by Paul Hunt – President
After a busy month of travel to Europe and throughout the United States, on Saturday I learned of Aeroplan’s upcoming increase to the point requirements for a “free” flight.
Aeroplan’s rationale for the point requirement increase is, in part, the increasing cost of rewards. This is not much different than an organization in any industry experiencing a cost increase and in turn taking a price increase. In fact, this is one of the most common issues I consult clients on.
After reviewing the Aeroplan Flight Reward Chart to see just how much of an impact this increase will have on my ability to use my points, it became obvious that this is not a straight 5% increase across all flight segments and ticket classes. In fact, the Aeroplan point requirement increase shows elements of price research and optimization.
Value based pricers use optimization research to help make better decisions on how to raise prices. Well designed research measures price sensitivity across different segments of customers and the results are used to develop and implement an optimal pricing strategy that is good for the bottom line.
Whether or not Aeroplan conducted research before announcing this increase is unknown to me but here is how I see elements of optimization being applied in the point requirement increase:
- Point requirements are only increasing on certain flight routes. In fact, less than half of the flight routes will increase. Research measures the impact of a price change on different products. If each flight route is considered to be a different product it makes sense that a point increase is applied to routes so that the business will be in a better position overall.
- Point requirement increases range from 5% to 25%, depending on the flight route and ticket class. Price sensitivity varies by product and customer segment so the size of the price change should vary accordingly. This achieves a pricing strategy that is best for the bottom line.
- On average, the increase for a business class ticket is greater than the increase for an economy class ticket. Research identifies price sensitivity of different customer segments. A greater increase on point requirements for business class tickets indicates that either business travelers are less sensitive to the point increase, or demand on business class reward flights will decrease allowing more full fare tickets to be sold to business class travelers.
Competition is another key consideration with price increases. In Aeroplan’s case it is not just about losing customers to another loyalty program. If I give up my loyalty to Aeroplan I no longer need to maintain loyalty to Air Canada. And perhaps I’ll consider switching to another travel rewards credit card. Good pricing research and optimization measures how customers will switch between competitors, how competitors will react and what the effect is on the bottom line.
As a frequent flyer and Aeroplan collector I am not thrilled that it will cost more for a free flight. However, as a pricing strategist I am pleased to see elements of value based pricing, segmentation and optimization being applied to the price increase.
Paul Hunt is president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a monthly pricing column in the Financial Post.
From Paul Hunt’s Financial Post Executive Blog. Updates on a weekly basis.