The Merchandising Evolution (and Why NDC Matters)

The Merchandising Evolution (and why NDC Matters)

John R. Moran L.E.K. Consulting

© 2013 L.E.K. Consulting LLC. All rights reserved.

NDC in Action Topics

The evolution of consumer expectations

Merchandising’s potential

Why does NDC matter?

10 questions to ask about your ancillary strategy

2 © 2013 L.E.K. Consulting LLC. All rights reserved.

NDC in Action How have consumer expectations evolved?

Let’s go back to 2007…


NDC in Action

The customer experience just six 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)


NDC in Action 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 © 2013 L.E.K. Consulting LLC. All rights reserved.


People are getting information from peers and highly targeted ads

1,100

845

610

350

15060

120

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: Facebook 6 © 2013 L.E.K. Consulting LLC. All rights reserved.


E-commerce and personalized recommendations are mainstream

61

48

34

2520

15

0

10

20

30

40

50

60

70

Amazon total revenue Billions of dollars

11 10 09 08 2007 12

Source: Amazon 7 © 2013 L.E.K. Consulting LLC. All rights reserved.

NDC in Action 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

Tomorrow Yesterday


NDC in Action Retailers are still way ahead of us


NDC in Action

Meanwhile, ancillary revenue has grown…

3633

23

1310

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, IATA

Ancillary revenue isn’t optional, it’s oxygen

Global total net income is expected to be <$12 billion


NDC in Action … 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

11


NDC in Action A vision of merchandised ancillaries

12

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 is high)

Room offered during initial comparison shopping Meal/seat offered during check-in


NDC in Action Why does NDC matter?

Future new standards and tools enable powerful new strategies

The freedom and power to change the game

13

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?”


NDC in Action

Ten questions to ask about your strategy


NDC in Action 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?


NDC in Action 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


NDC in Action

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

17

Boarding / take-off

Planning

Booking

Managing

Dreaming

Inflight Deplaning Airport

Hotel

Transport

Return journey

Need states Destination-

focused

Frugal

Practical

Stressed

Bored

Excited

Leisure passenger journey


NDC in Action

4) What does your brand stand for, and what experience should you aim to create?

18

What customer experience will fulfill your brand promise?

What do you aspire to mean to passengers?

What do people associate with your brand today?


NDC in Action 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 Trials 3

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


NDC in Action

6) What costs a fee vs. what is free? What should you bundle together?

Fully Bundled A la Carte

Bundling of Ancillary Products / Services

Enha

ncem

ents

Offere

d

Low

High

Merchandising

Unbundling Enhancements

Bundle Optimization


NDC in Action

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?

22

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


NDC in Action

10) How do you turn product development into 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


NDC in Action Thank you

Website: www.lek.com

Email: [email protected]

LinkedIn: L.E.K. Consulting / John R. Moran

Twitter: @JohnRMoran


http://www.lek.com/

mailto:[email protected]

The Merchandising Evolution (and Why NDC Matters)

Business

consulting llc

global ancillary revenue

mobileamazon revenue

ancillary strategy

targeted ads source

mainstream source

ubiquitous source

reported billions of