Tuesday, July 20, 2010

The role of channels

On the tnooz web site there is a whole lot of discussion about the pricing of travel through channels and what the responsibilities of the various players are. Specifically the link poses the question, "Should airlines be forced to disclose equal pricing and fees in all channels?"

Now pricing is an interesting and really important part of any business/business strategy, and thence business architecture. The fundamental question of "How do we price?" affects how we market, how we sell, to some extent how we produce. So for example in a business with only a direct sales model, the systems (in the broadest sense) that deal with sales don't have to handle other channels. But businesses with multiple channels have to make the role of the channel explicit in all systems that are concerned with sales.

If the channels don't control the pricing, what use are they? Surely the idea (really simplistically) is for the channels to provide the conduits for products from suppliers to consumers and thus to set the price for the product via that conduit.


To be successful as a channel, you presumably have to price items higher than what you get them for. Not all items - you can do loss leading if you wish. A pretty simple market place really.

The airlines are responsible for setting the cost to the channel, not the price to the consumer - except where the airline is the channel. The role of the airline acting as its own channel is different from the airline operating its own business. The travel business is a bit different from other retail businesses where, typically the manufacturer doesn't operate its own channel. Although when we see store within a store concepts (like the cases where a makeup provider sets up shop inside a retailer) the makeup provider is acting as its own channel. The store in which the make-up provider is operating is simply another supplier and associated costs must be factored in.

Purchasing is different again. In a world of competition the channels should be clamoring for the consumers' business. Through all manner of inducements. As a consumer I can choose which channel I purchase through depending on a number of factors. Just as I can choose whether to shop at Harrods (Cool, easily identifiable status symbol bag) or Walmart (Look, I am a thrifty person in the new economy).

So in the travel business we really do have to separate out the responsibilities of the various parties in the transaction. There are more parties than just the airline, channel, and purchaser involved. Hotels, rental car companies, restaurants, golf clubs, credit cards,.... All have parts to play. Each may have multiple parts - the part as the supplier, the part as the purchaser, the part as a channel. If we don't separate the parts, we can create interesting opacity. In some industries that is very desirable. However in a business oriented towards consumers, the consumers want transparency.

The job of the channel is to provide that transparency.

So any player in the relationship that wants to be in the role of the channel (whether it be a traditional travel agent, an airline, a hotel, an online travel agent,...) has to act like a proper channel and take the proper channel responsibilities. Simply put:

* Acquire "inventory" at the proper time/price

* Package acquired "inventory" into offers

* Offer the acquired "inventory" under terms that are attractive

* Accept offers to purchase such inventory
 
*  Fulfill those offers
 
It gets a bit tricky because there are actually multiple channels involved in the end. I can purchase the basic travel through, say, Travelocity or Orbitz. But when I eventually travel, I may end up buying something directly from the airline itself (say a meal). Actually, at that point the airline is acting as a channel for a meal preparation company, so it can choose how to set its prices.
 
In order really to understand a complex, network business, we architects really need to think through the roles in the ecosystem, and pay attention to, and manage business architectures that support the pricing models that matter.
 
When there is turbulence, aim for flexibility. When there is stability, aim for simplicity.