One of the most frustrating parts of traveling is booking an airline seat. The price shown to buyers in the morning is undoubtedly increased by the evening. And, the price you finally paid is probably not the same as the price paid by the person sitting next to you! Airfare prices seem to change by the minute, and it all feels random to frustrated buyers.
Maximizing the sales of seats, called ‘revenue management’ by the airline industry, is incredibly complicated. Airlines use complex algorithms and computer systems that are constantly calculating the perfect price. The computer programs must predict consumer behavior in order to determine what the market is willing to pay for the seat.
An empty airline seat is a perishable commodity; once the plane leaves the runway, the empty seat can never be sold. How would you price the seat?
Group Activities and Discussion Questions:
- Pricing is a complex topic. Discuss the six steps for pricing (determining objectives, estimating demand, determining cost/profit relationships, select price level, set list price, and make adjustments).
- Discuss the various pricing models in class: demand-oriented, cost-oriented, profit-oriented, and competition-oriented.
- Discuss how yield management (or revenue management) pricing works.
- Show the airfare pricing video: https://youtu.be/-oJlJ5oo5AM
- For a selected product, divide students into groups and have each group work on any/all of the six steps.
- When setting the price level, assign each team a different model to use (demand-oriented, cost- oriented, etc.).
- Debrief the exercise. Compare the various pricing models and discuss advantages/disadvantages of each.