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…
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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)
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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.
NDC in Action Things have changed
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.
NDC in Action Things have changed
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
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NDC in Action Retailers are still way ahead of us
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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
10 © 2013 L.E.K. Consulting LLC. All rights reserved.
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
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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
© 2013 L.E.K. Consulting LLC. All rights reserved.
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?”
© 2013 L.E.K. Consulting LLC. All rights reserved.
NDC in Action
Ten questions to ask about your strategy
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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?
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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
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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
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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?
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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
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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
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NDC in Action
7) How do you target, personalize, and price dynamically?
21
Merchandising engine
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NDC in Action
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... )
© 2013 L.E.K. Consulting LLC. All rights reserved.
NDC in Action
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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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
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NDC in Action Thank you
Website: www.lek.com
Email: [email protected]
LinkedIn: L.E.K. Consulting / John R. Moran
Twitter: @JohnRMoran
25 © 2013 L.E.K. Consulting LLC. All rights reserved.