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Skift and Amadeus teamed to launch the Skift Survey: State of Travel Startups 2018. Check out all the results and view the full infographic here.
There’s no room in the travel industry for stagnation, as major incumbent players experiment with new revenue models to fortify their positions amidst fierce competition, and smaller players are disrupting the space by identifying solutions to address a variety of industry pain points. However, with so much competition out there in such a large industry, it’s often difficult for startups to get far off the ground. In fact, no matter how great the business idea, the right business model can make or break a venture.
Skift’s survey of several hundred individuals who work at travel startups, conducted on behalf of Amadeus, found that much of the industry’s entrepreneurial activity will center around several business models in the next few years. According to the survey data, the three most popular business models respondents expect companies to experiment with are subscription-based pricing, personalized pricing based on customer profile and unbundling. Here, we look at the three different models.
1. Subscription-based pricing
The so-called “subscription economy,” or the business landscape in which companies use subscription-based business models, is growing. Technology driven sectors are increasingly shifting their business focus from working the transactional fixed-price model to serving customers over time. According to the survey, nearly 27 percent of respondents expect that subscription-based models will be one of the most frequently adopted business models in the travel industry over the next few years.
Frequent travelers, such as those who travel for business, may be lured by factors such as the potential cost manageability of subscriptions, whether product or feature based. While subscription pricing may not be the best solution for every travel product or service out there, startups who can employ it effectively gain several benefits. For example, by mitigating the sporadic nature of travel purchases, subscription models present an opportunity to focus product development around a high-value customer base. Also, through subscription revenue streams, the startup has more freedom and insight to scale effectively.
One example of a company experimenting with a subscription-based model is Surf Air, a membership airline offering all-you-can-fly benefits and personalized service. The airline entered the market with subscription priced flights, and offers unlimited flight service for a fixed monthly fee. Originally launched as a service for frequent travelers who sit between commercial and fully private air travel, and who commute throughout the California regularly, the four-year-old startup now has its eyes set on Europe to help alleviate traveler friction for the “Brexit commuter.”
2. Personalized pricing based on customer profile
Airlines and hotels have long been able to sell the same product — a seat on a flight or a hotel room, for example — to different customers at different prices. And thanks to advances in artificial intelligence and increased availability of consumer online data, travel companies are now using sophisticated algorithms and analytics to not only gauge price sensitivity, but also predict consumer behavior. Approximately one-fifth of survey respondents indicated that business models utilizing personalized pricing will likely be more prevalent over the next few years.
How does this type of personalized pricing work? An online travel agency, for example, can now understand when a customer performs multiple searches across multiple devices over a period of time without purchasing, and use that information to present a discount on the service that will “seal the deal.” Or, by segmenting customer priorities with analytics, a travel company can locate those customers who would be willing to exchange incremental flexibility for a higher price.
Despite the potential benefits of this personalized pricing approach, there are potential risks and tactical questions that travel tech companies need to consider. One is the threat of customer backlash, as this model may incite privacy concerns among customers, or concern that they’re victim of price discrimination or surges. Another potential threat is that the business model simply fails as the customer simply learns to game the system.
Regardless of concerns, recent travel industry developments suggest this model is growing in popularity. Trivago recently made a small, but noteworthy acquisition of Tripl, a company that provides tailored, personalized travel and activity recommendations based on customer social media data and factors such as weather and pricing. Another company putting this model into practice is GoHero, a chat-based personal concierge app which integrates with various messaging tools, and uses AI to understand customer preferences. The app allows travelers to review pricing and availability as well as book and plan travel.
Unbundling, also known as the “a la carte” fee model, is increasingly in the spotlight due to its use by legacy and budget airlines. According to the survey, 14 percent of respondents expect that unbundling-based business models will be one of the most frequent experimentations in the industry over the next few years.
The concept of keeping operating costs low by charging for extras (such as priority boarding, seating choice, baggage, food, etc.) emerged over a decade ago with Ryanair, easyJet, and Southwest Airlines. Since then, more airlines have followed suit and some hotels have recently decided to adopt this model as well. For example, budget boutique chains such as Tune Hotels in the UK and Malaysia and Nomad Hotels in France are offering “pick and pay” amenities. Guests pay for unbundled services, such as internet connections, room cleanings, or an in-room safe, only if they want them.
CB Insights recently reported on an array of new ventures seeking to unbundle the hotel experience. Some of these startups may not be exclusively marketed to travelers, but offer add-on experiences that appeal to certain customer segments related to the travel space. For instance, many business travelers develop a preference for boutique hotels which often have limited access to conference rooms. These travelers can reserve meeting and working spaces via startups such as Breather, without incurring the commitment required by the closest market alternative, co-working spaces. Meanwhile, Magic, a startup offering “personal assistants on demand” through a concierge app, could attract travelers staying in hotels without concierges.
Providing an innovative service or product to travelers isn’t enough to succeed in today’s competitive travel market, and will only get you halfway to where you need to be. Establishing the right business model is just as important — and with so many emerging options out there, the needs of both the company and the customer need to be closely considered to make the right choice.
Check out the Amadeus for Startups infographic below to learn more about the most popular business models.