Airlines have some of the most sophisticated discretionary pricing systems in the world. Maximizing revenue has long depended on their ability to distinguish expense-account business travelers with demanding schedules who value time over money from penny-pinching infrequent flyers looking for the cheapest way to spend a weekend in Vegas, or to visit Grandma sometime next summer.
At first blush this might seem like the sole domain of number-crunching analysts; laser-focused finance types tracking competitive schedules, seasonal patterns and conjoint research to refine their pricing algorithms to the point of predictive precision. It might not suggest itself as fertile ground for consumer-driven innovation.
What a surprise.
Delta recently rolled out a revolutionary new system that formalizes the pricing process for dealing with potential bumps–moving some passengers off of an over-booked flight. Historically, this service has been performed at the gates by harried airline representatives making pricing offers over the loudspeaker. If the offer it too low, they have to raise it (that’s embarrassing). Too high and the result is a land grab, with eager travelers lining up like when they bring out a new pan of sausage samples at Costco.
Delta’s novel approach is to auction these bumps off, in advance, to the lowest bidder. The airline can usually anticipate where there might be capacity issues. So when you book your flight online, you’re given the chance to say just how much compensation (in airline credit) you’d need to bump to the next flight. Suddenly the market gets efficient; not to mention more orderly. And Delta saves money, avoiding the penalty of offering more than is needed to resolve the overbooking problem.
Why we like this innovation:
This is a remarkably simple way to optimize pricing (or reverse-pricing, if you will) without upsetting consumers. And it matches the benefit to the customer in the most efficient way possible. Finally, it’s a wonderful example of looking at the dominant trend of online ticket purchasing and figuring out how it can change the rules across the business. (Choosing your seat is another example.)
The opportunities for businesses to innovate in their thinking are limitless. Congrats to the visionary pricing wonk at Delta who looked up from his calculator to see a brave new idea.