Cruise Lines: When do you Upgrade versus Discount?

Cruise Lines continue to encounter an all-too-familiar issue that many in the travel industry face: how do you sell inventory before it expires?  Once a voyage departs, empty cabins are expired inventory, which means no ticket, on-board, or excursion revenue.  Whether it’s due to the lack of a demand forecast or the need to accurately forecast, empty cabins represent a mismatch between the capacity of the voyage and incoming bookings.

Even when sufficient demand exists for the voyage, this demand may not match voyage category capacities.  When there is insufficient demand in higher cabin grades at the current price point and excess demand in the lower cabin grades, an option exists either to discount the higher cabin grades or allow upgrades from the lower cabin grades.  Making the revenue maximizing decision in this situation requires the advanced analytics of a Revenue Management System (RMS).

Remaining available demand and elasticity, both cornerstones in a RMS, are key inputs in deciding between upgrades and discounts.  Elasticity varies across and within voyages, such as between cabin grades, source markets, or over the different intervals in the booking window.  Each interval within the booking cycle has its own demand forecast and elasticity, based on historical performance, to help inform whether to upgrade or discount.

If the remaining demand is highly elastic, then it’s more responsive to a price change.  This means that a smaller discount is required to bring in more demand, resulting in higher Revenue per Occupied Lower Berth (ROLB) than from providing complimentary upgrades from the lower cabin grades.  A pricing hierarchy normally exists across cabin grades, and maintaining the hierarchy after discounting higher cabin grades may require a discount on other lower grades as well, resulting in an overall lower ROLB.  Additionally, Cruise Lines may also be required to provide reimbursements to the passengers who already booked at a higher rate.  Where demand is less sensitive to price changes, deeper discounts are essential to generate demand.  When the discount gets too large, keeping prices higher on all cabin grades and providing complimentary upgrades is a better option to create more revenue.

There are many unknowns that go into the equation of when to upgrade versus when to discount: is there enough demand to fill or oversell?  What discount is sufficient to stimulate demand to fill capacity?  Is it the right time to discount, or should the discounts be offered later in the booking cycle?  In addition to all the other decisions Cruise Lines make, they must ensure that they have the appropriate tools and processes in place to forecast demand and understand when to discount versus when to upgrade in order to maximize voyage revenue.

As you think about your cruise strategy, there are other methods to shift passengers, besides complimentary upgrades, which generate additional revenue: upselling and berthing.  In my next blog, I’ll focus on who the target upsell passengers are as well as when to berth to free up inventory.  If you want to learn more about this concept before the next blog, contact us.