Improving revenue performance with third-degree price discrimination in the cruise industry

The leisure cruise industry has enjoyed high levels of growth for nearly five decades due in part to traveler interest in the cruise experience, but also to relatively lower pricing. Although revenue management of cruise fares is now standard practice, there are untapped opportunities to improve yields through data-driven market segmentation and third-degree price discrimination. This paper uses a finite mixture modeling approach to develop, empirically validate, and compare pricing models. By unveiling segments of travelers based on individual attributes, third-degree price discrimination can improve target marketing, the timing and appeal of price discounts, and the matching of variable demand with fixed, though differentiated, room supply. Empirical results from running thousands of simulations with pricing data from one of the world’s largest cruise lines show that the segmentation analysis using third-degree price discrimination can increase fare revenue more than four percent. The modeling approach used in this research extends the emerging literature on revenue management in the cruise industry and offers meaningful managerial implications for advanced pricing tactics and revenue management.