Why airlines need to segment smarter
People travel for many different reasons but often airlines don’t go far enough in meeting their specific needs.
Marketing textbooks generally speak of customer segmentation based on demographics. We are talking millennials vs baby boomers, singles vs young families, affluent vs the budget or, perhaps, value conscious. Some marketing firms track 20 or more ‘psychographic’ segments that exhibit different buying habits and propensities.
Airlines, on the other hand, typically use customer segmentation based on behaviour. The underlying segmentation is generally ‘purpose of trip’ (business vs. leisure) rather than customer age or affluence. Since business travellers tend to book their trips closer to the departure date and often demand additional ticket flexibility, airlines can take advantage of this with fares that vary significantly by days-before-departure (DbD) and refundability.
These factors are used as indicators of a customer’s price sensitivity. Restricted fares (non-refundable fares booked far in advance) are the lowest and designed to meet the needs of the most price sensitive travellers. Full fares (the highest fully refundable fares) can be six to eight times the value of the lowest fares and are designed for business travellers who need that flexibility and are willing to pay for it. The range of fares in-between appear, in increasing value, between six weeks before departure and the day of departure. As such, days-before-departure is the most important driver of fare levels, and the most popular indicator of price sensitivity.
Missing a trick?
DbD is obviously an imperfect proxy for business vs leisure, and an imperfect indicator of price sensitivity. It is also means that airlines are missing a trick in maximising airline revenue. Without improved segmentation, airlines also miss out on new merchandising opportunities related to ancillary purchases. Questions airlines should be asking include: