THE CRUISE LINE INDUSTRY By The Strategic Pricers: Davis Austin Ty Bostain Nick Baccile Daniel Weisen GAME PLAN Introduction Industry Overview Demographics Pricing Strategies Recommendations Introduction • Why did we choose the cruise line industry? – Personal Interests and experience in the industry. – Lots of current news events. – Unique and interesting pricing strategies. – Few number of large players. Cruise Industry Overview • Projected $36.2 billion dollar industry for 2013 • Projected 20.9 million passengers for 2013 • Highly concentrated market • High barriers of entry mostly due to the sunk costs it takes to build a cruise ship Barriers to Entry • Cost of ships – RCL just built $1.4 B Oasis of the Seas • Access to ports • Large crew – willing to travel away from families • Government Regulations/Traveling Internationally Recent News Stories • Concordia operated by Costa Cruises a subsidiary of Carnival wrecked of the cost of Italy in January of 2012. • 30 people killed Actual Industry Growth Estimated Growth of Passengers by Continent 16,000,000 14,000,000 12,000,000 10,000,000 $ 8,000,000 North America 6,000,000 Europe 4,000,000 Other 2,000,000 2013 2014 2015 Date 2016 2017 Cruise Passengers by Continent 2.9% 6.5% 2.9% 0.2% North America Europe 27.0% 60.5% Asia South America Australia Middle East/Africa Cruise Industry Functions • • • • Transportation Rooming accommodations Dining Guest Entertainment – Shows – Teen/Children activities – Casino (not always but common) • On-shore activities (Excursions) Market Share by Number of Passengers 7% 3% 11% Carnival 48% 8% Royal Caribbean Norwegain 23% MSC Cruises Disney Other HHI = 48^2+23^2+8^2+7^2+3^2=2,955 Carnival Cruise Lines • • • • • Founded- 1972 Headquarters- Doral, Florida World’s largest cruise operator 2012 Full Year Net Income- $1.3 billion Own 11 different cruise line brands including Holland America & Princess Cruises • 100 cruise ships in fleet – 86,800 employees Stock Chart Royal Caribbean • • • • • Founded- 1997 Headquarters- Miami, Florida World’s second largest cruise operator 2012 Full Year Net Income- $432 million Royal Caribbean owns five cruise lines including Celebrity Cruises • 41 cruise ships – 60,300 employees Stock Chart Star Cruises • • • • Founded- 1993 Headquarters- Hong Kong, Asia Full year Net Income 2011- $185 million Dominates market share in the Asia-Pacific destinations • 18 ships – 18,000 employees MSC Cruises • • • • Founded- 1987 Headquarters- Geneva, Switzerland 12 ships – 12,000 employees Big presence in Mediterranean cruise market Disney Cruises • • • • Founded- 1996 Headquarters- Celebration, FL & London, U.K. 4 boats (Dream, Fantasy, Magic, Wonder) Subsidiary of The Walt Disney Company Perceptual Map Luxurious Inexpensive Expensive Family Age Demographic of Passengers 26% 7% 18% 20's 30's 40's 22% 26% 50's 60+ Income Demographics 1% 7% 9% $39-50k 10% $50-60k 16% 39% $60-75k $75-100k 19% $100-200k $200-300k $300+ Race Demographic 3% 6% White Black Other 91% Result North American 40 + years old White Income $100-$200k Pricing Strategies • Second Degree Price Discrimination • Third Degree Price Discrimination • Temporal Pricing – Seasonality – Overbooking • Max Capacity Willingness to Pay • The Cruise Experience – Tourist’s perception of cruising as safe, social, serviceoriented, and customer friendly. – Some travelers perceive cruising as expensive, claustrophobic, elitist, seasickness-inducing, and reserved for older couples only. • Branding – Cruise brands take great care when it comes to their reputations because it implies a certain standard. – Branding is essential for garnering new business, encouraging repeat customers, creating brand recognition and defining the company’s approach to operations and marketing. The Product • Cruises have three different economic features: – Inelasticity - a cruise ship is “perishable” because it can’t be stored – Heterogeneity - the product consists of a variety of components that make the cruise experience different for each customer – Complementary - the cruise is not one single experience but a host of elements that combine to form the cruise experience Second Degree Price Discrimination • Two-tier pricing system • First purchase-ticket to get on the boat • Additional purchases during the vacation – Cruise Line Excursions – Alcoholic/Soft Drink Beverage Packages • Classic Beverage Package (beers, wines and soft drinks) $45 • Premium Beverage Package (addition of premium alcoholic cocktails) $55 On-Board Sales • Top 3 most profitable areas – Casino & Bar – 53% – Shore Excursions – 19% – Spa – 10% Ticket and On-Board Revenue Ticket $1,311 $417 Onboard Spending Casino & Bar $222 Shore Excursions $81 Spa $41 All other onboard spending $73 Total Spending $1,728 Third Degree Price Discrimination • Allows consumers to self-select into their desired price range – Different classes of boats within a cruise liner • Larger/Newer the ship, more “luxurious” – Different classes of room choice • Interior, Ocean View, Balcony, Suite Room Class Price Discrimination Ticket Price per Night Sale Date - April 14 $600 $512 Price per Night $ $500 $400 Inside $289 $300 Ocean Balcony $200 $162 $126 $100 $0 Allure of the Seas Suite Temporal Pricing • Seasonality – Pricing jumps in the summer months and Christmas week – Vacation time – Travel during warmer summer months and colder winter months Seasonality Inter-Temporal Pricing • As cruise approaches, consumer demand becomes increasingly more inelastic, allowing cruise lines to raise prices. • However, immediately before the departure date, cruise lines attempt to maximize capacity, leading to last-minute price decreases. • Brochures are carefully designed to encourage advance booking, through such strategies as making off-season prices look dramatically lower than their on-season counterparts and promising discounts for booking early. Inter-Temporal Pricing Between Ships Ticket Price per Night Sail Date - April 14 400 Price per Night $ 350 300 250 Dream 200 Fantasy 150 Magic Mariner of the Seas 100 Oasis of the Seas 50 0 2-Apr 3-Apr 4-Apr 5-Apr Date 6-Apr 7-Apr 8-Apr Inter-Temporal Pricing Between Rooms Ticket Price per Night Sale Date - April 28 Ticket Price per Night Sale Date - April 14 $700 $600 $626 $512 $600 $500 $500 $400 Inside $320 Ocean Balcony $300 $240 $254 Suite Price per Night $ Price per Night $ $400 Inside $289 $300 Balcony Suite $200 $162 $200 $126 $100 $100 $0 $0 Allure of the Seas Ocean Allure of the Seas Overbooking Strategy • Customers can’t leave once on the vacation • The more crowded the ship, the seemingly more enjoyable the environment/ambiance • Repeat customers • No business travelers • Long booking periods with large amounts of third party bookers (expedia, travel agents) Recommendations • Considerations? – Atmosphere? – Amenities? – Brand? – Room Class? – Season? • When to book your next cruise? – Take the risk! Closer to departure date The End • Questions?