How Trip Subscriptions make money. Part 1: increasing booking revenue

Trip subscriptions are like chocolate cakes, delicious and with multiple revenue-generating layers. Ok, maybe cake layers don’t generate revenue, but you get the idea. In this series of articles, we’ll look at the 3 layers of subscription revenue generation and give you a taste of what is inside each one.

We’ll focus specifically on Trip Subscriptions because they are the subset of travel subscriptions that is getting the most attention at the moment and is more likely to disrupt the industry.?

To get started, we will look at how the revenue generated by selling trips as part of a subscription compares to selling them in the traditional, transactional, way. Later, in the next two articles, we’ll dive deeper into additional revenue streams, and the decoupling of revenue from operations.

Ticket revenue

Traditional ticket sales and subscriptions have the same goal: maximize revenue, but they approach it differently. In traditional sales, the focus is on maximizing the value of individual transactions. In subscriptions, the focus is on maximizing the revenue extracted over a customer’s lifetime, also known as lifetime value. Both approaches also aim to increase revenue by:?

1. Stimulating demand for the service?
2. Increasing the perceived value of the product???
3. Capturing a larger share of the existing market?

Because of this shared focus, the two models often complement each other, allowing the company to target different segments with different sales strategies. Subscriptions, for example, have a commitment element that is unlikely to appeal to all of the company’s audience, but that can be very profitable for some key segments of the market.

This is because, while subscription prices do not change, they represent a passive, recurring, and automated, purchase of trips and come with a series of side effects that have a profound impact on profitability. The most famous one is breakage.?

Breakage

Breakage is a subscription term that indicates the portion of trips that are purchased as part of the subscription but never used. To understand how it works, it’s useful to imagine the subscription as a series of cycles.?

Each cycle starts when the subscription fee is charged, and the user receives a “quota” or allowance of trips, that must be used before the next cycle starts. If the trip is not used by the time the next cycle starts, the company will keep the money, generating some “free” revenue.

The % of trips that are left unused is known as “breakage” and can vary from as little as 20% to as much as 45%, depending on the program setup and the goals that it has been designed for. This “free” revenue is good for the program’s profitability, but should be carefully balanced to retain subscribers.?

In the airline world, for example, our customers have seen healthy breakage rates that went as high as 35%-40% without causing a loss of subscribers. The same effect is also seen in other circumstances, such as when customers choose a more expensive plan that includes return trips, but end up only using one-way ones, or pay for last minute booking privileges and end up booking well in advance.??

Demand stimulation?

Understandably, most subscribers do not like the idea of wasting trips they have paid for, and this has some significant implications. One of them is that subscribers end up taking more trips than they otherwise would, creating new demand that only exists because of the subscription.

This new demand has, in some of our programs, accounted for 50% of the total trips taken with the subscription. It contributes to revenue in two ways: First, they effectively constitute new ticket sales and second, they create significant opportunities for ancillary sales.?

This stimulation of demand for ancillary products is relevant in industries like aviation, and is helped by the “second wallet effect” where users perceive the purchase of ancillaries as a separate expense and become more likely to add them to their trip. This happens because the initial purchase is passive, and therefore not mentally added to the cost of the trip in the redemption phase.?

Market share

To understand how subscriptions contribute to market share, we must first make a small disclaimer. There are generally two ways to increase market share, by making the pie bigger, and ensuring that new demand travels with you, or by capturing customers who otherwise would have travelled with a direct competitor or another mean of transport.

Subscriptions help with both, but to make things easier to understand, we choose to refer to the first kind as “demand stimulation” and the second as “market share gains”. The difference between them is intention, as in the first case the user was not planning to travel and decides to do so because they have a ticket available, and in the second the trip was planned.

The mechanics that drive the behavior are also identical, since in both cases the trip is taken with the company because there was a ticket that was passively purchased via the subscription. Travelling with any other company would mean paying twice for the same service, and is therefore never considered as an option.?

This means that subscribers will always travel with the company that they subscribe to. As a consequence, the company will increase the share of a user’s planned trips that it is able to capture.

Dilution & Displacement

A side effect of users having a ticket that is purchased at a fixed price is that sometimes they will end up paying less than they otherwise would have. This effect is known as “dilution” and is generally considered to be a positive for the consumer because it represents a tangible saving and, if managed well, can also be a positive for the company.?

The challenge is to manage dilution so that it does not affect the overall profitability of the program. This can be done by creating tiers within the program that are designed to appeal to different kinds of subscribers and use a wide catalog of business rules to define things like quotas, advance purchases, geographies etc.??

Similar measures are also effective against another feared, but relatively harmless, phenomenon known as “displacement”. Displacement that takes place when subscribers book the last seat/room available, blocking others higher-yielding last minute travelers from booking.?

The start of the story

In traditional travel sales, the story of revenue generation pretty much ends with ticket sales. For subscriptions, this is only the start of the story. In the next two articles, we’ll dive into other ways in which subscriptions drive profitability, and discover that ticket revenue is only a small part of the whole picture.?

We’ll start by using our second article to look at how changing the relationship between a travel company and its customers impacts profitability. Then, in our third and final article, we will discover how it’s possible to decouple growth from operational investments.

In the meantime, if you’d like to learn more about subscriptions in travel, do not hesitate to contact us at [email protected].