1. Describe and assess the internal and external factors which affected AirAsia’s pricing strategy. Internal factors affecting pricing include the company’s marketing objectives, marketing mix strategy, costs, and organization considerations. Marketing objectives before setting a price, the company must decide on its strategy for the product. If the company has selected its target market and positioning carefully, then its marketing mix strategy, including price, will be fairly straightforward.
AirAsia is introduced as Asia’s first low-fare, no-frills airline in 2002, according to its tagline “ now everyone can fly”, this positioning required charging a low price. Besides, marketing mix strategy which is price is only one of the marketing mix tools that a company uses to achieve its marketing objectives. Price decision must be coordinated with product design, distribution, and promotion decision to form a consistent and effective marketing program. Decision made for other marketing mix variables may affect pricing decision. 4P’s includes product, place, price and promotion.
For examples, flies only one type of aircraft, operating 13 Boeing 737s on a 12-aircraft schedule, reduces staff training, operating and maintenance costs In addition, use secondary airports like Subang, procedures are cheaper and less complicated Then, promotion such as price promotions, it set aside 100000 seats for sale on the internet, charging one-way fares ranging from S$ 2. 60 to S$ 23. 70 on selected routes Costs set the floor for the price that the company can charge. A company’s costs may be an important element in its pricing strategy.
AirAsia with lower costs can set lower prices that result in greatest sales . Then, AirAsia implement such ways to make costs lower, for examples quicker turnaround time, flight utilization of its aircraft, flies only one type of aircraft to reduces staff training, operation and maintenance costs, does not offer complimentary meals or drinks. use secondary airports because procedures are cheaper and less complicated,reduces circling time and simpler baggage handling systems, provide ticketless travel to save cost of printing and delivering
Organization considerations, management must decide who within the organization should set prices. Company handle pricing in a variety of ways. In industry in which pricing is a key factor, company often have a pricing department to set the best prices or to help others in setting them. AirAsia have a pricing department to set the prices for each flies. This department reports to the top management. External factors that affect pricing decision include the nature of the market and demand , competition.
The market and demand in oligopolistic market, pricing in oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other’s pricing and marketing strategy. There are few sellers because it is difficult for new sellers to enter the market. The price of AirAsia’s ticket is lower, MAS has slashed domestic fares in half. Consumer perception of price and value also affected the price. AirAsia now flies to over 20 cities with one-way fares as low as S$16 for flights from Kuala Lumpur to Penang, is cheaper than going by bus.
Consumers perceive that the price is below the value, they will continue to consume it. AirAsia’s fares are based on supply and demand, prices generally increasing as seats are sold. Next factor is competition in the market. In setting its prices, the company must also consider competitor’s cost and prices and possible competitor reactions to the company’s own pricing moves. In addition , the company’s pricing strategy may affect the nature of the competition it faces. AirAsia’s prices have led to a shakeup in the regional aviation industry.
The price of AirAsia’s ticket is lower, MAS has slashed domestic fares in half. 2. What type of new product pricing strategy did AirAsia employ? Explain. Pricing strategies usually change as the product passes through its life cycle. Companies bringing out a new product face the challenge of setting prices for the first time. They can choose between two broad strategies which is market-skimming pricing and market-penetration pricing. As mention in case study, we can see that AirAsia employ a market-penetration pricing as a type of new product pricing strategy.
Market-penetration pricing can be define as setting a low price for a new product in order to attract a large number of buyers and a large market share. The high sales volume results in falling costs, allowing the company to cut its price even further. Several conditions must be met for this low-price strategy to work. First, the market must be highly price sensitive so that a low price produces more market growth. Second, production and distribution costs must fall as sales volume increases. Finally, the low price must help keep out the competition and the penetration pricer must maintain its low-price position.
AirAsia was launched as Asia’s first low-fare, no-frills airline with the mission to make travel so affordable. It carried 3. 1 million passengers, many of whom had never flown before. AirAsia’s prices have led to a shakeup in the regional aviation industry. For example, the cost of a Singapore to Bali round-trip ticket on AirAsia is S$123 that’s including bus fare to and from Singapore to Senai in Johor. AirAsia periodically runs price promotions. For example, it set aside 100,000 seats for sale on the Internet, charging one-way fares ranging from S$2. 0 to S$23. 70 on selected routes. AirAsia manages to offer such discount prices by keeping costs down. It employs cost optimization techniques such as quicker turnaround times and flight utilization of its aircraft. AirAsia offers only economy class, with free seating and boarding that reduce boarding time. It does not offer complimentary meals or drinks. AirAsia also provides ticket less travel, thus saving the cost of printing and delivering tickets. 3. Describe and evaluate the price adjustment strategies that AirAsia appears to use.
There are six price adjustment strategies: discount and allowance pricing, segmented pricing, psychological pricing, promotional pricing, geographical pricing and international pricing. Discount and allowance pricing Discount and allowance pricing is reducing prices to reward customer responses such as paying early, volume purchases and off-season buying. There are many forms of discounts, like cash discount, quantity discount, functional discount and seasonal discount. For the case, seasonal discount is used. Seasonal discount is a price reduction to buyers who buy merchandise or services out of season.
AirAsia’s discount fares are most often found on midweek travel dates, while those on weekends and holidays may be higher. Seasonal discounts allow AirAsia to keep operation steady during an entire year. Segmented pricing Segmented pricing is selling a product or service at two or more prices, where the difference in prices is not based on differences in costs. There are many forms of segmented pricing, like customer-segment pricing, product-form pricing, location pricing and time pricing. For the case, time pricing is used. Time pricing is prices varied by the season, the month, the day and the hour.
Customers of AirAsia may pay fares at three different levels for flights at different times and days, for example, L fares are priced at S$48, Q fares at S$63 and M fares at S$71. AirAsia sets prices on time basis, depending on seat availability and demand. Psychological pricing Psychological pricing is a pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product. Another aspect of psychological pricing is reference prices, which are prices that buyers carry in their minds and refer to when they look at a given product.
For example, the cost of a Singapore-Bali round-trip ticket on AirAsia is S$123 (including bus fare to and from Singapore to Senai in Johor, where AirAsia flies out of). In contrast, Garuda charges S$305, Singapore Airlines S$406 and Malaysian Airline System (MAS) S$654. This is to imply that the same travel route with AirAsia is cheaper or more economical than the other three airlines. Promotional pricing Promotional pricing is temporarily pricing products below the list price and sometimes even below cost, to increase short-run sales.
The lowest AirAsia one-way fare from Bangkok to Singapore was S$12. 65 only, but that is for the booking period March 8 to 23, 2004 for travel between March 28 and October 30, 2004. This is to create buying excitement and urgency among the customers during that period. Geographical pricing Geographical pricing is adjusting prices to account for the geographic location of customers. There are many forms of geographical pricing, like FOB-origin pricing, uniform-delivered pricing, zone pricing, basing-point pricing and freight-absorption pricing. For the case, freight-absorption pricing is used.
Freight-absorption pricing is a geographical pricing strategy in which the seller absorbs all or part of the freight charges in order to get the desired business. AirAsia may absorb all or part of freight charges, so its prices become lower and this attract more customers. If it gets more business, its average costs will fall and more than compensate for its extra freight cost. So, AirAsia can hold on to increasingly competitive markets. International pricing International pricing is deciding what prices to be charged in the different countries in which a company operates.
AirAsia’s fare for Singapore-Bali trip is different from Bangkok-Singapore trip. That is because of different cost in different countries. 4. Characterize the response to AirAsia’s pricing strategy by its regional competitors. The company that faces a price change initiated by a competitor must try to understand the competitor’s intent as well as the likely duration and impact of the change. When facing a competitor’s price change, the company might sit tight, reduce its own price, raise perceived quality, improve quality and raise price, or launch a fighting brand.
Now, we can see from the case study that a response to AirAsia’s pricing strategy by its regional competitors. Firstly, Singapore Airlines (SIA) once considered SilkAir to a budget carrier but eventually decided to launch a “fighter brand” in Tiger Airlines. This is one way that they as a company want to minimize cannibalizing its premium offering. Besides that, Tiger Airlines also want to have a flying to popular tourist destinations such as Bali, Hong Kong and can flying to destinations within a four-hour reach of Singapore.
It also will continue to serve as feeder airline to SIA and will not offer budget fares. Then is Valuair that started by a former Singapore Airlines pioneer, named Chin Beng Lim. Valuair aims to commence operations from Changi International Airport but eschewing Changi’s proposed budget terminal because it want to be able to interlink with other international airlines. Besides that, Valuair aims to target passengers who desire some frills like aerobridges and leg room and hope to fly all-economy flights.
In addition, Valuair also will not have price tiers but rather employ fare categories. Finally, Valuair also has leased two new Airbus A320 planes and all the Valuair’s staff has relevant experience based on their position. 5. How should AirAsia respond to its competitors in the discount airline market? Evaluate its package deal and corporate market initiatives and recommend other marketing strategies for the airline. To respond to other competitors, AirAsia should maintain its lower price, but raise the perceived value of its offer.
It could improve its communications, stressing the relative quality of its product over that of the other lower-price competitors in the discount airline market. If AirAsia make its price lower again, it may operate at a lower margin and get loss from the action. For example, AirAsia can improve its service in the flies to be friendlier to customers. AirAsia can also make its aircrafts’ condition cleaner and safer, seats become more comfortable, and ensure the customers become more relaxed with serving more entertainment, like music and movies to them in the aircrafts. [pic]