|
Pricing objectives for a carrier should reflect overall company objectives and reflect, in many ways, how the carrier will compete in its markets. Pricing objectives might also change for a particular service offering as it progresses through its product life cycle. Carriers with multiple markets might also establish various pricing objectives for these markets. For example, passenger airlines have separate pricing objectives for first-class and coach markets as well as for business and leisure travelers. This section will present several different pricing objectives that can be utilized in the transportation industry.
Especially in the case of ailing passenger airlines, survival-based pricing is aimed at increasing cash flow through the use of low prices. With this price level, the carrier attempts to increase volume and also encourage the higher utilization of equipment. Because an empty airline seat cannot be inventoried and is lost at takeoff, the marginal cost of filling that seat is small. Survival pricing then tries to take advantage of the marginal cost concept. Closely related is a unit volume pricing objective. This attempts to utilize a carrier's existing capacity to the fullest, so the price is set to encourage the market to fill that capacity. Multiple pickup allowances in the LTL industry, space-available prices in the freight airline industry, and multiple-car prices in the railroad industry are examples of this type of pricing objective.
Another price objective is called profit maximization, which can occur in the short run or in the long run. Carriers using this type of pricing usually are concerned with measures such as return on investment. This type of objective also can utilize what is called a skimming price. A skimming price is a high price intended to attract a market that is more concerned with quality, uniqueness, or status and is insensitive to price. For example, although a high-cost move, pricing for the maiden flight of the Concorde was certainly aimed at those who would be willing to pay a high price because of the limited number of seats. This strategy works if competition can be kept out of a market through high investment costs or firm loyalty.
Many times a skimming price strategy is followed by a penetration price strategy. This can lead to a sales-based pricing objective, which can be an effective strategy because: (1) a high price can be charged until competition starts to enter; (2) a higher price can help offset initial outlays for advertising and development; (3) a high price portrays a high-quality service; (4) if price changes need to be made, it is more favorable to reduce a price than to raise it; and (5) after market saturation is achieved, a lower price can appeal to a mass market with the objective of increasing sales. A sales-based pricing objective also follows the life cycle approach of using skimming during the introduction and growth stages and penetration during the maturation stage. The recent reintroduction of luxury passenger railroad service might be a good example of this type of strategy. In transportation, this strategy would more likely be successful with passenger movements because of the reliance it places on the pricevalue relationship.
A market share pricing objective can be used in an industry whose revenues are stagnant or declining. This objective tries to take market share from competitors through the use of lower prices. This strategy is used frequently in passenger airlines and the LTL motor carrier industries. In some cases, this strategy assumes that competitors' offerings are substitutes and that competitors are not in a position to match the lower prices; if the services were not substitutes, a lower price would not provide a competitive advantage. For example, an airline that lowers its fares for business travelers to gain more of this market but does not offer the same number of departures and arrivals as a competitor might not succeed at gaining any market share.
Finally, a social responsibility pricing objective forgoes sales and profits and puts the welfare of society and customers first. For example, after the tragic incident in New York City on September 11, 2001, many carriers offered to carry such items as food, clothing, building supplies, and medical supplies into the devastated area at greatly reduced prices or for free.
Because carriers in the various transportation industries service multiple markets, it is quite possible for them to employ several pricing objectives at one time. A carrier must be careful when setting an overall company pricing strategy that these multiple pricing objectives are complementary, not conflicting.
|
Quick Reply
