The three important aspects of marketing planning in the cargo business are network or schedule, products to be offered, and pricing. Network/schedule provides information on frequency, equipment, departure times, and routing. Network/schedule is decided based on demand, revenue, costs, and capabilities of aircraft. Products define the type of service level (time definiteness, service guarantee, flight specific), additional services (pick up/delivery/storage), and shipment characteristics (weight, commodity). Airlines define products based on capability/costs of offering a product, customer/market requirements, and competitive offering. Pricing is typically a function of products, costs of carriage, customer value, and competition.
The term pricing is oftentimes used loosely and incorrectly by several air cargo software system providers. Many refer to the rating functionality within a revenue accounting system as pricing. Others refer to picking up the appropriate rate for a shipment at the time of booking as pricing. Some refer to hurdle prices or bid prices generated by revenue management systems as pricing. However, the correct definition of pricing is determining the prices to be set based on various pricing drivers such as customer, product, competition, and price elasticity. In other words, determining what prices to put in the rate sheet and publishing the rate sheet.
There are two major challenges associated with rate sheet creation. The first one is understanding the product, customer, product, and price elasticity and determining the average prices by origin, destination, product/service level, commodity, and customer. The second one is converting the average rates into a rate sheet showing the rates/prices by weight break as well as container/pallet types. The other inherent challenge in the pricing process is the ability to update rate sheets frequently. Pricing process at most airlines around the world is manually intensive and may not use all the available information to set prices.
Objectives of the Pricing Solution
The objectives of the pricing decision support solution are as follows:
- Create pricing guidelines based on customer value, price elasticity, and target margins
- Determine the average rates/prices to be offered for various origin, destination, customer, product, commodity
- Generate rate sheets showing rates by weight break and container/pallet types
- Provide the capability to update rate sheets frequently (weekly or monthly basis)
- GUI with standard capabilities such as Search, Edit, Delete, Print, and Export
- Screens to edit reference data such as product and parameters (for example, criteria weights)
- Screens to view/edit inputs and outputs
- The application in general will have user overrides for a number of values calculated by the models – absolute override, increase/decrease by a percentage, etc. We will ensure that capability to override price elasticity
- Alerts (emails/pop ups) based on user defined rules
- The pricing decision support software will enable airlines to optimally set prices resulting in the following benefits
- Prices that represent the product, market, customer value, and customer behavior
- Enhanced productivity and faster turnaround time to create/update rate sheets
- Consistency and accuracy in setting prices across the network and across analysts
Pricing Decision Support Components
The pricing decision support software has six core modules: customer value, price elasticity, target pricing, weight break, dashboard/reporting, and a data loader module. The pricing decision support software is a web based Application, where it exposes a lightweight thin layer that can be launched within a web browser without any software installation on their client machine. The application runs on popular browsers such as IE and Firefox. The software can be locally installed within the carrier’s IT environment or hosted by External IT for RTS in Dallas, USA.
The graphical user interface (GUI) of the software supports the various modules as follows:
The data loader module supports the transfer of data from various external data sources to the software database as well as export data from database to external systems. Data loader has the basic data validation/quarantine/re-processing capabilities. The customer value pricing module determines the value of customers using certain key attributes. It associates rates to customer values to determine the recommended pricing options for a customer considering price elasticity and probability of a customer accepting a price.
Price elasticity module uses historical air waybill data to calculate price elasticity. Statistical regression models are used to generate price elasticity equations at the appropriate level. Users can select the history to be used for price elasticity calculations. Target pricing module calculates the target selling price considering costs of carriage and target margins. The existing cost model at the carrier may be used in which case the required inputs for cost calculation will be sent from the software to carrier’s cost module to obtain costs. The software will also have a cost module that considers fuel costs and handling costs. Users will provide the desired margins.
The rate sheet module converts recommended average rates to rates for different weight breaks as well different ULDs. The dashboard module provides reports and graphs on customer value, target prices, price elasticity. These reports will provide different views of the data in terms of customer, station, product, etc.