Pricing Strategy of Eurostar - Essay Example

Running Head: Eurostar - Pricing Strategy Eurostar - Pricing Strategy [Institute's Eurostar ticket prices vary according to time and class of travel. Explain and illustrate this price policy. Discuss what would happen if there was a uniform price policy Since November 1994, Eurostar has been providing short-haul travel services in Europe, transforming the way of traveling and making it possible for a large proportion of population to avail their service. It has established connecting services and has links with over hundred destinations in different parts of Europe. (About Eurostar, 2009) Eurostar offers a range of ticket types for its customers, ranging from Standard to Leisure Select to Business Premier. Eurostar's pricing strategy is based on the concept of differentiated pricing as they charge differently depending on the class and time of travel. (Travel classes, 2009) It is important to understand the concepts of one-price policy and variable-price policy. One-price policy is when the same price is fixed for the product by the seller, irrespective of who the consumer is. Variable-price policy is one whereby, seller sells the same product at varying prices to different customers. Large-scale manufacturers and big retailer usually follow one-price policy. On the other hand, small-scale manufacturers and small retailers follow variable-price policy. Variable-price policy is said to be prejudicial about the credibility and prestige of the customers. (R. D. Agarwal, p. 410, 1983) The concept of contribution pricing is relevant here. Contribution pricing is the setting of prices based on the principle that as long as an item is sold for more than the variable cost, it is making a contribution towards the overheads of the business. This notion may lead a firm towards one of two approaches to pricing; price discrimination and loss leaders. In case of Eurostar, price discrimination is relevant. Price discrimination occurs when different prices are charged to different people for what is essentially the same product. This is done in order to maximize revenue by charging more to those that can afford, and are willing to pay more. Price discrimination is a response to the recognition that different types of people may have different price elasticities of demand for a product. For instance, people under 16 years of age get high-price entrance to cinemas and football grounds in many parts of the world. This is because the owners know that higher prices will cut their demand substantially. In this case, as in all considerations of price discrimination, it is essential that there should be the minimum of crossover between market segments. In other words, if many adults could get in for half-price, the point of the discrimination would be lost. It is important to remember that price discrimination is when a firm sells the 'same product or service' at varying process to different customers. This also applies to off-peak and on-peak telephone calls or train fares. Perfect price discrimination occurs when all the consumers are charged a different price, whereby the entire consumer surplus has been taken over by the business. For an understanding of the concept of consumer surplus, it is important to understand that a consumer good will be valued more highly by some consumers than by others. Yet they all pay the same price for it when uniform pricing policy is being applied. Some consumers would be willing to pay a price higher than the actual market price. The term consumer surplus refers to the value of the extra satisfaction which these customers get from the item, over and above what they have had to pay for it. The consumer surplus is shown on a supply and demand diagram by the triangle enclosed by the demand curve and the price line. The demand curve shows how consumers value the product and all those who are prepared to pay at a higher price get some extra satisfaction. Source: Tutor2u For price discriminatory pricing, it is important that there be barriers for prevention of market seepage, which is switching of consumers to one supplier from another. Hence, the market is not in perfect competition. There should also be differences in the price elasticities of demand. Elasticity determines the price sensitivity and willingness to pay at a given price. It is also important that the segmentation costs of market be not prohibitive. This can be done through internet as in the case of Eurostar. Generally, price discrimination is practiced in cinemas, travel industry, pharmaceuticals, car rentals, and rail and airline companies. Airlines charge more for urgent booking and travel industry increases the prices during school vacations. Car rentals are costly during weekdays and different prices are charged for same drugs in different parts of the world. (tutor2u, 2009) The diagram below illustrates what happens when a firm uses price discrimination. The market price, where demand and supply intersect is at Price 4 and Quantity 4. The consumer surplus is the triangular area enclosed between the price line, demand curve and the y-axis. In order to capture this consumer surplus, firms charge different prices, i.e. P1, P2 and P3. By selling at price which exceeds the marginal costs, the firms make profits. Source: Tutor2u In today's world, travel trends have changed dynamically. People now travel farther and comparatively more so during the peak hours. Due to these reasons, Euro star has modified its pricing policy accordingly. As peak period's rider ship grows, the operating costs of the company also increase. This is when companies tend to follow differentiated pricing. The sensitivity of the fare structure to changed and new travel patterns and sky-rocketing costs is the reason for differentiate pricing in this particular case. In order to avoid financial deterioration, Eurostar has opted for this policy. From an economic point of view, the concepts of equity and efficiency are described in terms of the 'ability to pay' and the 'benefits received'. Fare structures will be efficient when customers are contributing to the costs of the services that they are availing. This is in-line with the benefits they get from availing the service. Marginal costs of their trips are reflective of this. Equitable fares would be those that are determined considering the riders' income capacities. The concept of equity is reflective of the fact that transit companies provide alternatives based on the customers' mobility and financial disadvantages. Therefore, the 'ability to pay' criterion is suggestive of the effects of redistribution in the fare structures and that it is not beneficial for those who are not so dependent on these services and are rich. Protection against inequities is possible when there are no such redistribution effects. When far pricing is being done, there are no transfer effects and all the patrons are assessed on the real costs of their trip. Hence, we can draw that equitable and efficient pricing structures do not involve redistribution and charge the true marginal cost. Transit costs are substantially high during the peak hours. Additional numbers of employees are required for the accommodation of loads at the rush hour. If Eurostar follows a uniform pricing policy, it would be benefiting the rich class only and many customers who are financially not so strong will be potentially deprived of this service. The lower income group might have to forego using Eurostar because it is out of their financial reach. These foregone trips might mean empty off-peak and revenue losses for Eurostar. Uniform pricing policy is very likely to broaden the gap between the revenues and the transit costs as Eurostar relies heavily on the peak hour trips that also place greater service requirements on it. Eurostar's time-dependent pricing help in slightly increasing the clientele on the whole. In this way, off-peak ridership may rise. Generally, in such a scenario, companies follow this policy because the revenues generated from this of-peak ridership more than compensate the losses incurred from peak hour patronage. This is reflective of high fare elasticity of off-peak trips. Eurostar probably anticipates high revenue yields even though time-based fares are apparently less revenue-productive. Differentiated pricing is promising for the business as far as uniform pricing problems are concerned. When fare structure is highly differentiated, a company can generate extra revenues, which is very significant, particularly in times of tight-fisted budgets and soaring costs. Ridership effects are also minimal as losses in some areas are more than counter-balanced by the other areas. Therefore, it is easy to conclude that differentiated pricing approach is preferable for the business. Any business chooses its pricing strategy depending on its objectives and goals. If they aim for 'fare comprehension' or 'customers' convenience', it would be logical for them to opt for uniform pricing policy. On the other hand, if it wants to reduce deficits, it would rather opt for differentiated pricing. When the aim is to achieve distributional equity and economic efficiency, the company would rather opt for finely graduated pricing strategies. This is when a balance can be achieved between appreciable revenues and modest ridership losses. Equity gains and efficiency are also achieved. Differentiated pricing allows Eurostar to enhance its financial performance and lower the inequities. It also enables Eurostart to retain its patronage levels. References About Eurostar, 2009, < http://www.eurostar.com/UK/x_euro/leisure/about_eurostar.jsp>, Accessed on October21, 2009 Travel classes, 2009, < http://www.eurostar.com/UK/x_euro/leisure/travel_information/on_board/travel_classes.jsp>, Accessed on October 21, 2009 R. D. Agarwal, Organization and Management, 1983, < http://books.google.com.pk/booksid=CkqeSb7JH0IC&pg=PA410&lpg=PA410&dq=uniform+pricing+policy+%2B+disadvantages&source=bl&ots=J99SJ5KfDG&sig=IdfxFH_I5ecekVqUgXoYcfj5d7s&hl=en&ei=lXPeSvqUFJfq6AOY2JmoDg&sa=X&oi=book_result&ct=result&resnum=7&ved=0CDQQ6AEwBg#v=snippet&q=one-price&f=false>, Accessed on October 21, 2009 Tutor2u, consumer surplus diagram, 2009, < http://tutor2u.net/economics/content/topics/marketsinaction/consumer_surplus.htm>, Accessed on October 21, 2009 Tutor2u, price discrimination presentation, 2009, http://www.tutor2u.net/economics/presentations/price_discrimination/player.html, Accessed on October 21, 2009 Read More