Segmentation and differential pricing: how one site accomplishes both

Citation

(2009), "Segmentation and differential pricing: how one site accomplishes both", Journal of Consumer Marketing, Vol. 26 No. 2. https://doi.org/10.1108/jcm.2009.07726bag.002

Segmentation and differential pricing: how one site accomplishes both

Article Type: Internet currency From: Journal of Consumer Marketing, Volume 26, Issue 2

Edited by Dennis A. Pitta, University of Baltimore

During the heyday of air travel in the 1960s, airlines discovered a way to squeeze extra revenue out of their passengers while safeguarding their basic bread and butter. It was called “flying standby.” Different price rates were already in place. There were prices for adults and prices for children and a few special prices for military and government travelers. In addition, there was a thoughtful bereavement fare, available only to those who lost loved ones and were flying to funerals. Basically, prices were fixed and if you wanted to fly, you paid. One problem in the system was the opportunity cost of an unfilled airline seat. When fuel prices were extremely low, the variable cost of serving one more passenger in an unfilled airplane was minimal. It may have involved a very small amount of additional fuel and a meal, but basically, serving one extra passenger was “free.” There are clear differential pricing elasticities among the passenger segments. The dilemma was how to entice an additional passenger without affecting the existing passengers on the flight.

That system existed before the days of massive computing power and the ability to predict seasonal changes in demand precisely. Airline management knew that holiday travel demand was higher than normal and summer travel for leisure was higher than winter travel. They also knew that weekend travel loads were lower than weekday loads. Many knew the quantitative differences and, thus, could raise prices for specific periods. However, the knowledge that upcoming travel on 27 April on six flights from one city to another would normally yield loads of 60 per cent, 84 per cent, 71 per cent, 41 per cent, 95 per cent, and 73 per cent was far more precise information than they could generate. With the revolution of computing power and the brainpower of industry outsiders like university mathematicians, precision is commonplace.

It is an oversimplification but today airlines can anticipate those historical travel loads and price the highly filled flights higher than those with fewer passengers. They can even factor external events such as weather, threats of terrorism, stock market fluctuations and short-term changes in the economy to fine tune their set of fares to yield the greatest revenue.

Back in the 1960s, even without the great precision available today, airline management realized that there was another segment of air passengers who might be targeted. Inherent in the existing pricing scheme was the element of urgency. Airlines realized that business travelers had to travel and arrive at their destinations in a timely fashion. In contrast, the leisure travelers had less pressure to be at a given place at a given time. The dilemma the airlines faced then and all marketers face today, is how to separate the two segments and maximize revenue by serving both. The answer was brilliant: segment by age. The existing two fare system: adults versus children lent itself to adding one more segment; teenagers. Teenage passengers, those between the ages of 12 and 21, comprised a growing segment of travelers. Most were students who attended schools far away from home and wanted to return periodically. For peak holiday periods, they would be forced to pay full fare. But for times away from the peak holiday periods, like 27 April, there would be unfilled seats available. The solution was to fly standby, which required waiting for the promise of a seat, contingent on availability. Standby exists today but then, flying standby promised an adult fare at half price. The key was that adults could not take advantage of the deal. The airlines required teenagers to provide proof of age and join an airline “special club” reserved for them. One was the “12-21 Club” which clearly identified the segment by age and isolated them from children and adults. The system passed into history as forces on the airline industry dictated cutting costs and quantitative methods allowed more effective load management and pricing. However, the basic concept is making a comeback.

Student Universe.comStudentuniverse.com

Student Universe.com describes itself as a specialty travel service that caters to students and faculty. Thus it restricts its audience. It states, “Our fares are not available to the general public. All airlines require us to only sell to current college students and faculty. We have partnered with StudentsOnly to verify your current student/faculty enrollment status.” In fact, StudentsOnly is a division of StudentUniverse.com, specializing in automated student enrollment verification. It is an intelligent step. Airlines need to isolate their prime customers from students to avoid cannibalizing their more lucrative source of income.

StudentUniverse is the largest online travel agency for students in the USA and claims to be the number one destination for cheap airline tickets for students. Students can book airline tickets, rail tickets, hostel rooms and travel insurance. The site cites the importance of a student discount. Student airfares are supposedly cheaper and may offer more flexibility and better terms. The website will verify a student’s status and then will qualify him or her for discounts on flights all over the world. They state that they offer, cheap one way flights, cheap flights to Europe, cheap flights to Asia and more

We noticed immediately that StudentUniverse offered a clear benefit: students did not need to buy an ISIC card, an International Student Identification Card. Other travel agencies charge $22 for an ISIC card, but StudentUniverse.com verifies status to avoid needing the card. That was nice but how about performance?

Site effectiveness

We tested the site’s fare search system by entering data for known trips we planned. Several of the attempts returned the bad news notice:

We’re sorry, but currently your DEPARTURE flight from ------------------------- to ----------------------- does not have any student seats available. Please check our search tips or try the flexible search option to find student airfare.

The search tips presented several pieces of information:

• •

  Try searching alternate airports and/or dates. The more flexible you can be, the more likely we will have something available. This is especially true around the holidays, or if you’re traveling in the next couple of days.

• •

  We offer one-way flights from the USA and Canada to most major cities worldwide. We also offer one-way flights from Europe, Asia, Australia, Central and South America, to the USA and Canada. We do not have round trip flights from these areas to the USA and Canada at this time, so you should search for two separate one-way fares to get the best student deals.

• •

  Try searching for a round trip if you are having difficulty finding a one-way flight.

• •

  Try searching for two one-way flights to and from your destination. Some airlines allow you to stay at your destination for only 30, 60, or 90 days

The information was helpful. We were able to delay the departure date by one day and received a fare. The fare seemed a little high and we wondered if it were actually the lowest we could find. At that point we tried Kayak.com a popular and powerful airline ticket booking website. Kayak.com searches most of the airline and travel websites and usually reveals some remarkable deals.

We entered data for a trip from Washington, DC to Sao Paolo, Brazil. Kayak.com returned US$891 for a flight lasting 26 hours, although the next flight listed at US$893 took 18 hours.. In contrast, Studentuniverse.com returned a 16.5 hour flight for $812. In addition, the site noted that there were nine seats left at the time of our search. Those results, a 10 per cent reduction, got our attention.

In fairness, the search experience can be a bit frustrating. We found more “no seats available” notices than flights. The author is a typical frugal faculty member who is always looking for a bargain. However, for those of us who expect some choices, the limited number of student fares represents that trade off between service or convenience and price. It reflects the historical roots of the “reduced fair for standby flights.” However, more choices, or at least some choice would make the service more valuable.

Significance of the web site

It may not really be universal that old fashions resurface in the future. But, the idea that trading convenience for price is an old one that keeps being refreshed. Studentuniverse.com illustrates some truths for the internet. It combines the universal ease of access with a bit of exclusivity that helps market its services. That exclusivity is a bit of enhanced segmentation which leads to product differentiation. The site caters to student needs better than to ordinary travelers’ needs. For example, it features hostels not just hotels. What is unknown is the extent of the deals that airlines offer the web site. The promise of isolating these discount flyers from the business or normal leisure traveler must allow airlines to wring a bit more revenue from its operations.

As a web site whose name attracts its target segment, and whose design enhances its customers’ satisfaction, Studentuniverse.com is model for others to emulate.

Reader requests

Please forward all requests to review innovative internet sites to: Dr Dennis Pitta, University of Baltimore, 1420 North Charles Street, Baltimore, MD 21201-5779, USA. Alternatively, please send e-mail to: dpitta@ubalt.edu for prompt attention.