Assignment 2. 5 Supply, Demand and Easyjet The Marketing Mix is the name given to the elements which are the key components which a marketing plan should be based upon. Typically in Marketing literature there are four elements: price, place, promotion and product, however this is now sometimes expanded to incorporate another 3 elements: people, physical evidence and process. Pricing policy is clearly very important to the marketing mix and is affected by variables such as firm’s objectives, the nature of competition, demand and firm costs.
Firms operate pricing in different ways according to their marketing strategy and the industry in which they participate; an example of pricing methods will be shown and evaluated further in the essay in reference to EasyJet and British Airways flight pricing. As mentioned in the introduction, the role of pricing within the marketing mix is a varied one depending on what the firm is trying to achieve and the conditions within which it is operating. This contradicts what economic theory tells us: that pricing should be based upon setting prices at the point where Marginal Revenue = Marginal Cost in order to maximise firm profits.
However, in real life “few firms explicitly follow the economic model in developing pricing policy” (Doyle 1997), because firms may be trying to achieve other things than maximising profits such as gaining market share, in which case they could be using the loss-leader tactic (where prices are set at a point which actually makes a loss for the firm which they are able to recoup through customer retention once prices increase or through the sale of full price complementary products).
Doyle suggests that there are several common type of pricing policies such as: market-penetration pricing, market-skimming pricing, cost-orientated pricing, perceived-value pricing and price discrimination. Market penetration pricing refers to the concept discussed above such as loss-leading where short-term profits are sacrificed in order to increase/gain a market share(Baker, 1997). Market-skimming is the practice of setting high prices with subsequent high profits and expect to only sell a small volume of products; this can only work if there is no risk of nother company being able to completely take-over your potential sales with a cheaper price. Cost-orientated pricing is where prices are set as a basic mark-up on top of product costs, which can be known in business as ‘cost-plus’ pricing or target pricing when it refers to a certain level of return on investment. Perceived value pricing is based on the perception that buyers have of your firm’s product relative to other products in the market. Finally, the concept of price discrimination is one of particular importance to this essay given its data content of airline pricing.
Perfect price discrimination is an economic concept where a firm seeks to charge every buyer exactly the price that they are prepared to pay. In reality, this is very difficult to achieve as how can a firm possibly be expected to know the exact value which each individual buyer places on their product? The only way that perfect price discrimination can be achieved is through an auction format, but this is debatable. General Price discrimination is a common strategy, however, and this involves firms charging different groups of customer’s different prices for the same product.
In order for it to work, Doyle states that “customers in the highest-price segment must not be allowed to buy from the lower-price segment” e. g. there must be boundaries in place to ensure that a high-price customer cannot sneakily purchase at the low price. Within the airline industry this is achieved by differentiating between time of bookings – long-term advance bookings are the lower price customers and bookings made close to the time of departure are high price customers. The prices for Easyjet flights from London Luton to Madrid are as follows below: • Tomorrow = 124. 98 • One week = 183. 98 One month= 82. 98 • 3 months = 70. 98 The key difference between these prices is that the more in advance you book, typically the cheaper it is. This indicates that Easyjet flight pricing is based upon demand (and supply but supply is fixed) for the flights, as the further in advance you book, the cheaper it is and on the flipside if you discover you have to go to Madrid tomorrow the price is much higher as your need/demand is more urgent and thus you will pay a higher price. However the obvious exception here is that it is nearly ? 60 cheaper to fly out tomorrow than it is to fly out in a week’s time.
I would suggest that this appears to be an anomaly, as the obvious pattern of decreasing prices with advance bookings coupled with the knowledge that Easyjet formulates it’s prices based on supply and demand for each particular day and thus rewarding advance bookings (lower demand for far away dates) with cheaper prices suggests that this is an unusual occurrence. One reason for the flights in a week being higher than a flight tomorrow to Madrid may be because the flight in a week is the weekend before Valentine’s Day so may be booked up more than we would typically expect from a normal day a week in advance.
This peak and higher price for a potentially popular weekend represents that Easyjet is employing an almost near perfect pricing scheme in an economic sense e. g. each consumer is being charged a slightly different price relative to the level of demand for the flights (there is a fixed supply due to the fixed number of seats available). [pic] The graph above represents graphically the information from the Easyjet website which is displayed in bullet points above.
As is clear to see – apart from the peak at 1 week – there is a downwards trend over time which I would expect to be even more obvious if we were to add in more data for weeks between 1 week and 1 month and between the periods of 1 month and 3 months. The decrease in price does appear to be flattening between month and 3 months which I would advocate is because once we’re getting to booking a few months in advance the prices are getting near to Easy jet’s lowest price point so there isn’t much room to decrease- thus I would anticipate the bottom price for the journey being around the ? 0 mark (as at 3 months in advance it is ? 70. 98). Turning now to the British Airways data, below are the prices for a BA flight from London Heathrow to Madrid at the same time of day and date as the Easyjet prices above: • Tomorrow = 316 • One week = 217 • One month= 130 • 3 months =126 Again, we can see both in the data and in the graph below that the same price discrimination strategy is being pursued by British Airways as by Easyjet: the advance flights represent the cheap-price customer segment and the close flights (next day to next few weeks) represent the high-price segment.
In both companies the price discrimination policy works as they are able to enforce the different price/customer brackets because of time of purchase of travel tickets being the discriminating factor. Therefore similarities between the two airlines are in the nature of their pricing strategies – price differentiation – and therefore the decreasing trend in air fares if booked in advance. The differences between the two companies from the data collected appear to be two different things: firstly that British Airways has a higher base price than Easyjet (circa ? 20 to circa ? 70) and that British Airways has not taken into account high-demand special occasions such as Valentine’s Day weekend in its pricing in comparison to EasyJet, as shown by the lack of spike in price at the one week point on the British Airways graph. The higher base price of almost ? 50 more commanded by British Airways (BA) is probably due to both higher costs than EasyJet (who follow a low-cost strategy and thus deliver less service than BA on its flights e. g. ess cabin crew, no complimentary food/beverages, no free baggage check-in) and also the Brand-name of British Airways commanding a higher price. To conclude, pricing is a vital part of the marketing mix and overall strategy of all firms. Within the airline industry, the tendency is for price discrimination as due to the nature of travel and the booking of flights it is possible to discriminate between different bands of customers booking the same service based on their needs (economy, business class, first class) and their time of booking (advance, the day before etc. . From evaluation of comparable data taken from both EasyJet and British Airways it is clear to see that both are operating a policy of price-discrimination based on advance booking of fares. Bibliography Baker, J (1997) The Marketing Book, The Bath Press, Bath, UK. BritishAirways. com [on-line] http://www. britishairways. com/travel/home/public/en_gb Doyle, P (1997) Managing the Marketing Mix, reproduced in The Marketing Book, The Bath Press, Bath, UK Easyjet corporate website [on-line] http://www. easyjet. com/EN