenue dilution can result from several sources: Insufficient attention to protecting core revenue during transition Core revenue reduced as a result of transparency of on-line channels Dilution of internet revenue through “under-the-radar” activity Creation of destructive terms, rules, restrictions for internet participants New intermediaries gain leverage reducing traditional supplier control over pricing, inventory, etc. Dilution Potential Is Great
CURRENT HOW FUTURE Data in the e-Commerce World Data which is: Seamless Rich Precise Dynamic Responsive Integrated Fast Flexible Rework Data Foundation Re-engineer Business Processes Develop New Models & Systems Integrate traditional and new data sources Continue to Optimize & Evaluate The Situation: Less Timely Data from Traditional Sources Limited Data RE: Customer Choice/Behavior Aggregation of Data from CRS systems Disaggregated and Inconsistent Data from new channels
Integrated systems and data are critical in the e-Commerce world Delta Customer Competition What published fares were offered? What unpublished fares were offered? OAL bookings in O&D markets? How many people flew? How much did they pay? What fare class? How much did each Trvl Agency generate? What fares and inventory did we offer? How much revenue did we generate per segment/O&D? Past What can new sources of competitive info tell us? How much are they selling through various channels? How many bookings sold through each channel? At what fares? Type of customers are buying particular fares? What products can we target to discrete customer segments? Are there new ways we can stimulate demand ? What will customers’ lifetime value be? Where will they buy? Future
Passenger Valuation Issues • New dimensions impact passenger valuation -New channels and costs associated with each must be considered • -More detailed customer information may allow for • more differentiated customer valuation • -Stock warrant agreements with .com firms may cloud traditional valuation systems
e-Commerce will represent less than 30% of typical carriers’ revenue through 2003 Balance of priorities to traditional vs e-Commerce strategies will be difficult Decisions made now will determine airline industry economics of the future Risk of a future model which is disadvantageous to airlines Transition Challenges
Difficult to attract e-Commerce experienced talent given traditional airline salary structures Traditional airline benefits (travel/medical/dental etc.) unimportant to many candidates Traditional airline work environment not attractive to new workforce Retention difficult given high demand for experienced e-Commerce professionals by both competitors and .com firms Attracting and Retaining Talent
e-Commerce creates tremendous opportunities and risks for Revenue Management Active involvement by RM is critical to maximize opportunities and reduce risk Precedent set today will determine industry economics for the future Transition period will be challenging Conclusions