The Merchandising Evolution (and why NDC Matters)

The Merchandising
Evolution (and why NDC
Matters)
John Thomas
Global Aviation Head
L.E.K. Consulting
© L.E.K. Consulting LLC. All rights reserved.

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Topics
!  The evolution of consumer expectations
!  Merchandising’s potential
!  Why does NDC matter?
!  10 questions to ask about your ancillary strategy
2

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How have consumer expectations
evolved?
Let’s go back to 2007…
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The customer experience
just seven years ago…
Facebook had 12 million users
(no mobile)
4

Mobile looked like this
(no iPhone/Android)
Amazon revenue was $15
billion
(no Kindle, no Prime in most
countries)
23 airlines reported global
ancillary revenue of $2.5
billion
(no 1st/2nd checked bag fees)

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Things have changed
0
250
500
750
Global PC / mobile device unit sales
Millions of units
PCs

Smartphones
/

tablets

12
11
10
09
08
2007

Information and purchasing capabilities are now personal and
ubiquitous
Source: IDC, Gartner 5

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Things have changed
People are getting information from peers and highly targeted ads
1,100
845
610
350
150
60
12
0
200
400
600
800
1,000
1,200
12
11
09

Facebook active users
Millions of people (beginning of year)
10
08
2007
13

Source: 6

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Things have changed
E-commerce and personalized recommendations are mainstream
61
48
34
25
20
15
0
10
20
30
40
50
60
70
Amazon total revenue
Billions of dollars
11
10
09
08
2007
12

Source: Amazon 7

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Consumer expectations are
changing too
!  Too much information puts
a premium on curation;
offers come to me
!  Omni-channel learning,
trial, and purchase
experiences
!  Assume you’ll remember
me
!  Customization, menus, and
targeted / personalized
options and extras
!  My price
!   Information opaque and
inaccessible; “know what
you want and go hunt for
it”
!   Single channel for
discovery and purchase
!   Anonymity the norm
!   Limited choices;
accustomed to standard
offers and a “one size fits
all” experience
!   One price
TomorrowYesterday
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We are caught in this seismic shift at a
time of transitioning to being more B2C
!  Much more direct B2C
relationships with our
customers
!  Taking back control of
selling to our customers
even though some of that
will still happen through 3rd
parties
!  Forced into B2C to reduce
distribution costs and
increase revenue
effectiveness
!   Heavy reliance on 3rd
party distribution
!   Focus was on marketing
to customers not selling to
customers
TodayYesterday
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As we shift to being retailers, traditional
retailers are way ahead of us
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Meanwhile, ancillary revenue
has grown…
36
33
23
13
10
2
0
10
20
30
40
50
43

A
La
Carte

FF
/

Commission

Global airline ancillary revenue (estimates based on reported)
Billions of dollars
13F
12
11
10
09
08
2007

Source: IdeaWorks,
Ancillary revenue isn’t optional, it’s oxygen
Global
total
net

income
is
expected

to
be
~$12
billion

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… and helped crown a new set of
leaders
2.5

1.0

2.0

1.5

0.5

0.0

Top 10 airlines by economic profit, 2008-12
Billions of dollars
0.3
0.3
0.4
0.4
0.4
0.5

0.9

2.2

1.1

1.5

EP

ranking

’03-‐12

61
1
59
4
6
5
7
2
3
N/A

#1 #2 #3 #4 #5 #6 #7 #8 #9 #10
Source: Capital IQ, Bloomberg, CompuStat, DOT Form 41, L.E.K. analysis
EMEA

Asia-‐Paciﬁc

Americas

12

© L.E.K. Consulting LLC.
All rights reserved.

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A vision of merchandised
ancillaries
13

Right offer
Right place
Right
person
Right price
Right time
!   Room offered with OTA in booking flow
!   Meal/seat sent to his mobile the day before / in airport
Example
We believe merchandising in this way can double ancillary
revenue
!   “John, a 35-year-old infrequent flier with us, visiting
Disney World with his gluten-allergic infant”
!   Discounted hotel room
!   Gluten-free meal paired with empty adjacent seat,
etc.
!   Room offered at a discount to drive ticket purchase
!   Meal/seat offered at premium (unless inventory high)
!   Room offered during initial comparison shopping
!   Meal/seat offered during check-in

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Why does NDC matter?
Future new standards and
tools enable powerful new
strategies
The freedom and power
to change the game
14

Historically, legacy
technology dictated
ancillary strategy
What should you be asking yourself before implementing the
technology?
“What should we do?”
determined by
“what can we do?”

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1) What is the overall strategic
objective?
!  Incremental revenue and profit?
!  Customer experience enhancements?
!  Rewarding and reinforcing loyalty?
!  Reduction of core product cost through unbundling?
!  Passenger behavioral changes?
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2) Who is your customer?
Customer
segments
(historical)
Customer segments
(today)
•  Mostly male
passengers,
usually 34-55,
who travel
business
itineraries
Business Travelers
•  High-income
individuals,
couples or
families
traveling for
leisure
High-Income Leisure
•  Mostly male passengers, usually 34-55, who travel 20+ business
itineraries p.a.
•  Often business class passengers traveling alone
Road
Warriors
•  Mostly male passengers, usually 34-55, who travel <20 business
itineraries p.a.
•  Economy class travelers more likely to travel with colleagues
Occasional
Business
•  Male and female passengers over 55, who travel for leisure
purposes exclusively
•  Value-oriented, economy class passengers
Retirees
•  High-income individuals, couples or families traveling for leisure
•  Travelers who value comfort, often on long haul flights
High-Income
Leisure
•  Younger, tech savvy passengers under 30, traveling for
pleasure, college, or job opportunities
•  Value-oriented, economy class passengers
Etc.
•  Older individuals, couples or families traveling to visit friends
and/or relatives
•  Primarily middle-income, economy class travelers
VFR
•  Value-oriented travelers, particularly families traveling for
entertainment or outdoor recreation
•  Primarily middle-income, economy class travelers
Package
Vacationers
16

Young
Singles

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3) Do you treat them as accounts?
Do you understand their journey?
17

Boarding /
take-off
Planning
Booking
Managing
Dreaming
Inflight DeplaningAirport
Hotel
Transport
Return journey
Need states
Destination
-focused
Frugal
Practical
Stressed
Bored
Excited
Leisure passenger journey

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4) What does your brand stand forand what
experience should you aim to create?
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What customer experience will fulfill your brand promise?
What do you aspire to mean to passengers?
What do people associate with your brand today?

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5) What products and services should
you offer?
Repackaged B2C
Airport Lounge Packages
Family Traveler Packages
Child Traveler Packages
Business Traveler Packages
Core
Product

Enhanced Mix of B2C & B2B
“Window Shopping”
(On-line stores)
On-line Gambling
2

2

2

2

4

4

6

7

4

1

4

6

Enhanced B2C
Internet On-Board
In-Flight Entertainment
Food/Beverage On-
Board
Upscale Amenity Packs
2

2

2

5

5

4

5

Core B2B
IFE/Web Advertising
5

Core B2C
Baggage Fees
Booking over the
Phone
Confirmed Seat
Assignment
Fee to Stand by
Ticketing Fees
Miles Rationalization
Unaccompanied Minor
2

2

1

1

1

6

7

1

1

3

Experience Packages
1
Product
2
Flight Experience
4
Airport Experience
6
Mileage and Status
7
Customer Service
5

3
B2B
B2C
B2B

Enhanced B2B
Enhanced Advertising
Consumer Trials3

3

Enhanced B2C
Premium Seating
Lounge Access
Priority Baggage
Priority Security
Priority Check In and
Boarding
Elite Status a la carte
Mileage Purchase
Trip Protection
Insurance
Repackaged B2C
Subscription Services for
Amenities
FF Gaming Bundles
Entertainment Packages
Enhanced B2B
Vacation Packages 2.0
Off-
vessel
On-
vessel
Core B2B
Traditional Advertising
Hotel Partnerships
Mileage Redemption
Rental Cars
Financial Services
6

7

3

7

3

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6) What costs a fee vs. what is free?
What should you bundle together?
Fully Bundled A la Carte
Bundling of Ancillary Products / Services
EnhancementsOffered
Low
High
Merchandising
Unbundling
Enhancements

Bundle Optimization
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7) How do you target, personalize,
and price dynamically?
21

Merchandising
engine

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8) How do you advertise
and sell across channels?
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!  Have consistency across all channels, both direct and indirect
!  Think outside the box online
!  Advertise differently than you sell
!  Use channels for different things (exploration vs. sharing vs.
problem-solving vs. impulse-purchases vs... )

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9) How do you deliver
without operational compromise?
23

Generally requires:
!  Strong core operations to begin with (e.g., on-time
performance)
!  Simplicity through technology
!  Training and tools for frontline staff
!  A cultural shift and extensive communication
!  The ability to measure and course-correct

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10) How do you turn product
developmentinto a core capability?
24

To make this a competitive advantage, you need:
!  A well-oiled new product development (NPD) process
!  Measurement and metrics to conduct product portfolio
optimization
!  The structure, staff, and processes to manage the products
!  Ongoing strategic investment in the technology

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L.E.K. has advised on nearly all marquis
ancillary revenue implementations…
25

Client
example
Project
emphasis
Results
#1
Full
Service
Carrier

in

Americas

#2
Full
Service
Carrier
in

Americas

#1
LCC

in
Americas

Major
Value-‐oriented

Brand

l  Advised
on
fee
strategy
generaRng
hundreds
of

millions
of
dollars
in
incremental
revenue

l  Helped
airline
unbundle
their
services
to

maximize
$1.4B
in
potenRal
ancillary
revenue

l  Full
merchandising
strategy
development
and

implementaRon
with
an
esRmated
$1B
in

addiRonal
revenue
gained

l  World
class
product
improvement
and

industry-‐leading
digital
interface

l  Increased
priority
service
oﬀerings
to

aZract
high-‐value
passengers

l  MoneRzaRon
strategy
of
extra
legroom
on

aircra[
resulRng
in

annual
proﬁt
increase
of
>
$150M

l  Developed
wide
variety
of
lucraRve
ways

for
customers
to
buy-‐up
to
improve

their

customer
experience

Pioneering
Flag
Carrier*

l  Industry
leading
personalizaRon
of
the

airport
experience

l  Groundbreaking
strategy
to
moneRze
revenue

streams
on
back
of
new
fare
class
structure;

incremental
hundreds
of
millions
of
dollars**

l  Industry
leading
traveler
“opRons”
and

incorporaRon
of
upselling
and
loyalty

program
to
build
a
comfort
product
that
is

the
airline’s
most
valuable
feature

Major
European
Airline

Brand

l  Complete
brand-‐equity
aligned
Ancillary
Revenue

strategy
and
execuRon,
leading
to

transforma)onal
economics

l  CreaRon
of
edgy
services
consistent
with

world-‐leading
brand
proposiRon


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…and is recognized as a world leader in
Travel Ancillary Revenue
26

Strategic
Partnerships
NewsleZer

Partner
Brief

Istanbul, Turkey (2008)
Los Angeles, CA
Frankfurt, Germany
Vienna, Austria (2009)
Merchandising
Thought
Leadership
–

Sample
speaking
Engagements
and
Published
Work


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Thank you
!  Website: www.lek.com
!  Email: j.thomas@lek.com
!  LinkedIn: L.E.K. Consulting / John F Thomas
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The Merchandising Evolution (and why NDC Matters)

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