In the late 1970s, a global movement began to deregulate the airline industry. At that time, airline load factors were averaging under 60% and the industry was losing billions. Today their load factor is approaching 90% and US carriers made almost $30 billion in 2015.
Unlike manufacturers that have invested heavily in plant and equipment, the marginal cost to manufacture one more widget is minimal where they can manufacture virtually an unlimited supply. Airlines have a time sensitive fixed inventory, seats. Once the plane leaves, that inventory is lost for good and can’t be sold. Capital investment on new airline routes can be cost prohibitive for many routes. So how did the airlines turn a money losing industry to a profitable business? They became very efficient at learning how to price seats.
On a recent trip, I had three employees all fly to Destination D. One employee started at Origin A then flew to B then C to get to D. Another started at origin B to C to D. The third employee started at C and flew directly to D. The person who had the most stops paid the least for his ticket and the person with the shortest distance with no stops paid the most. The airline industry has learned how to convert what would appear to be simple logic on the shortest distance pays the least into a set of complex scientific algorithms to determine how to generate the maximum revenue per seat mile, regardless of distance flown.
The software industry started after the airline industry, and they have learned how to take a single product and charge two dramatically different prices for the same product. As two strangers sitting next to each other on an airplane rarely pay the same price, it is the same in the software industry.
Although the algorithms of software pricing aren’t as complex as the airline industry, consumers inevitably see the same pricing swings for the same product. Ironically, I’ve never met anyone who hasn’t worked in the airline industry claim to understand the complexities and nuances of airline yield management despite purchasing hundreds of tickets throughout their lifetime.
Having worked in the airline industry for seven years and in the software industry for almost 25 years, software licensing is more complex than airline yield management. Yet, every software buyer or negotiator feels that they understand the complexities of software more than they understand airline pricing. The reality is software licensing is exponentially more complicated and sophisticated than airline yield management.
The airline industry has learned how to take an apparently simple product like a single seat between two cities, and complicate the price resulting in many software applications all offering to find the best available discount. Yet, as we don’t have any difficulty acknowledging our limited understanding of pricing behind airline tickets and will refer to third party applications to ensure we get the best possible price, we feel we can negotiate a software ELA without support. That is why the software industry is making as much as it is. Sell a simple product, confuse the buyer as to the pricing of its product. They’ve taken it one step further than the airline industry by making customers feel that they can buy software without professional assistance.
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