Pricing Strategy of Ryanair

By | May 2, 2014

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Executive summary

This study would be consisting of three major parts: analysis of current pricing strategies; the second part is to analyze the impacts of the current pricing strategies; and the last part is to design the pricing strategy objectives and also provide suggestions on how these objective could be achieved.

First of all, in the case of Ryanair, the company is now applying a dynamic pricing strategy with a number of evidences such as in-flight services or value added services such as baggage, meal and seat selection are separate and they are sold to those who are willing to pay for such services while the others will enjoy cheaper ticket prices and also ticket prices are cheaper if they are booked earlier.

Secondly, in term of impacts of the current pricing strategies, we analyze both the current and future marketing implications. By reviewing the 4P marketing mix model, we found out that price of product is not standalone aspect of the products, it has closed relationship with the other 3Ps of the company and therefore there are implications to other marketing activities by adopting a particular pricing strategy. Such influences could be reflected in the setting of the company’s promotion strategies.

Thirdly, in term of the design of the pricing strategy objectives, with the help of several tools such as BCG growth model and Life cycle costing theory, together with reference to the company’s current status, we manage to come up with several conclusions regarding the company’s pricing objectives such as the company needs to maximize the market share before the low cost airline business enters into maturity.  
Content page
Title page 1
Executive summary 2
Pricing Strategy of Ryanair 4
1. What is Ryanair current pricing strategy? 4
2. Are there any current or future marketing implications from such a move? 6
3. What strategic pricing objectives would you recommend to Ryanair? 9
4. What competitive price setting decision strategy might Ryanairpursue? 13
5. Conclusion 15
List of References 16

List of figures

Figure 1 Real cost breakdown- Lufthansa vs Ryanair 5
Figure 2 The 4P marketing mix 7
Figure 3 The BCG growth share matrix 10
Figure 4 The biggest carriers at London airports 10
Figure 5 Life cycle cost and cash flow 11
Figure 6 Factors influencing the pricing strategy 13
Figure 7 Glasgow average fares, Spring and Autumn 14
Figure 8 A typical ticket price from London to Balaton 15

Pricing Strategy of Ryanair
-Prepared by Marketing Director of Ryanair

With the trends happening in the airline industry, such as increased threat from the competitors and customer dissatisfaction with some of our services and arrangement, this study would be to study our current pricing strategies and foresee the future pricing strategy setting mechanism and techniques.

1. What is Ryanair current pricing strategy?

The price strategy is one of the 4Ps in the marketing elements which include product, price, place and promotion. According to the research, (Schultz, Barnes & Azzaro 2009, p. 41) in the 4Ps process, companies are advised to develop their marketing strategies and action plans based on the analysis of the product, pricing, placing or distributing, and promotion. The 4Ps marketing methodology forces our marketing people to consider how our product go to the market and what communication tools should be used and so on. In definition, price is what a buyer must give up to obtain a product. Its strategy mainly involves the activities aiming at finding a product’s optimum price, typically including overall marketing objectives, consumer demand, product attributes, competitors’ pricing, and market and economic trends (Damodaran 2011). Based on the view of some studies (Lamb, Hair & McDaniel 2009), price is an important competitive weapon and is very important to the organizations because price multiplied by the number of units sold equals total revenue for the companies and therefore it is frequently the most flexible and changeable factor of the four marketing mix elements.

In term of the types of the price strategy, there are a number of categories of pricing strategies. In particular based on the focus of the price determination, pricing approaches could be divided into three major categories: cost based pricing, customer based pricing and competitor based pricing. Cost-based pricing is applied when price is determined by adding a profit element on top of the cost of making the product. Customer-based pricing is applied where prices are determined by what a firm believes customers will be prepared to pay. Competitor-based pricing is applied where competitor prices are the main influence on the price set (Heisinger 2010).

Figure 1 Real cost breakdown- Lufthansa vs Ryanair
Source: Kerzner 2009

With various pricing strategies, by reviewing the business practices by Ryanair one can see that the company is adopting a dynamic pricing strategy. It is a flexible pricing mechanism made possible by advances in information technology, and employed mostly by Internet based companies through responding to market fluctuations or large amounts of data gathered from customers – ranging from where they live to what they buy to how much they have spent on past purchases (Heisinger 2010). In another word, customers with different willingness or necessity under various situations would be charged differently. There are a number of key evidences in our company suggesting that our company is currently adopting. First of all, a large proportion of the flights are designed to land in the remote and smaller airports where the rental cost would be lowered, and thus the prices of the tickets would be in a lowered level. Because of such arrangements, people choosing to fly with focus on cost would be able to choose such flights because of their willing to travel via such remote airports while those customers with focus on convenience could still choose flights bounded for large cities by with higher prices. Secondly, most in-flight services are chargeable. In-flight services or value added services such as baggage, meal and seat selection are usually free for all passengers. But as for the company, it separates such value added services alone and sell them to those who are willing to pay for such services while the others will enjoy cheaper ticket prices. In another word, the company offers customers with choices, lower ticket prices or more services. In this way, the company adopts a dynamic pricing strategy by differentiating different types of customers. Thirdly, another evidence suggesting that the company is applying a dynamic pricing strategy is that the ticket prices are divided into different categories based on the market fluctuations and a large amount of data gathered from customers, in general customer who have booked tickets very earlier before the departure date of the flights could enjoy cheaper fares. In addition, the number tickets in different price levels would depend on the market demand which is based on more complicated information gather from the market and the study of the customer purchasing behaviors. Therefore it could be concluded that the company is adopting a dynamic pricing strategy using a flexible pricing mechanism to bring in profits as well as sale numbers to the company.

2. Are there any current or future marketing implications from such a move?

Figure 2 The 4P marketing mix
Source: Kotler, Shalowitz, Shalowitz & Stevens 2007

As reviewed in the 4P’s marketing mix model, price of product is not standalone aspect of the products, it has closed relationship with the other 3Ps of the company and therefore there are implications to other marketing activities by adopting a pricing strategy.

While multiple sources of evidence find that dynamic pricing leads to better usage rate of services on the hot days (Letzler 2004, p. 31), a major marketing implication for the company’s current business is that the company needs to promote our discounted tickets a long period of time ahead of the flight schedule. For example, March and April tend to be off-season for tourism in Europe, and in the off-season the sale of the tickets tend to be an issues for our airlines, therefore the company has allocated a larger proportion of tickets in the extremely cheap price levels but the company needs to promote our discounted tickets a long period of time ahead of the flight schedule for two major reasons: our long term promotion is aiming at stimulating more price sensitive customer into consumption and it takes time for them to arrange their travel plans; on the other hand, since a larger proportion of our profits come from the tickets sold closer to the departure date in a normal price level or a higher price level, therefore the discounted tickets could only be sold a number of days before the flight schedule. But there are also inconveniences brought to the customers by encouraging them to buy the tickets half a year before, say, such as flight schedule changes by our company because of some certain reasons or by the customer decisions, it will be elaborated in the next section.

Since fare classes could be used as part of the dynamic pricing mechanism to cope with the changing customer demand and this mechanism has assisted airlines to change some of the uncertain demands into certain demands (Ben-Yôsēf 2005, p. 232) long time before the flight schedule by providing lower fares to the early birds, and also it is in our common understanding that family trips or honeymoons could usually be the purposes of our long term outgoing plans. Therefore, the dynamic pricing which attracts more customers aiming at family trips or honeymoon trips implies that the company should tailor our services and products to better serve our family groups or couples going for their honeymoons. Tailoring our current service products in some points are of great necessity, for example, many of our customer have complaint that they do not have enough of leg room to stretch out and thus feel very uncomfortable, such dissatisfaction may stop some customers from flying with us in their family trips or honeymoon trips. Therefore, the company could provide family package that consists of relatively convenient and welcomed services such as seat selection to meet their needs in the special trips that are meaningful to them.

As said above, there are also inconveniences brought to the customers by encouraging them to buy the tickets in a long term travel plan, but usually there could be flight schedule changes by our company for certain reasons such as reduction of flight frequencies or change of flight route though the latter may not happen usually, or more frequently the changes or cancel of the travel plans are by the customer decision. As a result, while the increased usability of advanced technology and decision-support tools supporting dynamic pricing and fare monitoring have encouraged more purchasing of services in advance (Christ 2009, p. 13), dynamic pricing also implies that our company need to communicate with our customers about the possible future changes as well as the advice that they prepare their travel plan with some flexibility to cope with such possible changes.

According to some studies (HoomanEstelami 2010, p. 127), a key consideration for marketing success is ensuring the proper levels of intermediary incentives because whenever an intermediary enters into negotiations with buyer regarding prices or other terms of the sale, the incentive systems need to be designed in such a way that the intermediary is able to close a sale in a profitable manner for the company. In this point, our company current is not doing well and it is been usually criticized that the company does not offer sufficient commission to our sale agents.And our current strategy is that the company encourages the customers to buy online and this strategy neglect those who are in a rush and they tend to buy tickets in the agencies, therefore, based on the understanding of our dynamic pricing mechanism, it implies that wthe company could provide more incentives to the intermediaries in particular in the higher fare classes.

3. What strategic pricing objectives would you recommend to Ryanair?

Based on the view of Raymond P. Fisk,Stephen J. Grove and Joby John (2008, p. 121), price strategies driven by pricing objectives are linked to the service organization’s overall marketing strategy. And all service organizations focus pricing strategies on covering costs and making a profit. According to them, there are two major kinds of pricing objectives which are profit-oriented objectives and volume-oriented objectives. While profit-oriented objectives focus more on creating higher aggregate returns on the company’s investment in the business the volume-oriented targets focus more on involving as larger number of customers as possible. And also with reference to our business situations, it could be concluded that the following pricing objectives to be fulfilled by our future business and marketing strategies setting and implementations.

Figure 3 The BCG growth share matrix
Source: Stonehouse & Campbell 2004

Figure 4 The biggest carriers at London airports

In the 1980s, Japanese firms inundated the global markets with their products and focused their attention on increasing market share. Their apparent success at converting the market share to profits led other firms, including some in the United States, to also target market share as a critical objective (Damodaran2011, p. 39). The company believes that the growth of the low cost airlines in the civilian aviation industry will also expand like what the Japanese firms did in the 1980s. It will be among these industrial leaders in this trend. And as a result the priority objective of our price strategy would be to maximize our business market share in the EU market. Also through the company’s own business practice, statistics found out that the company’s profitability and rations such as return on investment (ROI) will also be enhanced with the increase of our business scale, this probably could be understood by the effect of economic of scale which refers to a company’s ability to leverage its fixed cost infrastructure across more and more clients or customers (Dorsey& Mansueto 2004). And it would be important to strengthen this advantage by expanding our business scale. This is also in accordance with the theory of the BCG growth share matrix, because when the low cost airline service become the cash cows, their growth rate would decrease, it would be important that it obtains a larger market share before it becomes such a cash cow product.

Figure 5 Life cycle cost and cash flow
Source: Drury 2008

Based on the knowledge on the product life cycle costing, according to Colin Drury (2008, p. 538), investment on the R&D (research and development) activities tend to overweight the profit in the beginning stages resulting in the start-up loss which would be recovered in the later stages when products or new technologies become marketable. And as according to the researches the company has identified some problems, and one of them is that many customers are not content with the service and other arrangements, such problems would stop our business from further growing. With these two facts. The company set one of the pricing objectives as to ensure the product quality through innovation and service changes with investment spent in the relevant R&D efforts which could be costly in the beginning stage, and therefore the company needs to price the services higher to recover such investments.

In addition, according to Doole and Lowe (2008, p. 383), the pricing strategies are also impacted by the market factors as well as environmental factors. Therefore, in the case of Ryanair it is recommended it also sets its price to meet the expectation of the customers in term of not only providing the lowest fares but also comfortable and wonderful flying experiences.

Figure 6 Factors influencing the pricing strategy
Source: Doole & Lowe 2008, p. 383

4. What competitive price setting decision strategy might Ryanairpursue?

There are a number of techniques that could facilitate the price setting decision making and enable the company to maintain competitiveness in the airline industry in Europe and even around the world. While we are pursuing a dynamic pricing strategy, some of other pricing techniques and tools are elaboratedas following.

To alleviate the problem of customers knowing when discounting will occur, one of the majorapproaches is to employ random discounting which is applied when companies temporarily reduce their prices on an unsystematic basis. And it is believed that when prices reductions of a product occur randomly, the current users of that brand are likely to be unable to predict the coming promotions (Pride& Ferrell 2009, p. 330). The application of the random discounting in the business is also important for two major reasons: first of all, if the promotion activities are held regularly or periodically, the discounted tickets would be enjoyed mostly by the old customers who visit the company’s websites frequently; secondly, random discounting accompanied by sufficient marketing efforts before the start of the promotion would assist to attract new and potential customers. Another skill is bundling pricing. Bundling pricing refers to a pricing arrangement under which the supplier offers substantial discounts to customers if they buy several of the firm’s products, so that the price of the bundle of products is less than the sum of the prices of the products if they were bought separately (Baumol&Blinder2007, p. 281). This pricing strategy could be applied in the business for two major situation: Group booking & Travel package. In term of group booking, we provide with the customers or travel agencies with a special discount if the number in the group in the same flight exceed a certain number (say, 10 per group). The group booking discount on one hand provide cost advantage to travel agencies and solve the issue that many of them complaint about there are no incentives for them to book ticket with us and on the other hand, the group booking discount is a long term based regular promotion and traveling groups could apply at any time when the requirements are met. In term of the travel package pricing, we could provide with the customers with better deals by cooperating with our business partners in the business sectors such as hotel, land transportation service, catering and other destination services. With a large customer flow, we would have strong bargaining power to bargain down the price of the service from the company’s strategic partners and provide with lower total fares to our final customers.

Figure 7 Glasgow average fares, Spring and Autumn
Source: Based on ticket price calculations

Figure 8 A typical ticket price from London to Balaton
Source: Based on ticket price calculations

And usually there are a number of steps involving the determination of the final price, and two of them are to select a method for price calculation and the other is to examine the competitors’ price level. In term of selecting the price method, the company of Ryanair would still use the dynamic pricing and regarding the measuring of the competitors’ price level, the figure above indicates that the company still has advantages over the competitors, but still such comparison should be made from time to time.

5. Conclusion

With the analysis above, it could be concluded that the company can continue to adopt the current dynamic pricing strategy to further expand the company’s market share in the EU market while some innovation should be made to better improve the service provision to better serve the company’s customers.  
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