It’s time to think differently about airline subscriptions

Calling all revenue managers

Let’s talk revenue dilution. It’s a topic that comes up time and time again when we speak to airlines about subscriptions. Revenue managers tell us that this is their main concern and they don’t see how subscriptions could ever work for them.

So here’s how we see it. The issue isn’t that subscriptions ignore the basic principles of revenue management. It’s that revenue managers don’t understand the principles of subscriptions, or the value they bring. In a recent survey, we found that 84% of revenue management professionals failed to properly define a subscription program. So we’re here to help.

Inside an airline showing the different prices passengers have paid

Change your perspective

At Caravelo, we work with revenue managers every day in our own team and also within airlines. We know it’s an incredibly challenging job which has been made harder by the pandemic.

Part of the job is preventing dilution – making sure you sell the right seat to the right passenger, for the right price. This is a careful and continual balancing act of changes in price, demand and capacity. We often find that revenue managers are suspicious of subscriptions. “Why would I sell a flight at that fare when I can charge more for it?” We know it feels right to ask this question, but this is setting yourself up for failure. This is applying revenue management thinking to a subscription reality.

Both revenue management and subscriptions have the same goal, to maximise revenues. But the approach and journey is different. Therefore, the success of both models cannot be measured by metrics built for a different approach.

The goal of revenue management: To maximise revenue by optimizing each and every transaction.

The goal of subscriptions: To maximise revenue by optimizing the lifetime value of each traveler.

If you analyze a subscription program from a  single transaction perspective, using a revenue management mindset, you could see dilution or displacement. But we ask that you take a moment to consider how this could look different if a customer is locked in for twelve months, flying 99% of their flights with you.

Subscriptions and revenue dilution

Using the same metrics as revenue management to measure subscriptions will not result in an accurate picture or fair comparison. Revenue management tends to focus on billing one-time transactions and as a result highly emphasises revenue dilution. Subscriptions focus on the total customer revenue by bringing in more than just one transaction. They bring an airline lifetime value. As a result, they vastly reduce churn and create stronger relationships with the customer.

By using a more holistic approach, the default behaviour with a subscription becomes retention. With a single ticket transaction, the default behaviour is churn and you immediately have to win back your customer at extra cost. CEO of Caravelo Iñaki adds, “in a nutshell, we maximise customers, not transactions”.

Revenue retention graph

We have the same goal

The secret is out! At Caravelo, we have the same goal as airlines – to grow revenue. So we wouldn’t suggest a model that causes revenue loss.

We strongly believe in the subscription model, but we’re not alone in this belief. Subscriptions are sweeping across all industries. Whilst some subscription models are extreme (Netflix), others are just one part of that company’s revenue stream (Volaris).

You don’t need to be Netflix to benefit from the subscription economy. But you also don’t need to fully rely on one-off transactions and zero income when the next crisis hits. This is another way to create revenue using a different technique, used in almost every sector.

Ticket showing different types of subscriptions

A healthier mix of models

During the pandemic, airlines relied solely on transactional income, so when flights stopped, so did their income. With airlines who had subscriptions, they didn’t see a huge drop off in revenue on this part of the business.

In fact, subscriptions strengthen revenue management by complementing it. By working alongside revenue management, subscriptions contribute to a healthier mix of business models.

We still believe a large amount of airline revenue will continue to come through singular transactions. But, imagine a world where you compliment that income, grow loyalty and incremental revenue at the same time. A world where 20% of your customer base pays you every month, and you can predict that income and management yield better.

Graph showing monthly recurring revenue

A new consumption model

2021 is the year where we start again. It’s increasingly difficult to predict the markets, revenue and the future right now. But we know that consumers are looking for different consumption models and subscriptions are increasingly popular.

Think about a world where both revenue management and subscriptions work together and inform one another. They don’t need to compete. By placing your focus on the customer rather than the product, you start building relationships, not transactions. So before you go, have we made you think? If you are interested in finding out even more about subscriptions, we’re here to tell you more.

As Netflix CEO Reed Hastings once said,

“Most entrepreneurial ideas will sound crazy, stupid and uneconomic, and then they’ll turn out to be right.”