Group-buying sites for airlines – lessons from Lufthansa Brazil’s Groupon experiment

When I recently delivered a keynote speech on how airlines can drive ROI from social media, the topic of selling airline tickets on sites like GroupOn and LivingSocial has was raised in the Q&A that followed. And the responses have been mixed on this – some airlines don’t mind trying it, while others are concerned with the huge marketing investment required. And these are very real concerns – that’s why we’re hosting a webinar on how airlines can leverage group-deals and social shopping (you can still sign up).

For now, let’s discuss the merits and pitfalls of such offers, with Lufthansa Brazil as a case study.

A word of caution about group-buying for airlines…

  1. Marketing costs. Typically, to sell on a site like GroupOn, a minimum of 50% discount it required. Additionally, the site itself takes a commission that typically goes up to 50% of the sale price. That means for a $1000 ticket, the airline would only get $250. And $750 is the cost of marketing, which is steep by most standards.
  2. Revenue management troubles. Group-selling sites require a specific quantity to be sold at a certain price. Many of the revenue management systems airlines use aren’t well suited to this – a new fare category might need to be created and the push-back from RM to Marketing can often be strong.
  3. Fulfillment in doubt – A lot of sales that happen on group-selling sites are impulse sales – that means people buy the tickets based on price, whether or not they intend to travel. And this results in a higher than usual no-show numbers for airlines, since the opportunity cost is low. And because the travel period is spread over a few months, it’s difficult to predict when passengers might not turn up.

Despite these hurdles, a number of airlines have tried selling on group-selling sites, and one of the more successful efforts has been by Lufthansa Brazil, whose case study I’d like to share here.

How Lufthansa Brazil sold successfully on GroupOn…

Lufthansa’s very first group buying site action, worldwide was led by the Brazil office. In Brazil, Lufthansa is the only “international” airline to have done an action with a group buying site. And here’s a screenshot of their offer.

1. Discount on a voucher, not on a ticket..

In essence, Lufthansa (LH) Brazil issued several discount vouchers (value: BRL 170 – roughly US$105) to be used by customers directly on Lufthansa.com at the time of the ticket purchase. The voucher would only be used on Lufthansa.com and each customer received a “discount code” on the voucher which would be inserted in a special field on the website and the ticket price recalculated.

This way, Lufthansa solved the Revenue Management problem – there was no special fare category required. A simple discount code could be used at the time of payment. This kept things very simple.

2. Voucher validity and other conditions

Additionally, the discount could be applied to any LH operated flight originating in Brazil. Tickets had to be purchased by 31 May, 2011 and the the flight must be taken by August 31st.

Lufthansa ensured that the discount vouchers would be used by a certain date, and the flight taken in possibly lean times, as opposed to peak holiday periods in December.

3. Cost of Marketing

Interestingly, instead of keeping only 50% of sale price, Groupon sold the vouchers for BRL 20 and they kept all the revenues. That means while Lufthansa didn’t give out or receive any cash and only issued the vouchers, the cost of marketing was essentially BRL170 per voucher.

While that might sound counter intuitive, since it’s cost a lot, it turns out that Lufthansa Brazil chose to do the action with Groupon much more for the brand exposure than to use it as a sales tool.

What results did Lufthansa Brazil achieve with GroupOn?

1. Brand Awareness – exposure to over 10 million Brazilians!

The Lufthansa Brazil offer was Groupon’s “offer of the day” and the “national offer”, meaning that in addition to being displayed on Groupon’s homepage, the brand was sent out to roughly 10 million subscribers via e-newsletter and made available via Twitter to approximately 55,000 followers. And that’s pretty significant for a regional office of an airline.

2. Double the number of expected vouchers sold

GroupOn sold 423 coupons on this deal, as opposed to Lufthansa’s initial target of 200. While that’s good, it also amounts to over US$300,000 in revenue when these 423 coupons are redeemed – assuming an average Economy class fare out of Brazil at US$700.

Now, the cost of sale for Lufthansa worked out to about 15% – given each ticket would be discounted by $105. That’s actually quite a good ROI for driving the revenue we’ve discussed, and the exposure also can’t be ignored. Moreover, the website hits from Brazil were almost 8X the normal traffic, on the day of the deal and a few days following it.

And this was achieved without any outbound communication from Lufthansa Brazil, other than tweets from their local @Lufthansa_BR account and retweet the messages from Groupon.

Due to these reasons, the action was deemed a huge success and Lufthansa is likely to repeat the deal in other countries.

So, when should airlines use group-buying sites?

  1. When driving brand awareness is a need – like during the launch of a new route. For example, I’d expect Singapore Airlines to run a GroupOn deal in Brazil to bolster their service to Sao Paolo, but not so much in Singapore.
  2. When they have a lot of ancillary items to cross-sell and up-sell, where they can still make the numbers despite heavy discounting on the ticket price. This would work very well for budget carriers, which sell a number of ancillary services, in addition to the seat itself.
  3. Little or no cash outflow involved – Like Lufthansa Brazil did, it’s important to keep costs as low as possible

What are your thoughts about group-buying sites? Do you have stories to share? Let’s hear them in the comments and over on Twitter. And for a more in-depth analysis and lots of case studies to learn from, be sure to attend our webinar on this topic.

Special thanks to Marcelo De Biasi, Rodrigo Erthal and Flavio Amancio from Lufthansa Brazil for sharing their lessons from this campaign.

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