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 another 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:
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