Need assistance in determining the best pricing strategy by answering the attached questions 1-7 based on the spreadsheet provided.
1. Include an assessment of whether the current fare maximizes profits. If not, identify the fare that should be charged. Give evidence that it is the best by showing that profits are highest if this fare is charged.
2. Complete the Customer Demand Data spreadsheet for Clear Blue Sky by calculating all appropriate revenues, costs, and profits. This spreadsheet can be downloaded from the Project Materials.
3. Discuss whether fuel costs should be used as a basis for pricing.
4. Comment on the suggestion that the company could use price-discrimination strategies to improve profitability.
5. Discuss the requirements for effective price discrimination, and describe how
Clear Blue Sky satisfies these requirements.
6. Identify and describe each group of travelers according to their price sensitivity. Analyze the price elasticity of demand for each group.
7. Recommend a pricing plan that effectively separates each group of consumers. Providing actual prices is not necessary, but your plan should clearly indicate the level of pricing for each group.
Here is the information about the Raleigh-Durham to Chicago route, a distance of 680 miles. The maximum capacity of our planes flying this route is 125 passengers.
Based on data from customer purchases and marketing surveys, we estimate demand for passenger tickets on this route as follows. Note that demand is a linear relationship between price and quantity:
Price = 1,250 - (8 × Quantity)
Our fixed costs include salaries of pilots and flight attendants and fuel. For a one-way flight, current total fixed costs amount to $25,000.
Our variable is $50 per passenger. This figure is constant whether the person is the first or 125th passenger aboard the flight. Variable costs include the expense of additional fuel requirements for bearing another passenger and associated luggage, and the costs of food and beverage service, ticket processing, and baggage handling.
Fuel costs are a primary component of our flight expenses. In Clear Blue Sky's current fare structure, we establish a price that is a multiple of the average market price for the kerosene-based jet aviation fuel used in our fleet. For example, given current fuel prices, the one-way fare charged in the Raleigh-Durham to Chicago market is $850.
Fuel costs are expected to rise. Therefore, I propose a fare increase from $850 to $890 in the Raleigh-Durham to Chicago route. This recommendation is based on our proprietary fuel-to-fare factor.
Basing ticket prices on the fuel prices allows us to minimize the risk of changing fuel prices. By passing on the increase in fuel prices to our customers, I believe we will be able to maintain the level of profitability on this route.
We've examined data on our customers from the past several years, and we've also looked at several industry-wide reports. Based on our research, we believe our market contains four identifiable customer market segments: business, government, student, and leisure travelers.
Our estimates of price sensitivity are below.
Business travelers = -1.1
Government travelers = -1.3
Student travelers = -2.6
Leisure travelers = -3.2
There has also been some discussion about whether other academic/university travelers (e.g., professors and staff) form a distinct group. However, we have not been able to distinguish this group from our data, because of the difficulty in identifying these travelers. Our best estimate is that this group would fall somewhere between government and student travelers in terms of price sensitivity.
In examining the feasibility of using price discrimination strategies at Clear Blue Sky, we uncovered data about our competitors that may help us. Competing airlines apply several fare restrictions:
Advance purchase requirement: Travelers must purchase their ticket 14 days or 21 days in advance of their departure date.
Nonchangeable ticket: Travelers may not change their travel itineraries once purchased.
Nonrefundable ticket: Travelers may not receive refunds on tickets.
Saturday night stay: Travelers' itineraries must include a Saturday night stayover.
Proof of identification or age: To qualify for certain fares, photo identification may be required (e.g., university, government, or military ID or driver's license).
Please consider these fare restrictions in designing an appropriate price discrimination strategy for Clear Blue Sky.
Look at an underperforming market at Clear Blue Sky Airlines. The Raleigh-Durham to Chicago route is less profitable than our other routes. I need you to figure out what's going wrong and how to fix it.
Some background information on the route: For flights during certain times of the day, Clear Blue Sky is the only airline flying from Raleigh-Durham to Chicago. At the most competitive times of the day, only two other carriers serve this market. Clear Blue Sky Airlines is doing relatively well with our current pricing strategies, but we can do better. In addition, there is considerable pressure from Wall Street financial analysts and the shareholders to improve profitability. One immediate concern is the rising price of kerosene, which is the primary ingredient in the aviation jet fuel that we use.
Clear Blue Sky's current pricing strategy is to charge a single fare, based on fuel prices, to everyone on the same flight. Fares may differ from flight to flight, however.
Anticipating that fuel prices will rise, a working theory in the airline's marketing department is that Clear Blue Sky should raise its fares to improve profitability. I've had Tom Caldwell, a marketing analyst at Clear Blue Sky, take a look at this problem. He has given me some suggestions, but I want your perspective on this.
I'd also like you to examine the possibility of charging more than one price for this route. Some Wall Street analysts have been telling us that we should implement a price-discrimination strategy. I want you to evaluate this idea and determine if it's feasible.
I'll make sure that you have all the information you need to prepare a memo for me. I appreciate your assistance with this project.