Rajesh C. Jampala
Pricing is one of the most important elements of the marketing mix and has come to take center-stage in marketing warfare. It is a complex task and there is a science and art to pricing. To fix a successful price one has to depend on the scientific approach by carefully using metrics as well as intuition and judgment. This chapter provides an exposure to the various approaches to pricing that marketers usually rely upon.
Emerging business models highlight the value framework, which deals with marketing as a process of creating, communicating, and delivering value to the customers. As businesses face cut-throat competition, the emphasis should be on capturing and delivering value of the offering rather than on price. One simple way to understand the difference between price and value is through the statement: what a customer pays is price and what customer gets is value. By increasing the benefits and by reducing the cost to the customer, marketers can enhance the value of the offering. Hence, pricing should be based on value; capturing value is its purpose.
Virtually all companies want to set prices near the value that their products and services deliver to the customers. This requires a strategic shift from cost-or-competition-based pricing with low price-realization capabilities to customer value-based price setting with high price-realization capabilities.
A selected price should also be consistent with other variables in the marketing mix. It should fit with the realities of the marketplace and also achieve the financial goals such as desirable profit. From the firm’s point of view, an efficient price is a price that is very close to the maximum that customers are prepared to pay. In economic terms, it is a price that transfers most of the consumer surplus to the producer.
In the words of famous investor Warren Buffet “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have a prayer session before raising the price by 10%, then you’ve got a terrible business.” This highlights the importance of pricing power because of its implications for the earning power of the company.
Pricing is becoming very important as various external and internal factors impact business decisions dynamically. Internal factors include corporate and marketing objectives of the firm, the stage of the product in its life cycle, cost of manufacturing and distribution, the image sought by the firm through pricing, the characteristics of the product, etc. Coming to external factors normally firms have no control over them; however they have to adapt to them. They include government regulations, market characteristic, consumer preferences, and competitors’ pricing strategies.
The following are some of the objectives firms want to achieve through pricing; profit maximization in the short term, profit optimization in the long term, a minimum return on investment, penetration into markets, new market entry, and maintaining parity with competitors.
Companies follow different approaches to price setting but broadly they fall into three categories such as cost-based pricing, competition-pricing, or customer value-based pricing. Let us examine them briefly.
Kotler1 describes cost-based pricing as “setting prices based on the costs for producing, distributing, and selling the product plus a fair rate of return for its effort and risk.” The commonly used methods under this category are mark-up pricing or cost plus pricing, absorption cost pricing, target rate of return pricing, and marginal cost pricing. Mark-up pricing involves fixing a price for a product by adding (marking up) a margin to its cost price. The mark-up will be different for different markets and products. Absorption cost pricing or full cost pricing is based on the estimated unit cost of the product at the normal level of production and sales. Variable and fixed costs of production, selling, and administration costs are all added to get the total cost. By adding the required margin to the total cost, marketers arrive at a selling price. While the mark-up in absorption cost pricing is added arbitrarily, in target rate of return pricing, a rational approach is used to arrive at the mark-up. The aim of marginal cost pricing is to maximize contribution toward fixed costs. It aims at realizing all the direct variable costs of the product, plus part of the fixed costs.
Most of the cost-based methods of pricing evolve from the break-even concept. The break-even point is the level where the total costs exactly equal the total revenues; that is, the costs and revenues break even at a particular level. In other words, profit will be zero at the break-even point. At a level where revenues exceed costs, profits come in; at other levels, losses are incurred. The number of units that are required to be produced and sold to reach a no-profit situation at a given price is known as the break-even point.
While cost-based pricing strategies are operationally good, they do have their limitations. Since profits increase along with costs, firms may lose any incentive to reduce costs. This inefficiency of the firm is charged to customers. Also, firms may lose by setting prices purely based on costs, and not considering market conditions, perceived value by the customer, or other considerations.
In a competitive market situation, companies opt for competition-based or competitive parity pricing. They follow three alternative courses — premium pricing, discount pricing, or parity pricing. A given competitor’s price will serve as the benchmark in these options. Premium pricing involves pricing above the competitor’s price. Discount pricing is pricing below such level. Parity pricing or going rate pricing is matching the price of competitors.
The virtue of this approach is simple and an easy way to make a pricing decision without much effort. It also seems to be safe as setting a price close to the competitor’s and adjusting to it, a firm does not lose market share on account of pricing. But this method also has its limitations. Managers tend to become passive, not fulfilling their pricing responsibilities. If competitors also follow the same strategy, the prices for the entire industry will be out of sync with market realities.
If firms in the same industry want to increase their market share, prices can slip into a downward spiral as was the case in the Indian telecom industry. When Tata Docomo started setting tariff very low with their plan “one second one paise” all other firms were forced to follow the line resulting in decline of average revenue per user (ARPU) and erosion in earnings. Firms should understand the nuances of price wars and should learn how to compete intelligently on the price front as they do on every other aspect of their business.
Price war sweetens movie-going experience in Mangalore
If attendance is going down in colleges on Wednesdays, blame it on the multiplexes. The cinegoers never had it so good when a price war started after the opening of the second multiplex in Mangalore City, almost six years after the first one started functioning. While the first multiplex charged premium rates for shows on weekends, including Sunday, the rates are now Rs. 80 for the show before 12 noon and Rs. 110 to Rs. 130 thereafter. Earlier, for new releases, the rates were three-tiered starting from Rs. 100 for the front row (special) to Rs. 180 for the gold class. Now there’s a uniform rate of Rs. 80 on Wednesdays for all shows, including 3D movies.
Multiplex operators say that competition has forced them to cut prices and they are trying to woo viewers with the best pricing. “We are absolutely not making any money with our pricing. But the encouraging trend is that the occupancy level has gone up by 25%. Where we make good is from food items priced in excess of 50%–60% more than the market rates.”
Venkatesh Kumar, engineering student, Manipal, says: The Wednesday deal is the best we have had. We, students, are always short of money. In case we cannot make it to the morning show, we can see the later show at the special price. To save money students don’t even mind bunking classes.
Source: Times of Indiaa
Value pricing is based on the assumption that the objective of pricing is not to recover costs, but to realize the value of the product perceived by the customers. The merit of this method is the belief that the customer is interested not in the cost of the product but only in the value. When marketers deliver value in excess of costs, their profits will be ensured along with customer loyalty.
According to Rajagopal,2 customer value-based pricing is increasingly recognized by academics and practitioners as the most effective approach to pricing for companies wishing to achieve increased profitability and sustained success. However, despite the apparent support for the implementation of value-based pricing, the practical reality is that more than 80% of companies continue to price their products and services primarily on the basis of costs and/or competitive price levels. The main obstacles to the implementation of value-based pricing strategies are deficits in value assessment, deficits in value communication, lack of effective market segmentation, deficits in sales force management, and lack of support from senior management.
• Demand/market-based pricing. The common methods under this category are “what the market can bear” pricing, skimming pricing, and penetration pricing. In these methods, the basic assumption is that sales and profits are independent of costs, but are dependent on the demand. In “what the market can bear” pricing, the highest price that customers are willing to pay for the product is market dependent. This method brings in high profits in the short term. Skimming and penetration pricing methods are used for new products. Skimming methods exploit the market initially with high prices and high profits, and later settles down for a lower price. This is especially suitable for luxury or specialty products. Penetration pricing seeks to achieve greater market penetration through relatively low prices. This method is suitable for non-luxury products purchased by ordinary consumers. It ensures high sales volume at reasonable prices.
Price elasticity of demand has to be taken into consideration in all demand-based pricing methods. It is the relative sensitivity of demand for a product to changes in its price. If an increase or decrease in the price of the product results in a significant decrease or increase in its sales, the product is said to be price elastic. If price change does not significantly affect the sales volume, the product is price inelastic.
• Product-line pricing. In the case of companies that market different product lines, they need not fix optimal price for each product, independent of other products in the line. Prices of different products can be fixed in such a way that the product line as a whole is priced optimally which will result in optimal sales of all products put together and optimum total profits from the line. This method is also known as the product-line promotion method of pricing.
• Tender pricing. On many occasions, business organizations are required to go for price fixation on the basis of tenders. This option is more applicable to business markets where institutional customers normally call for competitive bidding through sealed tenders or quotations. These buyers look for the best possible (lowest) price consistent with minimum assured quality specifications. The difficulty here is of fixing a price that takes care of all costs and profits and is low enough to get the business.
• Affordability-based pricing. For products which belong to the essential commodities group and meet the basic needs of all segments of consumers, affordability-based pricing method is useful. In this case, pricing is done in such a way that all segments of the total market can afford to buy and consume the products as per their needs. Here price is set independent of the costs involved and in some cases governmental price subsidy is involved. Such items are also distributed through the public distribution system. This method is also known as social welfare pricing.
• Differentiated pricing. In this method, different prices are charged for the same product by the company in different market segments or zones. Price differentiation is also occasionally based on customer class rather than geographic marketing territory. Another variation which is commonly used is where differentiated pricing is offered on the basis of purchase volume. Price is less for bulk quantity buyers and higher for small volume buyers.
• Target pricing. In this method the selling price of a product is decided with the aim that it should fetch a particular rate of return on investment for a specific volume of production. Normally the target pricing model is used most often by public utilities like electric and gas companies and companies whose capital investment is high.
• Psychological pricing. Consumer buying decisions are influenced mostly by psychological factors. Many marketers take this into account and try to avoid the psychological barrier in respect to price. Instead of fixing the price at Rs. 300 or Rs. 500, they peg it at Rs. 295 or Rs. 499. Bata Shoe Company is the best example for this pricing method. This approach is also followed by many marketers of consumer durables like TV, PC, washing machine, etc.
Can different pricing strategies work in different markets? Entering China and India
Close to the unveiling of the Nano, the cheapest car in the world, another Indian Company, HCL Infosystems, has announced a $350 laptop. With the lowest-priced laptop currently retailing for over $700 (excluding the “One Laptop Per Child” laptop effort), let’s examine how HCL arrived at this price for India and how other companies might learn from it.
Ironically, the announcement of the $350 laptop coincided with Apple’s showcasing of the Air—the thinnest laptop—priced at $1800 US. Obviously, the two products cater to entirely different market segments. However, there is a lesson here for well-known brands wanting to make a foray into large markets such as India and China.
Whenever a global brand enters an emerging economy, there is a tendency to adopt a “skimming strategy.” Even at its simplest, the approach is to multiply the home country price by the exchange rate, add the customs duties and taxes, and arrive at the price. This is counter-productive, given the mobility of people and the propensity to ask a colleague or a friend to pick up one of these products and avoid the customs duty and tax component. Almost every week, Indian consumers receive offers of well-known brands from the United States and the United Kingdom for a price less than half of what they would have to pay if they were to buy the same product through an authorized intermediary in India.
The consequences for both producers and customers are hard to miss. Producers are missing out on huge opportunities, and customers cannot have access to service when they need it, unless they are willing to pay a heavy price. Thus, we have a classic lose-lose situation.
The software industry is currently suffering in India and China in large part as a result of misguided pricing strategies. Software piracy in India is estimated at over 70% — compared to about 25% in the United States. One can take some comfort in the fact that piracy has come down from over 90% a few years back to 70% now, but this is a staggering figure and one that casts a shadow on the credibility of the Indian customer.
Various measures have been suggested to thwart the pirates — educating people, coming down heavily on users of pirated software and so on. But these address the symptom, not the disease. The software industry is just now realizing that price-sensitive markets such as India need to be approached differently than more mature markets. The use of Purchasing Power Parity as a determinant of prices can be a useful option. As an example, if software that is priced at $100 US is priced at INR 800 (just over $20 US) in India, with specific safeguards to prevent reverse exports, piracy could be curbed to a great extent.
Such an arrangement has worked successfully in other intellectual fields. Typically, a management text book in the United States can cost $120 or more. Converted into Indian Rupees at the exchange rate, the price would be beyond the reach of most students and even libraries. The concept of low-cost editions meant for sale only in South Asia has done wonders to the adoption of the latest and the best books by institutions of higher education. Low-priced editions are priced in the range of 300–400 INR (about $10). Going by this argument, Apple’s latest offering should be available in India for Rupees 15,000 (roughly $350 US) and about 25,000 (roughly $630 US) even if one were to add local taxes. If this were to happen, how many customers would HCL’s offering have? Probably not too many.
Successful tapping of high-volume markets requires that marketers adopt innovative pricing strategies to suit local conditions, as opposed to a global pricing strategy that many marketers seem to be adopting today.
What do you think? Have you seen other successful examples of different pricing strategies for different markets?
Source: Business Weekb
Pricing procedure is the actual activity or process of deciding the price using one or many combinations of methods. The usual steps involved are as below:
• The target customer segments have to be identified first and their profiles prepared.
• The company has to decide the market position and price image for its brand.
• Price elasticity of demand of the product is to be assessed along with the extent of price sensitivity of the target customer groups.
• The product’s life cycle is to be considered.
• Competitor’s prices are to be analyzed.
• The pricing method to be adopted is to be chosen considering all the above factors.
• The final price is determined.
• The price, pricing method, and the pricing procedure are to be reviewed periodically.
Sony’s Unilateral Pricing
When a company’s sales aren’t quite as high as originally projected, there are a few routes that the company can take to boost profits. Unilateral price fixing is one such route. While this type of price fixing isn’t unheard of, it’s risky nonetheless. Recently, Sony announced that the company would be fixing prices across the board, and it looks like Sony has already put this plan into action.
What is unilateral price fixing? Essentially, a company (in this case, Sony) let’s all retailers know that products manufactured by the company can’t be priced lower than a set minimum. According to reports from The Verge, pricing on Sony products on Amazon and other large retail sites has jumped largely overnight. In short, the days of getting a Sony TV or other product on the cheap through an online retail site might be gone.
Additional Notes from Sony
Not only is Sony cracking down on pricing, but the company has also set out to make sure that retail employees know all about the Sony products that they sell. Apple has had a large amount of success with its Apple stores, thanks to employees who know Apple products inside and out (this might change with the upcoming Apple displays at Target retail outlets, but that remains to be seen). Sony will be training all retail employees in order to make sure that they know how Sony devices operate.
Further, Sony has told retailers that all Sony devices should be operating smoothly and be entirely functional when shoppers visit any store selling Sony devices. Perhaps these assurances will help consumers swallow the higher prices for Sony devices, but, then again, Sony has to start putting out better products if the company truly hopes for a sales gain. It’s no secret that last year was tough for Sony and this year might prove to be even tougher if retailers aren’t able to unload higher-priced Sony devices.
A Very Risky Move
Most consumers love the idea of a bargain. Shopping on the Internet provides consumers with the ability to snag better deals on all kinds of devices. That’s why sites like Amazon do so well. Well, Sony’s new unilateral price fixing strategy might put an end to the deals that consumer can find online, and this might not be the best thing for the company to do. Unless Sony is putting out a device that consumers just can’t live without, people are likely to be frustrated with the fact that Sony devices can no longer be purchased at a bargain price.
There’s no doubt that Sony devices will go on sale during certain seasons, but even sale item prices will be fixed — meaning, you won’t find one Sony sale that’s better than another. Unless Sony’s new pricing strategy is received well by consumers, the company is making a very risky move — one that might hurt sales more than help.
Q1. What do you think about Sony’s new price fixing idea?
Q2. Is this one notion that’s bound to hurt Sony’s brand?
Source: http://sony-unilateral-pricing.articles.r-tt.com; http://traveltips.usatoday.com/airline-prices-change-much-15706.html
CASE: PRICING STRATEGY
Indian Airlines
Rajesh C. Jampala
India’s aviation sector began liberalizing in 2003. Since then it has witnessed tremendous growth. According to India Brand Equity Foundation (IBEF), India is currently the 9th largest aviation market handling 121 million domestic and 41 million international passengers. Today, more than 85 international airlines have access to India and 5 Indian carriers connect with over 40 countries. India’s airport infrastructure is undergoing modernization with induction of the most advanced facilities. It includes setting up of new greenfield airports and installation of security, surveillance, and air traffic navigation systems. However, the airline industry is also facing many challenges.
With the second phase of growth in Indian aviation expected to come from Tier-II and Tier-III cities, almost all domestic airlines are looking to connect with these smaller cities for expansion. The regional market is currently under-penetrated and demand is growing at nearly double the pace at the metros amid escalating disposable incomes and economic growth. Airports Authority of India (AAI) expects air traffic from non-metro airports to rise to 45% of total air traffic in India in the next few years, up from 30% at present.
To support this regional growth, greenfield airport development is occurring at Tier-II and Tier-III cities. There are currently 14 approved greenfield airport projects in India, 13 of which are in regional centers. The only exception is the much-delayed Navi Mumbai Airport. The Government has also launched a plan to develop an indigenous-manufactured aircraft to support continued expansion in this arena.
In the past, private airlines had generally bypassed smaller towns to focus on the more profitable metro routes. However, with metro routes now well served, airlines are looking for new market opportunities and with the concessions available to airlines operating smaller aircraft, regional operations are now looking more attractive. AAI has mooted various proposals to increase connectivity across the nation’s smaller cities. The proposals include a graded-concessional tariff structure for airlines developing networks covering Tier-II cities, involving potential concessions of up to 75% for the first year of operations to these cities. Other proposals include waiving of night parking charges at Tier-II airports.
India’s Directorate General of Civil Aviation (DGCA) in March 2011 also eased the requirements for regional airlines. Carriers looking to commence regional air services are now required to reach a fleet size of three aircraft within two years instead of the previously stipulated one year. By the end of five years, they are required to operate five aircraft, an easing from the previous two-year deadline. The previous strict regulations on fleet size and other operational conditions have prevented the growth of regional airlines in India so far. Though a comprehensive policy to promote regional airlines was devised in 2007, not a single regional-focused airline operated in the country. A number of carriers, such as Star Aviation, received no-objection certificates for regional operations, without actually commencing these planned services.
Regional airlines are granted a license to operate primarily within one of four zones: North, East, South, and West. They cannot operate between two metro cities, except in the South region. Indian Airlines took the lead in entering the regional market in 1996 with the launch of Alliance Air. Its objective was to serve the regional air travel market. However, the B737s deployed were not well suited to the demand profile at regional airports.
Regional air connectivity remains very low in India. However, regional aviation is an area of growth, with considerable opportunity existing in connecting Tier-II and Tier-III cities with smaller aircraft. At a time of squeezed profits, regional operations are also increasingly attractive as a new untapped market provides a way to feed traffic into metropolitan cities. Meanwhile, the Government is investing in the development of non-metro airports to support the growth of this segment.
Airlines are an important part of the Indian economy. Apart from contributing considerably to the national exchequer and providing significant employment opportunities, a whole host of industry sectors — from tourism to hospitality — also benefit from the well-being and growth of the airline industry. The high operating-cost environment in India, coupled with the competitive nature of the airline business, has resulted in a continued strain on the health of the airlines in India.
Industry sources indicate that Air India has debts of more than $8 billion and Kingfisher has debts of more than $2 billion. All of them are losing money with the possible exception of IndiGo. Aviation turbine fuel (ATF) costs have soared as oil import costs everywhere skyrocketed. But on average, fuel costs are around 60% higher in India than in other countries. This is because of a mosaic of state taxes, some as high as 35%, making India one of the costliest places in the world to run a fleet of planes.
With an Indian rupee dropping to its lowest level in history, recently hitting 68 against the U.S. dollar, the pain is set to increase for Indian airlines. When you add the costs associated with catering, maintenance and landing fees, as well as low yields per seat, the airlines are really struggling.
India’s aviation industry leaders lay much of the blame at the feet of Air India which they accuse of unfairly competing with India’s newer airlines, slashing fares while at the same time enjoying the luxury of government subsidies. The airline has been unprofitable since 1997 and has received government bailouts of $625 million and is requesting more before the end of the fiscal year that ends in March 2012, according to company figures.
Following the dismantling of the “Administered Price Mechanism” (APM) effective April 2001, the prices of aviation turbine fuel (ATF) in India are based on the “International Import Parity Prices,” and directly linked to the benchmark of Platt’s publication of FOB Arabian Gulf ATF prices (AG); and do not relate to the actual cost of producing ATF in India.
ATF prices for domestic operations also include freight charges from Gulf to India; customs duty of 10% ad valorem (which adds up to an effective rate of approximately 20% inclusive of the countervailing duties (CVDs) & “cess” (is a form of tax imposed such as irrigation-cess, educational-cess, and the like)); domestic transportation and other charges; excise duty of 8.24% (including cess); sales tax (levied by the State Governments) averaging across the country at 25% as add-ons to the Arabian Gulf (AG) prices, besides the Oil Companies’ marketing margins; and throughput charges paid to the Airports Authority.
Foreign airlines can now pick up 49% stake in India’s domestic carriers, a step that is expected to give a boost to the cash-strapped aviation industry. The Cabinet Committee on Economic Affairs approved the proposal, which would pave the way for much-needed equity infusion into India’s airlines passing through acute turbulence as most of them are in dire need of funds for operations.
Allowing foreign airlines to pick up stakes in Indian carriers has been a long-pending demand of the aviation sector. Most of the Indian carriers are suffering losses because of high taxes on jet fuel, rising airport fees, costlier loans, poor infrastructure and cut-throat competition. Though Kingfisher had been pushing for FDI to boost the sector, Jet Airways and IndiGo have expressed reservations saying allowing global players in would lead to cartelization and takeovers of Indian carriers. The opening of the sector to foreign airlines may, however, bring good news for passengers who would benefit from more competitive fares, better product and services, and better international connectivity.
Concerned over flight seats going empty, the Indian government has asked airlines why they could not charge low spot-fares on the travel date to fill up about 30% of their seats that go vacant. Observing that highly exorbitant rates were being charged closer to the travel dates, Civil Aviation Ministry officials, made it clear that the government had no intention to decide airfares which have to be determined by the market.
They pointed out that the average passenger load factor for all Indian airlines hovered around 70–75%, implying that the remaining seats on a flight go empty. The officials, at a meeting of the Civil Aviation Economic Advisory Committee in New Delhi, suggested that the airlines could charge last-minute spot-fares at low fares to fill up their seats.
Maintaining that the government would not determine airfares, they said the Ministry and aviation regulator Directorate General of Civil Aviation (DGCA) would continue to closely monitor the movement of airfares, particularly to check both predatory and exorbitant pricing. The meeting came in the backdrop of a Supreme Court directive to DGCA to examine the tariff structure of Indian airlines in view of the wide range of base prices of air tickets.
The court had expressed concern over the massive differential between the lowest and highest airfares on the price bands. DGCA sources said efforts would be made to compress these wide price bands, ranging from 12 to as high as 22 set by different airlines on each sector, and make airfares more transparent so that the traveling public was clear about the cost of travel.
While there was a need to make the price bands more transparent, there should also be some rationale behind the huge differences between the highest and the lowest airfares in these price bands, they said. Justifying the high price bands, airline industry sources said they have to take into account, apart from the actual costs of air travel, the variable costs on inputs like jet fuel, whose prices continue to rise, as well as staff costs.
While most of the major carriers have 13–14 fare levels on most sectors, no-frill carrier GoAir has as many as 22 one-way basic fares ranging from Rs. 3770 to Rs. 24,200 for travel between Delhi and Mumbai in December 2012. Its no-frill competitor IndiGo’s tickets ranged from the lowest of Rs. 3770 to the highest level of Rs. 16,449, while SpiceJet’s was Rs. 3770 and Rs. 15,489.
On the same sector in the same month, Air India charged the lowest fare of Rs. 3920 and the highest of Rs. 17,308, while the fares of Jet Airways ranged from Rs. 3970 to Rs. 23,950. Similarly, Jet Konnect fares on Delhi–Mumbai sector were between Rs. 3970 and Rs. 24,100. Over and above these basic fares, a passenger also has to pay passenger service fee, airport charges and fuel surcharges.
It can be quite frustrating when trying to buy plane tickets to find low fares only to see them vanish overnight. Ticket prices can fluctuate by hundreds of dollars from day to day, and predicting the change can seem virtually impossible, leaving many consumers to simply buy whatever ticket they need at the time.
Brendan McGuiganc of Demand Media thinks there is logic to these changes, although so many factors go into determining the shifts; consequently it can be difficult to predict when the lowest fares will be available.
Airlines look at two main types of consumers: early purchasers and last-minute purchasers. An early purchaser generally can wait for some time to find the best deal on a flight, but often will simply buy a relatively affordable ticket, since predicting the lowest price point can be difficult. Last-minute purchasers often pay full price for a ticket and do not have the flexibility of waiting for cheaper deals. As a result, prices will tend to spike radically within a few days of a flight, since airlines know some consumers have no other option.
Airlines are always trying to maximize their profit based on the forecast demand for a destination. As long as their predictions do not change, prices typically will not change until immediately before the travel date. Occasionally, however, a destination’s popularity will increase dramatically for some reason such as a write-up in a national magazine, a big event, or some other factors. When this happens, airlines might predict increased demand and raise their prices accordingly.
The major factor in determining airline prices is whether an airline believes it will be able to fill all of their seats. If there is a long lag in sales, resulting in a flight still being well below occupancy as the departure approaches, prices might undergo a major dip. Conversely, if there is a spike in sales for some reason, and the flight begins to fill up, prices will increase.
Economic realities, airline mergers and global events can sometimes cause aircraft to be removed from service. When this happens, overall capacity for a route is reduced, leaving fewer seats to be filled. Airlines will thus suspect that flights will be fuller and will increase ticket prices.
With so many variables, it is very difficult to predict when tickets for a particular flight will be at their lowest price, but analyzing historical data can yield some trends. A number of services, such as the online site Yapta, show historical price data for a specific flight date, displaying what the ticket prices were on each day leading up to the flight. This allows consumers to make more informed decisions as to when they should purchase their tickets.
The price war is back in Indian skies, much to the delight of air travelers. SpiceJet slashed fares by more than 50% on travel from February to April 2013. The airline said that it was offering “10 lakh seats for an all-inclusive fare of Rs. 2,013” for any domestic flight between February 1 and April 30.
Hours after Chennai-headquartered SpiceJet came up with the special fare offer; the Delhi-based IndiGo Airlines discreetly lowered its airfares. While IndiGo did not comment on the issue, the airline website was offering a return fare on the Delhi–Mumbai route at about Rs. 4500. Meanwhile the Government spoke to the industry and asked it not to go for a price war. Sources indicated that IndiGo, GoAir, and Jet have agreed not to engage in a price war.
February to April is traditionally a lean season for travel. Typically, a Mumbai–Delhi airfare when booked three weeks before the date of travel is about Rs. 4700. The fare goes above Rs. 8500 if booked less than a week before the travel date.
However, the low price that triggered a rush of bookings in the SpiceJet website resulted in a server crash. Many people could not access the site due to heavy online traffic. Meanwhile, SpiceJet said that the server problems were due to the heavy online traffic and they were working to rectify the issue. Industry watchers termed this promotion “irrational pricing.” Countering this allegation, (full name) Mills, the CEO, said, “I do not see how you can call this irrational pricing. We are selling seats which would have otherwise gone empty. We hope this limited time promotion will see people take up discretionary travel and possibly some people who would have, otherwise, travelled by train shift to air. We do not benefit or lose.”
1. Which do you support: state controlled or market determined price structure in the airline industry? What would be the best suitable pricing mechanism that aviation sector should follow?
2. What would be the most suitable pricing mechanism for the aviation sector to follow?
3. Discuss the importance of information management in the airline industry. How does information technology help in improving efficiency in the aviation sector?
4. Suggest how airlines can go for market development considering the present situation.
5. Do you believe slashing of prices as a special offer by Spicejet recently is irrational in nature?
• Some of the public utilities in India are following state administered price mechanism. However, progressively they are moving toward market-based pricing mechanism.
• Explanation about the advantages and disadvantages of both state controlled and market-driven pricing mechanisms to be provided.
• Airlines normally follow dynamic pricing models which depends on several factors such as route, time of travel, peak hours, seat sharing understanding with other airlines, international connectivity, seasonal variations, and importance of destination.
• The pricing in the airline industry is dependent on the pricing objectives of the respective firms within the industry. Low-cost carriers normally follow an economy pricing model as they position themselves as no frills all value carriers.
• Some of the other airlines may adopt premium pricing strategies to create niche for themselves in terms of brand image with differentiated customer service.
• The answer should cover the selection of suitable pricing mechanism and requires substantiation.
The civil aviation sector is extensively using Information Technology (IT) as any other industry. How the computer and telecommunication technologies are used to manage information needs of the airline industry to be covered in the explanation.
• Data management assuming greater significance in the airline industry. To maintain data about customers, fleet, employees, service points, airports, etc. one should have a comprehensive data administration mechanism.
• IT will help in better understanding about demand-supply gaps, customer profiling, service delivery, fleet optimization, document management, process optimization, information sharing, new trends, customer feedback, routing, scheduling, etc.
• The explanation should also cover about the role of IT in flight operations briefly.
Market development strategies are to be deployed by firms based on various factors. Stage of industry life cycle, government regulation, connectivity, infrastructure, fleet strength, financial viability, operational capability are some of the factors which may impact the market development.
• As firms are following different ways to survive in Indian airline sector there is no one standard straight jacket model for pricing. Spicejet like many other carriers in India is still struggling to find its own base. The slashing of prices for 1,000,000 seats for around Rs. 2000 is an offer having its own implications.
• It may trigger price wars, attract regulators attention, may encourage new passengers, and force customers to adjust their travel dates to avail offer.
• It will be a great learning lesson whatever may be the impact of the decision. Thus, it provides the Spicejet valuable insights about market response. In that sense it is not irrational.
• However, strong explanation is needed to say it is irrational decision.
a. http://timesofindia.indiatimes.com/city/mangaluru/Price-war-sweeten-movie-going-experience/articleshow/18779117.cms
b. http://www.bloomberg.com/bw/stories/2008-01-22/a-pricing-strategy-for-the-indian-marketbusinessweek-business-news-stock-market-and-financial-advice
c. http://traveltips.usatoday.com/airline-prices-change-much-15706.html