Case Study Easyjet Staying Ahead In The Pricing Game

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easyJet: Staying Ahead in the Pricing Game

In July 2008 the budget airline easyJet announced that it would have to cut flights over the coming winter period because it was expecting its pre-tax profits to drop by 45 percent due to higher fuel expenses. The company explained that oil prices had increased over the past few months and added more than $365 million to its fuel bills for the year.

easyJet had been able to offset around half of the additional costs by increasing its revenue and by cutting costs. It was expecting to produce a profit of between $218 million and $237 million, rather than nearly $400 million as it had in the previous year.

easyJet had responded in the same way as competing budget airline Ryanair had by cutting back on its capacity at Stansted Airport in the U.K. and trimming back the winter schedule. The airlines had effectively reduced the number of flights during less profitable periods, thus enabling them to switch aircraft from poorly performing airports to more popular ones.

Across the industry, fuel costs account for 40 percent of total airline costs compared to just 13 percent five years ago. Energy costs have claimed a number of casualties in the airline industry over the past six months leading up to the summer of 2008. Some 25 carriers have folded and across the whole industry airlines have posted a loss of $2.3 billion.

easyJet, operating in the budget sector of the airline industry, has not exactly been immune to the losses, but it has been less affected. In fact, many passengers have switched from higher cost airlines to budget airlines such as easyJet. easyJet's total revenue increased by 32 percent up to July 2008 and saw passenger numbers rise by 16 percent. The growth has been seen in its strong roots, linking London to France, Italy, and Spain. As the bulk of its passengers purchase their tickets in euros, the business has also benefited from a stronger euro.

easyJet began its operations in November 1995. Initially it had just two leased Boeing 737s. Founder Stelios Haji-loannou set up the company to operate just two routes, from London to Glasgow and to Edinburgh. Five years later the company was floated on the London Stock Exchange.

easyJet has a very different marketing strategy than conventional airlines. It was said that its intention was to make airline flights as cheap as a pair of jeans and to effectively cut out middlemen so that passengers would deal directly with the airline. Bizarrely, the company chose orange as its primary color and both the aircraft and employees are instantly recognizable. The marketing has always been relatively straightforward, focusing on easyJet's Web site address or telephone booking number.

The business operates a reverse price system. When flights are first advertised the cost per seat is relatively low; as seats are sold the price begins to rise until it reaches a premium price on or just before the flight's departure. In this way the business encourages customers to book early, which provides easyJet with the advantage of having customers' cash early, as well as being able to gauge demand for every scheduled flight.

easyJet has been acquisitive during its short history. In 2002 it purchased its major rival, the London Stansted-based Go airline. In one move it doubled the number of aircraft it had and inherited three new bases in the U.K. A year earlier the airline had begun operating out of London Gatwick. In October 2007 the company purchased GB Airways, primarily to expand its operations at Gatwick.

In many ways easyJet has replicated the business model used by the American Airlines and Southwest Airlines. It focuses on the high level of aircraft utilization, quick turnaround times, low operating costs, and charging customers for extras that would normally be part of a ticket purchase with a conventional airline, such as food and drink, hold baggage, and priority boarding. It has a major competitive advantage over its closest and most implacable competitor, Ryanair. easyJet primarily flies into the main airports of the cities that it serves, obviously incurring additional costs as a result. Ryanair, to cut costs, flies into secondary airports, some of which are a considerable distance from the city. A prime example is the fact that Ryanair uses a Paris airport that is actually 75 miles from the city.

Working to a tight schedule in order to not only ensure customer satisfaction but also to make maximum use of the aircraft, easyJet closely monitors the punctuality of its flights. For the week ending August 31, 2008, 71 percent of all flights arrived within 15 minutes of their scheduled arrival times and 94 percent arrived within an hour. When easyJet began in 1995, it flew 30,000 customers. The company topped 1 million customers in 1997, and now 37.2 million passengers are flown each year (2007 figures).

easyJet's key concepts frame the airline's continual growth, which focus on keeping costs low by eliminating unnecessary costs and cutting back on frills that are common among conventional airlines. The company uses the Internet to reduce distribution costs by allowing customers to buy tickets online; 95 percent of tickets are sold in this way. A novel pricing model is used to ensure that each aircraft is as full as possible, thus maximizing utilization. Ticketless travel and online check-in cuts down on administrative costs because tickets do not have to be printed, distributed, processed, and reconciled. Essentially the company is paperless. easyJet also charges extra for food and drink. The elimination of free onboard catering reduces costs and turnaround time. In addition, easyJet uses a simple service model. There are also no reserved seats, and the company has tried to cut down its turnaround times to 30 minutes or less. This allows it to maximize the use of its aircraft and gain extra flights with the same aircraft over the same route.

Low-cost airlines such as easyJet and Ryanair have developed very rapidly in the European market over the past decade. This means that seat capacity has also risen and that nearly all of this is attributable to low-cost airlines. easyJet is deft at using advertising and public relations exercises to gain maximum coverage and improved customer awareness of its services. It has also become involved in wrangles with conventional carriers such as British Airways and uses this as a way of promoting its services and low fares.

easyJet uses a one-way ticketing policy. The airline has one price in the market for each flight. The lowest fare is offered to the market first and, as the seats are sold and the departure date nears, the price increases. The general policy is to sell a number of seats at the low price and then to increase the price to the next price point. This policy is continued until all seats are sold. It is actually relatively rare for prices to drop, but if sales are slower and the flight has not reached capacity then more seats are released at lower fare prices and the increases are slower. Since the airline only sells one-way tickets, customers need to purchase two one-way tickets for a round trip. This gives customers full flexibility to plan their trips as they please, rather than being restricted. This is particularly important for business travelers.

Changing tickets is somewhat problematic for the customer, as it will depend on the current market price of the ticket that he or she wishes to acquire. In effect, the traveler will have to pay the difference between the price he or she originally paid and the current market price for that seat.

Matters have not always been necessarily clear between easyGroup and its subsidiary easyJet. easyGroup has gradually extended the brand's involvement in different areas, and at times there have been difficulties in balancing the core of the brand against profits. It has been difficult sometimes for consumers to understand the difference between easyJet Hotels and easyHotels, for example. The easyGroup overall strategy is to build on its brand values.

easyGroup has diversified into car rental, shopping comparison, credit cards, toiletries, pizzas, cruises, cinemas, mobile phones, watches, van hire, and serviced offices. At times easyGroup has had to protect its brand image. In 2004 it had to go to the high court to stop a business calling itself Easy Drinks from using the brand name. In 2005 it moved to prevent a takeaway business in London from using the name Easy. As Stelios Haji-loannou explained, "The easyGroup has spent many years and tens of millions of pounds establishing a brand. We are duty bound to protect that brand and consumers who might be confused into thinking that a company using the easy name is part of the easyGroup when, in fact, it is not. Being blackmailed into paying money to people who think they can sell us what is already rightfully ours is not an option."

In 2006, the group moved against another group called E-Easy brokers. The Financial Services Authority described the business as a blatant and illegal attempt to deceive customers by implying that the business had some connection with the Easy Money Financial Services Group.

The group's easyCruise service, which targeted the 18-40 sage group, was launched in 2005. The new venture was undoubtedly successful and expanded considerably until 2008 when the initial vessel, Easy Cruise I, was put up for sale and a building program for seven new ships was shelved.

By mid-2008 easyJet was operating 152 aircraft on 383 routes. Although the company was floated on the stock exchange, Stelios remains the largest single shareholder and is still the chairman of the board of directors. Stelios was knighted in November 2006 for services to entrepreneurship. easyJet remains a dominant force in the low-cost aviation sector in Europe and has enjoyed continual growth since it was founded.

Questions for Discussion

1. How do easyJet's marketing objectives and its marketing mix strategy affect its pricing decisions?

2. Discuss factors that have affected the nature of costs in the airline industry since 2000. How have these factors affected pricing decisions?

3. How do the nature of the airline market and the demand for airline service affect easyJet's decisions?

4. What general pricing approaches have airlines pursued?

5. Do you think that easyJet will be able to continue to maintain a competitive advantage based on price? What will happen if other carriers match the low-price leader?

Sources: Quotes and other information from easyJet (www.easyjet. com); Sir Stelios Haji-loannou (www.stelios.com); Top Business Entrepreneurs (www.topbusinessentrepreneurs.com); and EasyGroup (www.easy.com).

Pricing Strategies

Chapter PREVIEW

In the last chapter, you learned that price is an important marketing mix tool for both creating and capturing customer value. You explored the many internal and external factors that affect a firm's pricing decisions and examined three general approaches to setting prices. In this chapter, we'll look at pricing strategies available to marketers—new-product pricing strategies, product mix pricing strategies, price adjustment strategies, and price reaction strategies.

Let's start with a look at Kodak and its revolutionary new pricing strategy for inkjet printers: Are you tired of buying a reasonably priced printer, then paying scandalous prices for replacement ink cartridges? Kodak may have the answer. In a move that promises to turn the printer industry on its head, Kodak sells its EasyShare printers for more but charges you less for replacement ink.

HP, Epson, Canon, and Lexmark have long dominated the $50 billion printer industry with a maddening "razor-and-blades" pricing strategy (as in give away the razor, then make your profits on the blades). They sell printers at little or no profit. But once you own the printer, you're stuck buying their grossly overpriced, high-margin replacement ink cartridges. For example, you can pick up a nifty little HP multifunction inkjet printer for only $69.99. But the HP tricolor inkjet cartridge that goes with it costs $24.99. And a 100-count pack of HP 4-by-6-inch photo paper costs another $14.49. The price per ounce of inkjet printer ink can exceed the per-ounce price of an expensive perfume, premium champagne, or even caviar.

The big manufacturers seem content with this captive-product pricing strategy. In fact, they pull in four times more revenues from ink cartridges and paper than from the printers themselves. Customers don't like being held hostage and having to pay through the nose for ink and paper—some are outraged by it. But what can they do? Only HP cartridges work with HP printers. Buying another brand isn't the answer, either—all of the manufacturers pursue the same pricing strategy. Besides, it's difficult to compare long-term per-print prices across manufacturers. Few of us know or go to the trouble to figure out in advance how many cartridges we'll use or what future ink prices will be.

Enter Kodak—with a unique solution. Kodak recently introduced its first line of printers—EasyShare All-in-One printers— with a revolutionary pricing strategy that threatens to turn the entire inkjet printer industry upside-down. In a twist on typical industry practice, Kodak sells its printers at premium prices with no discounts, and then sells the ink cartridges for less. EasyShare printers sell for $149.99 to $299.99, depending on features, about $50 higher than comparable printers sold by competitors. However, EasyShare black and color ink cartridges go for just $9.99 and

$14.99, respectively, about half the prevailing competitor prices. It a whole new concept in printer pricing and economics.

To make the strategy work, Kodak first had to create a new kind of inkjet printer. It developed an innovative technology that uses tiny nozzles to squirt pigment ink drops that are just a few atoms in size. EasyShare printers take about 55 seconds to produce a 4-by-6-inch print, longer than some competitive printers that do it in 32 seconds. But the resulting photos take up to 90 years to fade versus dye-based inks that can begin to fade in as little as a year.

Moreover, Kodak found a way to contain all of the printing electronics within the EasyShare printer itself, whereas rivals include some of the electronics in the cartridges. This lets Kodak charge less for the cartridges. As a result, according to one independent lab study, Kodak's new printers "whomped" rival's printers in price per printout. The study showed that consumers using an EasyShare printer and buying specially priced packages of photo paper and an ink cartridge can print 4-by-6-inch photos for only 10 cents each, compared with about 29 cents each for typical home printers and 19 cents each at retail store photo services.

Thus, Kodak has the right printer and the right ink prices. Now, all it has to do is to re-educate consumers about printer pricing—about the benefits of paying more up front in order to reduce long-run printing costs. To do this, Kodak launched a

Kodak launched a "Think Ink" marketing campaign, built around the visual "think" image, with the first two letters in black and the last three in gold.

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