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The Travel Products’ Price Determinants

This is an excerpt from my latest tourism textbook, entitled; ‘Travel Marketing, Tourism Economics and the Airline Product’. This publication will be available through Springer and Amazon.com.


Price Determinants
The type of pricing strategy which marketing managers consider is determined by a number of factors, including: organisatonal and marketing objectives; types of pricing objectives; cost levels; other marketing mix variables; market demand; competition, and legal and regulatory issues, among other matters.

Organisational and Marketing Objectives

Company policy and image, target profit margins and staff count could influence the type of pricing policy which the marketing managers will apply. Company policy and image will play an important role when determining a pricing strategy. The price set must be consistent with the general corporate objectives and the strategic direction of the company. For example, a full-service airline may want to be associated with the top-end of the market by providing a high-quality service to the business travel segment. To price below the average rate for such a service may imply an inferior and poor-quality service.

Any airline which would like to target the business market should provide an extensive schedule and a high-quality service. Therefore, it will require considerable resources and capabilities to do so.

Pricing Objectives

The most fundamental pricing objective is that of survival pricing. When experiencing severe competition, businesses may be forced to offer lower prices than their rivals. This way they will generate revenue, and improve their chances of survival. A tourism service or sub-product will not generate revenue if it is not used over a given period of time (it will perish) . While the service or sub-products may be available for sale at some later point in time, the revenue that was originally lost, can never be regained. For example, a hotel had thirty empty rooms on a specific date. These empty rooms cannot be sold at a later date because the service has been completed, and perished. Similarly, an airline could depart with empty seats which cannot be sold at a later date.

Moreover, the demand for tourism products is usually seasonal. For example, many north Americans flee south to Hawaii and to the Caribbean, during the winter months; whilst Australasians travel to Europe during the summer months of June, July and August. Of course, seasonality may be due to other factors, other than climate, including; vacation and holiday periods. For example, families may habitually travel at the same time of the year, usually over Christmas, Easter or summer periods. This is the usual close-down time period for schools, industry and commerce, in many countries. Since tourism is highly seasonal, suppliers may reduce their prices during off-peak times. Hence, a low price strategy assists in creating demand particularly among price-sensitive customers. Conversely, operators may charge higher prices when there are peaks in demand, due to major attractions and special events.

Profit maximisation is another pricing objective. However, it may prove difficult to measure, as businesses could not be in a position to determine when they have reached maximum profit. As a result, profit maximisation may be evaluated according to a certain ‘level of satisfaction’. A change in profit relative to previous periods may be considered as satisfactory or unsatisfactory for the businesses. The setting of prices to obtain a fixed rate of return on a company’s investment is a profit-related objective. Many businesses could be aiming to achieve a specific profit.

Another possible pricing objective is that of increasing market share. Many companies may design pricing policies which will enable them to improve their market share. However, at times, they may be satisfied with their current status in the market. In this case, their objective would be to retain their status quo. Companies with such an objective may not use pricing as a competitive tool. They will probably maintain a steady market share by nurturing their brand equity.

Cost Levels

The marketing managers should be careful to analyse all costs so that they will be included in the total cost. Therefore, the pricing of products should be based on the company’s direct and indirect costs (and may consider overhead expenses) if they are projecting a certain profitability margin.

Other Marketing Mix Variables

The marketing mix elements, including; promotions (the integrated marketing communication mix) and place (distribution channels), could determine the target customers’ perceptions of the firms’ products (or services), in a given competitive context.

The extent to which a product is promoted can have a huge effect on consumer demand. The products’ price will usually determine their target market. Low-priced products may attract price-sensitive markets. Such products will be promoted through different marketing communications channels other than high-priced, better quality, premium services. The more expensive the products; the higher the customers’ expectations. Considerable thought and action must go into product development so as to provide the customer with a valuable service which reflects the product’s price. One of the most significant promotional tools is word-of-mouth publicity. For instance, online reviews and ratings are increasingly playing a major role in tourism marketing.

When making a pricing decision, the businesses should consider their distribution costs. The companies’ intermediaries, including; tour operators, online travel agents, and the like, will expect financial compensation for selling travel products. Alternatively, they will expect discounts and special incentives to push the businesses’ products to consumers. For example, they may book large seat orders and place substantial mark-ups on seats which they have bought from the airline (these products may be demanded for inclusive tours). These factors must always be taken into consideration by the airline marketing managers, as they have to add mark-ups to the cost price of seats, when selling them to intermediaries.

Market Demand

There is a highly segmented market for tourism products. Each of the market segments vary in terms of elasticity, and service requirements. These variables will influence the way in which prices a set.

The business travel segment is generally more inelastic in demand. Fluctuations in prices will not affect demand to any great extent. However, the business travel segment expects a high-quality service. Generally, business travellers are prepared to pay a higher price for such services. The higher fares will not only cover the costs of the superior service, but will also convey an image of a premium, prestige product.

The passengers from the leisure travel segment are usually price-sensitive. Their expectations are somewhat lower than those of the business travellers. Demand is extremely elastic in this segment; and an increase in price may result in lower demand.

The socio-political factors may affect market demand. If a destination is politically or socially unstable, tourists may not want to go there. Most people like to feel safe and comfortable. For instance, many destinations have experienced dramatic reductions in the number of tourist arrivals, following the terrorist activities in certain countries.

Economic factors, including the individuals’ income and well-being, will affect their propensity to travel. However, this may not necessarily translate to an increased demand for all tourism products. For instance, if leisure travellers receive an increase in income, they may decide to travel to long-haul destinations rather than short-haul itineraries. Alternatively, these clients may increase the quality and standard rather than to increase their frequency of travel. Such customers may decide to upgrade their hotel accommodation, or to travel in higher classes. Income may affect demand according to the purpose of travel. For business travellers it may not make much difference, whilst for leisure travellers it can make quite a substantial difference. Their demand may also be influenced by the availability of substitute products. If there are no substitutes for the product, then consumers will be forced to buy regardless of price.

In addition, customers may develop perceptions about tourism products. Whether they are accurate or not, they could influence their purchase behaviours. Therefore the travellers’ perceptions, the online ratings and reviews should be carefully considered, as tourism products must always be purchased in advance.

Competition

The businesses should be aware of their competitors’ prices. They may decide to respond to their rivals’ pricing strategies, or to be proactive by taking the pricing initiative, themselves.

Responding to the Competitors’ Pricing Initiatives

There is no rigid method of responding to a price initiative taken by competitors. Every situation is unique. However, businesses are capable of making confident decisions if they examine the situation from different viewpoints:

At times, competitors may decide to lower their prices: It is not wise for other businesses to follow suit, unless they establish why their competitors are pursuing such a pricing strategy. It may be the case that the competitors have made a bad decision. It must be determined whether the competitors’ pricing initiative was a long term or a short term one. For instance, an airline’s poor fleet planning may result in the company changing its prices on a long-term basis. In such situations, rivals will have to respond or risk losing their market share. Price reductions will eventually lead to lower yields for the airline. As a result, this will have a negative impact on the airline and its long-term sustainability prospects. If the pricing initiative appears to be a short-term action, it is advisable to ignore it, and to avoid de-stabilising the market.

The price reductions on certain products may be questioned by the airline’s customers. As discussed above, the airlines may usually charge higher prices for their business and first class as these services are considered as prestige products. The airlines can differentiate themselves from competitors when they provide superior services; that are perceived as an index of quality and corporate image.

On the other hand, the airlines’ should continuously monitor those competitors who are resorting to price-cutting policies. Certain leisure markets may be more price-sensitive than others, as they may exhibit higher price-elasticity levels. The lower prices could result in an increase in demand for the economy class of service.

Taking the Price Initiative

Generally, businesses may avoid lowering their fares, as this will affect their bottom lines. Price wars have destroyed the profitability of many businesses. However, there may be a tendency toward price competition: when firms have low variable costs; when there is little differentiation among the competitors’ products; when industry growth rate is low, and; when the economies of scale are important. The businesses need to consider their cost levels before taking the initiative to lower their prices. The lean businesses who may have less costs, will usually be in a much stronger position to lower their prices than other competitors with high costs. However, more established high-cost businesses may have stable financial backing, which will enable them to meet, if not undercut, the new companies’ prices. They could eventually push their competitors out of the market.

An increase in price may be required if the business is facing controllable or uncontrollable costs. For example, if the airlines’ uncontrollable costs, include; increased airport landing fees and air traffic control charges; they may either decide to absorb these costs or alternatively, they may increase their fares as a means of covering these added costs. Of course, rival airlines will also face the same pressure. In such cases, the airlines could inform their customers about their uncontrollable costs, which have forced them to increase their fares. Ongoing corporate communications and public relations will help them to maintain their customers’ goodwill. On the other hand, the airlines’ controllable costs, including the employees’ salaries and wages, are under their direct responsibility. Such costs may not justify taking pricing initiatives to improve the organisation’s financial performance. They may even aggravate the airline’s profitability, in the long-term.

Legal and Regulatory Issues

Legal and regulatory issues may have an impact on a company’s pricing structure. Although, the airline industry has experienced deregulation and liberalisation in the past decades, there is still some government intervention, in certain areas. In international markets, air service agreements between governments necessitate that national airlines should meet and agree on the fares and rates to be charged to passengers. The agreed fare is brought back to both the airline’s governments who have the right to veto the fare. Should this happen, the airline concerned must seek to re-open negotiation.

Deregulation and liberalisation have affected the airlines’ pricing policies in many contexts. For example, liberalisation has changed the fares regime in the United States of America, in the European Union and in many other places. Today, several airlines have introduced lower fares which have contributed to increased travel. Moreover, the rise of the low-cost carriers has often resulted in lower air fares within pre-agreed zones. Evidently, pricing is increasingly being used as a competitive tool, in many contexts.

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Key Elements of Travel Websites

website

The travel and tourism businesses are increasingly using corporate websites as they help them improve consumer leads and sales conversions. In addition, their clear, differentiated pricing information on service-tiers provide product options to online prospects. The tourism products ought to focus on the benefits they provide, by highlighting their value propositions; rather than simply illustrating their features. Despite the fact that so many transactions are carried out online, the travel websites could lack in their provision of personal interaction. This means that even the smallest thing that’s out of place on the ecommerce pages could possibly rapidly erode the customers’ trust in products and services. Therefore, tourism businesses could build consumer confidence and trust by using an SSL certificate to make transactions secure, particularly if they are processing credit cards.

The travel businesses’ corporate websites are expected to articulate their terms and conditions, including any relevant cancellation and refund policies. They should also feature their contact details (including an address, telephone and emails) to customers and prospects. Many sites could offer live chat facilities on their site, to help online customers in their queries, or to address their concerns.

If the businesses do not offer such interactions in real time, they still need acknowledge their online prospects’ message(s), and inform them that they will be responding to them in reasonable time. Moreover, the use of testimonials from consumers, including; reviews and ratings will serve as proof that the tourism business is providing an adequate level of service to customers. The positive experiences from customers themselves, will help to improve conversions and sales.

The tourism web sites should underline the true benefits of their product. Hence, they should present relevant written content which will make the product stand out from the rest. In this day and age, attractive web sites should be well-designed to entertain visitors. The travel sites have to feature a good selection of images and videos. This allows prospective visitors to become familiar with the tourism product. Destination management organisations are increasingly allowing online visitors to zoom in high-res images and video clips in their websites. The interactive images and videos should load as quickly as possible. Any delays of even a couple of seconds would turn off dissatisfied visitors. The speed with which a page loads can be a critical determining factor as to whether visitors may (or may not) commit themselves to lay down their credit card. When designing product pages, it is important to consider load speeds, particularly if there are large images, rich interactivity or other media in web pages.

Very often, different product pages may clutter up web pages with excessive calls to action. These pages may contain customer photos, complicated pricing options, unnecessary details on customer support, too many reviews, et cetera. Without good web designs, these calls to action could easily blend into a confusing mess.  While it may be tempting to utilise web pages with many actionable steps, the online sites should be as clear and focused as possible. A good call to action could include high-contrast buttons, call-outs and actionable elements which leave plenty of breathing room, to make them stand out.

Online users might not be willing to commit themselves in buying products straight away. Therefore, businesses could entice visitors to fill in their subscriber list to receive exclusive offers, via email.  This way, the businesses will be in a position to send newsletters and promotional material to their online prospects, at a later date.

Businesses ought to facilitate their online purchase and transaction confirmation. A complicated funnel could deter the conversion of prospects. The customers who are in the businesses’ checkout page(s) should be allowed to finalise their purchase as quickly and efficiently as possible. If their customer experience of their online purchase involves an unnecessary effort to check out from the website; they may have second thoughts on the businesses’ quality of service. Therefore, users should not be distracted with anything that will take them away from the businesses’ purchasing funnel. It is important to let customers finish their transaction before taking them anywhere else on the website.

This article was drawn from Springer’s ‘Travel Marketing, Tourism Economics and the Airline Product: An Introduction to Theory and Practice‘ by Mark Anthony Camilleri

 

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The use of interactive marketing in travel and tourism

Interactive marketing enables two-way communications between sellers and individual buyers. This exchange takes place online through social media, content syndication and mash-ups; tagging, wikis, web fora and message boards, customer ratings and evaluation systems, virtual worlds, podcasting, blogs, and online videos (vlogs).and blogs. Some of its advantages include the ability to precisely communicate to individuals with addressable messages that can be customised to individual consumers. Therefore, interactive marketing is also linked to content marketing.

Many companies can produce relevant content that is shared many as times through social networks. Such content may “go viral” among social media users. As a result, it can bring in many inbound leads, coming through download page, as internet users can choose what content they wish to be exposed to, respond to, and share.

 

Interactive marketing techniques typically include response mechanisms that allow consumers to respond directly to corporate communication. This marketing communication tool is much more precise and measurable, when compared to other media. The ability to measure direct and interactive marketing effects allow marketers to design communication programmes that target consumers, based on; recency – the amount of time since last purchase, frequency – the number of previous purchases, and monetary value – the total expenditures a customer makes over time.

Online businesses can make use of Google Attribution to measure the impact of their marketing across devices and cross-channels; as Google holds vast amounts of data on net users, from its services including; AdWords, Google Analytics and DoubleClickSearch. The technology giant has access to consumer profiles more than any other company, because it knows when they view ads in its search engine, or in Gmail, YouTube, Google Maps, and in its Android apps. It also knows where consumers go, both online and in the physical world, based on cookies and location data from their phones. The company will shortly be in a position to track credit and debit card transactions and to link them to online consumer behaviour (Associated Press). Google’s moves will bring significant marketing opportunities to advertisers. Businesses could leverage themselves if Google provides them with relevant data on their prospective customers’ needs and wants. Google could inform them when prospects need products or services, and what price they are willing to pay. These answers allow marketers to better target individual consumers. However, these advances will also raise privacy concerns. Wary consumers may install ad blockers, tracking blockers, and could decide to switch off their phone’s location services to ignore the greater personalisation of content from advertising.

Many individual users are using mobile devices to construct their new customer experiences. The use of social networks allows them to engage, communicate and co-create in the online world. For instance, the tourism organisations’ websites and destination management organisations are using social media networks as well as interactive communications to enable tourists to personalise their sites with their personal experiences. They empower tourists as they facilitate the co-creation of content for the benefit of others. As a result, social media users and their reviews may impact on tourism marketing. Independent reviews and ratings are often considered as trustworthy sources for prospective tourists, as they provide objective information on tourism products and services. For example, TripAdvisor provides travel-related reviews and opinions on accommodation establishments, restaurants and attractions. In addition, many websites, which are traditionally known as booking engines, including; Booking.com, Airbnb.com, et cetera, also provide reviews that are integrated in their presentation of properties, restaurants and other amenities. A distinction should be made between reviews and ratings: Reviews will generally include qualitative comments and descriptions, whilst ratings usually feature quantitative rankings, corresponding to degrees of user satisfaction. The ratings may be part of a review.

Sometimes, internet users may notice that there may be controversial reviews and unverified negative criticism.  In a similar vein, the tourism service providers may also claim that they were subject to unfounded negative ratings. Very often, businesses have been blackmailed by consumers, who have threatened them that they will write negative reviews unless their demands are not met. On the other hand, several consumers have also reported cases of unfounded positive ratings of services. Therefore, online users are increasingly paying more attention to these contentious issues.

Lately, the World Committee on Tourism Ethics has elaborated its recommendations for the responsible use of ratings and reviews on digital platforms. Their recommendations are addressed to three main groups of stakeholders, namely: online platforms (operators like TripAdvisor or Yelp) service providers (businesses that are listed on these platforms); and users (consumers).

Digital platforms that incorporate reviews and ratings for their products and services need to ensure the accuracy, reliability and credibility of their content. Online platforms should undertake all reasonable measures to ensure that the individual reviews reflect the real users’ opinions, findings and experiences. The provision of publicly available information through digital media involves a certain degree of trust. The veracity of the reviews is essential for their integrity, reputation and good functioning of the review platforms. Whilst it is not always easy to verify the authenticity of user generated content, the digital platform should have quality control mechanisms and processes to ensure that their reviews are clear, accurate and truthful, for the benefit of the service providers as well as prospective consumers.

Dr Mark Anthony Camilleri is the author of Springer’s ‘Travel Marketing, Tourism Economics and the Airline Product’

 

 

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Tourism and Technology: What the future holds for travel distribution?

mobile.pngThe development of digital media technologies, particularly the internet and social media are offering a wide range of possibilities to the travel industry. These latest technological advances have enabled many travel businesses, including airlines and hotels to manage their distribution channels in a more efficient and economical way.

With the changing landscape of travel e-commerce and the ubiquity of IT solutions which gather, store, and analyse data in a variety of ways; airlines have improved their ability to monitor their performance across channels. Very often, they are in a position to quickly adjust offers. Their prices are usually based on a variety of situations and circumstances, as they optimise communications and transactions.

By using big data and analytics on their customer behaviours, many travel businesses are taking advantage of channel-based distribution. Hence, the distribution networks have come a long way from the ticket counter. Evidently, travel and tourism businesses are leveraging themselves with data-driven marketing, as they seek new customers and prospects. For example, they may increase their profitability from high-yield customers as they are using elaborated pricing and revenue management systems. The travel distribution is evolving from its current passive, rigid, and technology-centric state to a more flexible, dynamic, and passenger-centric environment which we call ‘Active Distribution’.

Any changes in the tourism distributive systems may be stimulated by external macro factors such as politics and trade, global and national economies, technological innovations and access to them, et cetera. The airline industry could also be effected by increased competition from low-cost carriers, merger and acquisitions, and fuel costs, among other issues. However, the commercial future of the tourism industry may also be influenced by other factors, including travel distribution.

Tourism businesses can possibly become even more effective in how they sell their products and services, particularly if they deliver positive customer experiences. Tourists perceive value in customer-centric businesses. Most probably, in future, there will be significant improvements in terms of technologically enhanced customer services.

Tomorrow’s businesses will be serving passengers from geographically-diverse regions.  There will be more travellers from emerging markets and developing economies. The travel distribution systems will have to cater for senior citizens, as there are aging populations in many countries.

The distributive channels must be designed to accommodate a divergent nature of users. Tourism service providers and their intermediaries have to provide engaging, intuitive shopping experiences that tap into the traveller’s discretionary purchases.

The businesses will need to embrace new technologies and flexible distribution processes, as outmoded distribution components will be replaced. It is envisaged that the distributive systems will be increasingly relying on mobile devices as these technologies enable consumer interaction with speech and voice recognition software.

The tourism businesses will leverage themselves with artificial intelligence which could facilitate dynamic pricing as well as personalisation of services.

The distributive  systems could interface with virtual  reality software to help businesses merchandise their products in captivating customer experiences.

The third-party retailers will continue to form part of the distribution mix. However, many service providers will be using their direct channels to reach their targeted customers.

There will probably be fewer market intermediaries and online travel agencies will see significant declines.

It is very likely, that airlines will not have to pre-file volumes of defined fares through third-parties as they may not rely on inventory buckets to manage their selling capacity. The airlines must recognise the need to invest in new internal selling systems. Today’s passenger service systems lack the flexibility that airlines require. They are not adequate enough to serve  the airlines’ flexible and dynamic sales environments. These systems could be replaced with modular retailing platforms. Full Retailing Platforms (FRPs) will allows airlines to take back the control they require to be better retailers through any distribution channel (IATA, 2016).

However, Google, the multinational technology company, could be playing a much larger role in travel distribution. The technology giant could participate in, and possibly disrupt the tourism industry if it becomes an online travel agency. whether through acquisition or by launching a product of its own. In fact, its travel product, Google Flights is increasing in popularity among travellers.

Moreover, there have been recent developments in online payment facilities. Undoubtedly, there will further improvements in this area, as well. Payment providers like M-Pesa, Alipay, and PayPal will probably become more important.

In the foreseeable future, the travel marketplace will surely introduce new technologies and capabilities as multiple venture capital firms are increasingly investing in disruptive innovation.

There may be new businesses which could penetrate the market, including private air service operators who could provide “on-demand” airline services; alternatively, technology companies could develop or acquire their meta-search engines or online travel agencies.

Undoubtedly, the travel and tourism businesses need to find ways that intentionally overturn decades of outdated, distribution practices. The distribution community can choose to innovate and disrupt, or allow others to be leading innovators.

 

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Valuing Word-of-Mouth Publicity and Online Reviews

A very important function of public relations and publicity is to promote the corporate image and reputation of a business. The “image” is the total sum of impressions on the company. For instance, a casual act by an employee can appraise or damage the corporate image in the eyes of a single customer or caller on the phone. However, the major elements of corporate image include; the core business and financial performance of the company, the reputation and performance of its brands (i.e. brand equity); its reputation for innovation or technological process; policies toward employees; external relations with customers, shareholders, and the community, and; the perceived trends in the markets in which the business operates.

Public relations and publicity support other marketing tools, and could be seen as the backbone of the promotional mix. The success achieved by the other elements of the mix could easily be damaged or reduced by bad public relations or negative publicity, something which is undesirable to the businesses. Very often, the businesses cannot control the favourable or unfavourable messages about products or services that appear in online reviews. If for some reason, the business receives bad publicity, its role in this area moves to that of damage limitation. For example, many airlines and large hotel chains may have a section within their PR department to engage with online communities. This section will usually handle publicity issues, including negative reviews.

Recently, we are increasingly witnessing an surge in businesses’ engagement with online communities, including consumers. User-generated ratings and reviews provide relevant information on the business products and their levels of customer service. For instance, many prospective customers read reviews before choosing which places to visit, to stay or to eat. Very often the online ratings and reviews will have an effect on their consumer behaviours. It is likely that prospective customers will be mainly influenced by negative reviews, rather than by positive ones. Many studies indicate that individuals will read consumer reviews before shopping.

Presently, there are millions of online reviews that are related to travel and tourism. Digital platforms which provide travel-related content (are generated directly by users) concerning destinations, attractions and businesses. For instance, TripAdvisor provides travel related reviews and opinions on accommodation establishments, restaurants and attractions. In addition, many websites, which are traditionally known as booking engines, including; Booking.com, Airbnb.com, et cetera also provide reviews that are integrated in their presentation of properties, restaurants and other amenities. A distinction should be made between reviews and rating: Reviews will generally include qualitative comments and descriptions, whilst ratings usually feature quantitative rankings corresponding to degrees of user satisfaction. The ratings may be part of a review.

Sometimes internet users may noticce that there may be controversial reviews online.  Occasionally, the tourism service providers claim that they were subject to unfounded negative ratings. Moreover, many businesses may be blackmailed by consumers, as they threaten to write negative reviews unless their demands are not met. In a similar vein, consumers have also reported cases of unfounded positive ratings of services or unverified negative criticism. Online users are increasingly paying more attention to these contentious issues.

Recently, The World Committee on Tourism Ethics has elaborated its recommendations for the responsible use of ratings and reviews on digital platforms. Their recommendations are addressed to three main groups of stakeholders, namely: online platforms (operators like TripAdvisor or Yelp) service providers (businesses that are listed on these platforms); and users (consumers).

Digital platforms that incorporate reviews and ratings for their products and services need to ensure the accuracy, reliability and credibility of their content. Online platforms should undertake all reasonable measures to ensure that individual reviews reflect the real users’ opinions, findings and experiences. The provision of publicly available information though digital media involves a certain degree of trust, therefore the veracity of the reviews is essential for the integrity, reputation and good functioning of such platforms. Whilst it is not always easy to verify the authenticity of user generated content, the digital platform should have quality control mechanisms and processes to ensure that their reviews are clear, accurate and truthful, for the benefit of prospective consumers.

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