Airlines as Retailers
A comprehensive merchandising strategy should start with the customer. Getting the merchandising approach right reaps numerous benefits, including customer satisfaction and retention as well as revenue generation.
It is a widely held belief that ancillary revenues are the panacea for the airline industry. Despite the requisite need for ancillary revenues, creating and implementing a comprehensive merchandising program that effectively supports the pricing, revenue management, marketing, selling and fulfillment of ancillaries is a complex project that touches many different areas of an airline. While the task is a daunting one, the efforts can reap great rewards. Ancillary sales can increase airline revenue by up to 40 percent.
An airline's strategy depends on a number of influences, including its business model, brand, region, competitors, partner relationships, and certainly, its customers. Getting the strategic vision right is important to maximize customer acceptance and the success of the merchandising program.
However, a merchandising strategy comprises more than just selling bags and seats via the Web channel. When launching ancillaries, it is just as important to have a strategic emphasis on how to sell, in addition to what to sell, to position the airline for success.
An airline's selling approach can greatly influence the probability of a customer's purchase of ancillaries. When developing a merchandising strategy, it is important to consider all aspects of the marketing mix to optimize results including:
- The product,
- Marketing promotions,
- Channel strategy,
- Business processes,
- People strategy,
- Product delivery.
As airline customers increasingly complete transactions via mobile devices, they rely more heavily on social media information to make purchasing decisions. Therefore, airlines should follow suit with traditional retailers and include emerging channels and converging technologies, such as SoLoMo (or social- and location-based mobile apps), in their merchandising strategy.
To be successful at merchandising, it is imperative for airlines to embed a retail approach throughout all elements of their marketing mix.
Airlines As Retailers
The evolution of airline merchandising is moving from a "nickel-and-dime" approach to personalization of the trip experience through enhanced products and services. This evolution has begun at a critical time to attempt to hamper the inundation of customer dissatisfaction.
Airlines' initial attempts at merchandising have not been well received to date. The prevalent thinking among travelers is that airline merchandising is simply nickel and diming. The reason is two-fold.
First, the merchandising movement gained critical mass with the launch of first and second bag fees in the United States, which is something that had traditionally been bundled in the base ticket price. This was perceived as a takeaway, also known as the endowment effect in behavioral economics. The endowment effect states that changes framed as losses are weighed more heavily than changes framed as gains.
Generally, any product that was previously included in the base fare and is now an additional charge will be viewed as a takeaway and, hence, negatively perceived.
Second, the product positioning, or the manner in which fees were introduced and sold in the marketplace, influenced the public's reception to the concept. Baggage fees, in particular, were introduced as a way to offset rising fuel costs, but the price of the bags has not been directly tied to the price of jet fuel. In fact, baggage fees have continued to rise since their introduction while the price of jet fuel has fluctuated.
For these reasons, consumers perceive bag charges as a takeaway — a fee — rather than a value-add service. However, that perception can be avoided if a product is approached with a retail mindset.
If airlines move the focus of merchandising from unbundling to a retail-merchandising approach, the perceived benefits of merchandising to the customer can outweigh the drawbacks. Specifically, airlines must focus on offering customers needs-based products at the relevant time in the travel lifecycle.
However, the transformation from the traditional airline model into an eBay- or Amazon-type retailer does not occur overnight due to both business and technology constraints. Airlines must slowly evolve, maturing as appropriate for their brand, business model, competitive landscape, and operational and technological capabilities.
Merchandising Maturity Model
As airlines become increasingly dependent upon selling ancillaries to attain profitability, the natural progression in the merchandising maturity model is for airlines to think, act and sell like a retailer to drive revenue improvements while enhancing the customer experience.
À la carte
À la carte ancillaries, or products and services priced and purchased separately, are the easiest to implement from both a business and a technology perspective, due to the flexibility of this approach. For example, an airline can implement products in any channel, such as a mobile application, to expedite time to market.
Generally, the à la carte product is the first approach a carrier uses to dip its toe into the merchandising water. While this approach has great potential, it also has drawbacks. Depending on the airline's approach to selling, it may detract from the brand when perceived as nickel and diming. It is also possible to erode the value of an airline's loyalty program if select products and services are made available to non-members as well. Understanding customer segments and preferences, as well as focusing on providing value-add services that address perceived needs can help minimize the nickel-and-dime perception.
Adding Value Or Nickel And Diming?
To date, airline customers have not embraced airlines' initial attempts at merchandising. Often times, they have the perception that airlines are nickel and diming them at every turn. A strategic selling approach can minimize this perception and strengthen an airline's brand.
Bundling involves the packaging of specified à la carte ancillaries together for sale separate from the base fare. It is a slightly more sophisticated approach from both a technology and a sales perspective that increases up-sell rates by enabling airlines to sell more products and services than are generally sold when customers purchase à la carte ancillaries individually. In addition, the prices of individual ancillary items are less transparent when they are bundled together.
Branded fares, or fare families, is a more customer-friendly approach that provides maximum product and pricing transparency. Customers perceive they have a choice of the lowest fare with the least attributes or progressively increasing fare options with more and more valuable attributes. Branded fares allow carriers to offer an unbundled low fare that competes with a discount carrier as well as a more traditional full-service product at a higher premium. In its purest form, branded fares comprise fixed attributes within each fare family and fixed sell-up amounts between fares.
Additional complexities arise with this approach depending on the type of fare filings an airline uses and its competitive environment. For example, if an airline wants to expand the distribution of branded fares into the global distribution system channel, a specific fare-class approach must be used.
The hybrid model is a mix of branded fares and à la carte offerings that maximizes revenue by stimulating sell up from the base fare and increasing the take-rate of individual ancillaries. This approach provides the benefits of both strategies as well as the complexities. It also requires some strategic thought around which ancillaries will drive the most sell up in the fare versus à la carte.
Dynamic merchandising is the pinnacle of retailing. The last step in the merchandising maturity model is for airlines to fully embrace the retail model. This will drive revenue improvements by offering the most relevant products to customers, thereby increasing uptake. This approach comprises creating personalized offers for customers based on their history, profile, behavior — both observed and inferred — as well as purchase history of similar customers.
This tactic may deliver increased customer satisfaction and incremental revenues; however, it may not be appropriate for all business models and airlines due to the complexities involved. In its purest form, dynamic merchandising, including personalization, requires investment in data and infrastructure. Yet, some elements of personalization may be attainable through lower investments such as segmentations and rules-based offer management.
Mobilizing The Merchandising Strategy
Developing a strategy is just the first step in realizing the rewards of merchandising. The actual implementation of the strategy must be carefully planned to achieve set goals. Airlines must outline their priorities and objectives and then develop a plan to accomplish their goals.
A basic necessity for the launch requires placing the right products in the right touchpoints and the right channels for the right customers. The first phase of products must be directly relevant to an airline's customer segments to positively influence them and align with its brand.
For example, if an airline moves toward an ultra low-cost carrier model, it may be acceptable to introduce fees for boarding passes and carry-on bags. However, if it is a full-service carrier, it must consider the ramifications of ancillary product introductions that are seen as takeaways versus value-add products.
Customer touchpoints throughout the lifecycle of the travel experience include:
These touchpoints provide opportunities for airlines to interact with customers and offer relevant products and services.
In addition to selling through traditional channels, customers are increasingly completing transactions on their mobile devices and relying on information in social media to make purchasing decisions. Just as traditional retailers are considering their strategy in terms of emerging channels and converging technologies such as social-local-mobile — or social- and location-based mobile apps (SoLoMo) — airlines must follow suit and consider these channels when launching a merchandising program.
A basic organization must be in place to support the launch and ongoing management of the merchandising program. The successful execution of an airline's merchandising strategy requires a dedicated organization to focus on the elements of the program. Without a full-time commitment, daily operations or functions may unintentionally take precedent over the development and mobilization of the merchandising strategy.
To maximize revenue from the merchandising program, an airline must collaborate across all applicable departments. There needs to be a commitment from the entire organization, including:
- Revenue management,
- Loyalty programs,
- Mobile and other channels,
- Call centers,
- Revenue accounting.
Incorporating a merchandising strategy as an integral element of the customer experience requires airlines to consider how merchandising enhances and affects that experience when defining the marketing mix for its products and services. Subsequently, an airline generally must move from a multi-channel strategy to an omni-channel approach to ensure the strategy integrates all channels into a seamless customer experience.
Omni-channel airlines, like their retail counterparts, need to provide to their customers consistent information, easy access to the information and channel transparency. As customers become increasingly channel independent, airlines need to ensure content flows through the customer journey as seamlessly as the customers themselves, with the ultimate goal to provide the right products and information to maximize the revenue opportunity at each point in the process.
While baggage fees were introduced to help offset rising fuel costs, the price of checked bags has not been directly tied to the price of fuel. Therefore, airline customers perceive bag charges as a fee as opposed to a value-add service. This view can be avoided if a product is approached with a retail mindset.
To be successful in merchandising endeavors, airlines must develop as well as fulfill a strategy. Strategy formulation includes deciding on the desired level of advancement along the merchandising maturity model. This may include a decision to go with à la carte ancillaries, branded fares or a hybrid approach. Each approach offers improved revenue opportunity but requires an increased commitment from the organization and a varying level of investment.
An airline must build a business case and prioritize opportunities based on the level of complexity to implement, relevance to the customer, likelihood of success and other factors unique to the airline. Planning for the execution phase of the strategy will increase the probability of success in the marketplace.
Next, the airline must develop a go-to-market plan for carrying out merchandising opportunities as it relates to the full marketing mix:
- Product definition,
- Price levels,
- Channels and touchpoints,
- Organizational impacts,
- Communication and promotional tactics.
The go-to-market plan supports every aspect of end-to-end merchandising from creation and optimization to selling, delivering, servicing, accounting and reporting.
Finally, when an airline is ready with this plan, it must prepare for implementation by:
- Developing new business processes for the vast number of impacted organizational areas,
- Creating an ongoing management plan,
- Developing a new organizational design to support the transformation.
This approach can be applied to creating, enhancing or implementing the merchandising strategy, resulting in enhanced profitability.
Partnering For Success
The many decisions required for carriers to make the transition from the traditional airline model into retailing are complex and all encompassing, in terms of employee resources, financial investments, organizational structure and business processes. Partnering with an experienced solutions provider with consulting expertise in the development and implementation of merchandising strategies can provide valuable insight and guidance during the transition.
Ideally, a partner should have in-depth knowledge of both the commercial and operational aspects of airlines to help formulate merchandising strategies that benefit the organization as a whole. Onsite training and knowledge transfer are key elements for sustained, long-term success of a strategy once it has been launched.
Sabre Airline Solutions® offers consulting services in all aspects of the airline business, including the merchandising of ancillary offerings. Its access to industry-leading research and solutions supports recommendations that drive change and generate measurable results.
Ancillary revenues may not be the panacea for the airline industry, as many people believe. However, they present opportunities as never before to carriers with the foresight to recognize them as part of a fundamental business change rather than a passing trend.