Business Case study economic
Price discrimination is when certain people pay different prices for a product. It occurs when businesses charge a different price for the same good or service. Easyjet airlines charge a cheaper flight for all those who book early. I.e. A seat normally sold for 20 could be sold for 140 for late bookers. This idea has only just recently become popular over the past 5 years many people tried to book last minute for cheaper flights. Some airlines still charge cheaper fares to ‘fill in seats’ and would charge a very small mark up in the seat to make minimum levels of profit last minute.
ii) Full cost pricing is when a business may attempt to take indirect cost that can be attributable to a particular product on deciding the price. Easyjet uses different prices for different destinations as some flights across different destinations may have a different price towards others. For example, Easyjet charges 20- 140 for a flight from Luton to Nice which is 700 miles, but a flight from Luton to Istanbul is 80- 200, which is 1600 miles. This may be because of an increased intake of fuel and time of air attendants and pilots.
(b) One pricing method Easyjet may use is costplus pricing. This involves setting a price by calculating the average cost of flights and adding a mark up for profit. For example for each flight Easyjet makes it receives ï¿½6136 and makes a profit of 545 if it adds a 5% mark up on each ticket it would receive an extra ï¿½306.80 per flight and on average if Easyjets flights are 48.70 it will only mean each flight on average is now 1.13. This is an example of how costplus pricing works. It is a quick and simple way of pricing. It also ensures the revenue is accounted for and ensures profit capability.
Easyjet may also use contribution pricing. This method takes into account that different products within a company might need to be priced using a different criteria. Easyjet might take into account indirect cost and charges more for the flights that are more successful. E.g. a flight from London to Paris is more popular than a flight from London to Budapest. If successful flights are charged at a higher price they will contribute to more of the overheads and profit whereas less successful flights will contribute less. This is a good method of costing because demand factors are being taken into account. On table 19.5 once there has been enough sold to cover the cost the rest is put straight towards profit.
(c)There are many reasons of how Herb Kelleher’s 4 rules might influence the price strategy of low cost airlines. The first rule allows a business more flexibility and the ease of stress and complications of using more then one type of plan go to disarray. When using one airline only a certain amount of tools will be needed, staff will not need to be of expertise of different types of plane only the Boeing 737 in Easyjets case. Staff and stewardesses will be familiar with all the safety procedures and pilots will be transferable with each plane.
The second rule is cost based orientated, it allows profits to be a key focus area for good accounts and it allows the business to have a good understanding of products ability. It also allows for business to use the internet to cut out the ‘middle man’ and demands better from suppliers. This also gives the staff a motivation in the aim and objective of Easyjet.
The third rule is cost based orientated as Herb Kelleher wanted to keep the airline on the ground for as least time as possible. He believed the more time the plane is on the ground the more money that is wasted. His rule on 8 flights a day will mean 30 minutes on ground on each end. This allows all safety to be checked and is reasonable for companies like Easyjet and Ryannair to get to grips with as these are airlines with primary objectives as profit.
The fourth rule is more market orientated in that it is trying to look out for customer relations with the airline in the bid of re use of service. Kelleher believed that if customers are happy and believe they are being treated with loyalty they will use the airline again which is what Easyjet and other budget airlines want as their primary objectives are to fill up seats whereas other companies have objectives to charge premium prices for outstanding services. The fourth rule is more of a price tactic as in it is a way of using a promotional too usually over a short periods of time.