Dynamic Pricing: Can Dealer Operations Take Lessons from the Airlines?
It’s not easy to run an Airline Profitably
Many of us have had the experience while booking a flight, of watching the price for a seat change as the plane fills up as the time for the flight approaches. What we have experienced as consumers is an example of "Revenue Management," or "Yield Management" by the airlines. A simple definition of the practice is as follows:
Yield Management is a variable pricing strategy, based on understanding, anticipating, and influencing consumer behavior with the goal of maximizing revenue and profit from a fixed, time-limited resource.
According to Robert Crandall, the former CEO of American Airlines,
Yield Management is, "the single most important technical development in transportation management since we entered deregulation."
Yield Management is one of the tools that airlines have used to achieve more consistent profitability, where sales of a few extra seats can make an enormous difference. According to Forbes, US airlines need their planes to be well over 70% full just to break even.
To make these systems work, the airlines need extensive data about their customers and their intentions. Over time, the airlines have built ever more powerful sources of data from frequent flyer programs, reservation systems and web search data. The airlines have also developed increasingly sophisticated models to predict how individual consumers will respond to changes in pricing and other factors. And finally, airlines have invested in systems to actively manage their revenue through ongoing dialogue with their customers.
Application to Dealer Service Operations
A dealer's service operations have some similar revenue management challenges. They represent large, fixed investments in facilities, equipment, and skilled people. They are profitable when they are full and quickly become unprofitable when they are not. And, like the airlines going through deregulation, dealer service operations are facing some big disruptions. The transition to electric powertrains is driving significant investment in new equipment and training. Electric vehicles are also expected to need maintenance less frequently and at different intervals. In fact, Consumer Reports finds that EV owners today are spending half as much on maintenance and repairs.
Dealers will also see increasing use of Over-the-Air diagnostics and repair, as Tesla has demonstrated so successfully.
Finally, dealer service operations will see disruptions from the ongoing consolidation of automotive retailers, with growing pressure from the large public operators. The time might be right for leading operators to take a page from the airlines' playbook.
Connected Cars Provide Much More Data
With a built-in connection to every car sold by the dealership, dealers increasingly have access to a rich source of data. It is possible to know when each vehicle needs service and what kind of service it needs. It is also increasingly possible to use data from the vehicle to predict when a breakdown will occur well before it happens. Predictive Diagnostic tools have been announced from both OEMs like General Motors and from startups like Preteckt or Pitstop. The development of this data and these tools creates the potential for service events to be planned more proactively, rather than purely in reaction to customer calls and drop-ins.
Better Data Can Produce Better Pricing Models
With better data about vehicles’ service needs, it is possible to start building models to predict what it will take to bring individual customers in for service at a time that is most profitable for the dealership. Which kinds of customers can be persuaded to come in sooner or wait until a less busy time? How much of a price incentive (or other kind of incentive) will it take? Pricing models are built by trying out offers with different types of customers with different service needs.
Over time, models become increasingly accurate and pricing becomes increasingly targeted.
Better Systems Can Produce Greater Profitability
Many dealers already have scheduling systems in place, but the next step will be to use these systems to more proactively plan service visits in a way that maximizes utilization of service operations. Dealers will use customer data and dynamic pricing to anticipate when a customer will need service. Next-generation scheduling systems will be able to present precisely targeted offers, designed to bring vehicles in at the optimal time for profitable service delivery.
It is a dynamic, exciting time in the auto business right now, with disruptive technology and business trends well underway. motormindz’ Connected Practice has the experience and insights to guide you through these challenges and find effective and profitable paths forward.