April 3, 2009

Demand Based Pricing

In my previous post, I discussed the general pricing strategy for airlines. Our booking of the trip to Italy for $388 was an anomaly and didn't really fit with trends of airfare - round-trip to Europe goes for $800 during May (which I still find to be incredibly cheap.) The below graph gives a great picture, and its only one-year-old.

When we booked our tickets, we booked 5 at one time. Erik and Matt followed within the hour. We originally thought that the rate we booked at (which Paul somehow found) was going to expire. This was not the case, because when Carrie went to book her ticket a few hours later, the rate adjusted itself to $750ish dollars.

All travel websites implement a back end web-service for flight information and booking online (from a company like ITA Software). Even though the travel sites look different, (Expedia vs. Traveolcity) they use the same back-end web-service to offer flights. The travel "front end" sites offer sites from the same pool, with some price variance depending on the time of day or area of the country from where the person is visiting the site.

So the front end sites and the back end provider must keep in close contact, because the front ends are all selling from the same pool of flights.

The strange thing about our example is that we are leaving on May 7th, and the rate was only adjusted for that day. The day before and the day after (6th and 8th) had the same rate that the rest of the group booked. The pricing service saw that there was high demand of people from Lincoln, Nebraska booking the same flight to Italy, so it adjusted itself hoping that the last person would pay double to travel with the same group.

The fortunate thing about the rate adjustment was that Brett (internet travel extraordinaire) was able find one Website, Orbitz.com, that did not update their prices. So Carrie booked the flight through Orbitz at $388. But Orbitz has to turn around and pay the increased wholesale rate for the $750ish flight to the back end service.

We really dodged a bullet here. Online travel (shopping as well) is difficult, and consumes lives. Booking online travel is impossible - that's why I outsource whenever I can.

Demand based pricing is an interesting subject. Since the acceptance of online shopping, retailers know much more about their customers and can offer a range of prices for the same goods. Keep your ears up for more Italy trip posts and at least one more post (this week) related to variable pricing.


  1. I was watching those tickets as well and saw that price spike happen to a few other days. Are you sure it was strictly demand based? My sort of impression was that they had a limited number of flights available for the super low price, and once those particular flights sold out, the low price was gone and they started charging the usual. Technically you could still call that "demand-based pricing" in a sense, but it's not what I would usually think of with the term.

    Also nice work on the Orbitz thing.

  2. That explanation is more realistic than the one I offered in the post - It makes more sense having a set number of cheap flights, rather than a demand based system. I plan on doing another related post, so I will definitely come up with a better example.