Uploaded by Pratham Ranjan

4.5 Pricing Business

Case Study #1
An excellent method to enter a new market effectively as an airline can be seen in the methods
adopted by the company known as Virgin Airlines. One of these methods is known as
penetration pricing; companies that undertake this method enter the market with a low price per
product, this in turn entices customers to use said companies products and hence, they
increase their brand image and such. However, in the short term; this will result in low profit
margins, in the long term this will build customer loyalty by increasing brand image and
reputation. This method is clearly used by virgin airlines because as stated; they started at a low
price and from ended up becoming the 2nd largest airline in Australia. Furthermore, a smaller
scale method to break into the market would be price discrimination. For smaller scale flights
providing different costs for adults and children will benefit them in terms of their reputation,
because it can be advertised as a family friendly brand.
For a pre-established brand like Virgin Airlines, it will be highly beneficial to adopt the strategy
known as price skimming. This will be good for the company as they have already employed the
use of penetration pricing. There company is now the second largest airline in Australia, so
perhaps instead of increasing prices, they should start reducing ticket fairs so that customers
loyal to the #1 brand are enticed to switch brands. Furthermore, if they adopt this method, they
can find the optimum economies of scale, because their brand is already a budget airlines
(separate costs for food on planes..etc). If they adopt this method they would attract a lot more
customers, and sell more tickets rather than selling less more expensive tickets. Perhaps, they
can switch back to penetration pricing and increase their price after a certain amount of time.
However, this could adversely affect them because of the risk, they would reduce profit margins,
and if people don’t switch over from other brands, they could lose a lot of money, however, to
decrease this risk they could perhaps conduct research on how loyal the other customers are to
the other brands, and they can decide from there. Secondly, adopting price price discrimination
would be highly effective because they would be able to attract different market segments. For
smaller scale flights providing different costs for adults and children will benefit them in terms of
their reputation, because it can be advertised as a family friendly brand. Furthermore, they can
discriminate the prices according to business seasons. A lot of people travel during holidays so
raising prices for this segment of customers could increase profits. This segment would be
known as tourists, however, this segment will only be seasonal, and will not provide consistent
revenue. Furthermore, they can use customer loyalty to discriminate between the segments;
and provide a cheaper rate for their loyal customers; enticing people to use airline more for the
customer loyalty programs.
Case Study #2
Price discrimination is a pricing strategy used by companies to increase profits, they do this by
segregating the market into segments and pricing their products differently according to these
different segments, this helps them to increase their revenue because of the targeted pricing.
In this example the company has effectively used price discrimination to separate their different
markets, they have a different price for adults and children. This is effective because students
have a lower disposable income than adults for example; however if the tickets for children is
lower than that off the adults then they have a larger incentive to use said company; this will
help develop customer loyalty because the students will feel more recognized and hence, will
increase their brand image over time. Furthermore, for the people who come to theme park
often there is a annual pass, and this annual pass has unlimited entry, for the price of
approximately 3/4 normal tickets, which further entices customers to use this theme park. This
also increases customer loyalty.
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