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Concepts and Tools for Strategic Pricing

In this chapter, we will address the following questions:

  • 1. How do consumers process and evaluate prices? (Page 198)
  • 2. How should a company set prices initially? (Page 200)
  • 3. How should a company adapt prices to meet varying circumstances and opportunities? (Page 208)
  • 4. When and how should a company initiate a price change and respond to a competitor’s price changes? (Page 211)

Marketing Management at Ryanair

Profits for discount European air carrier Ryanair have been sky-high thanks to its revolutionary business model. Founder Michael O’Leary thinks like a retailer, charging passengers for almost everything—except their seat. A quarter of Ryanair’s seats are free, and O’Leary wants to double that within five years, with the ultimate goal of making all seats free. Passengers currently pay only taxes and fees of about $10 to $24, with an average one-way fare of roughly $52. Everything else is extra: checked luggage ($9.50 per bag) and snacks ($5.50 for a hot dog, $3.50 for water). Other strategies cut costs or generate outside revenue. More than 99 percent of tickets are sold online, and its Web site offers travel insurance, hotels, ski packages, and car rentals. This formula works for Ryanair: The airline flies 58 million people to more than 150 airports each year. Ryanair enjoys net margins of 25 percent, more than three times Southwest’s 7 percent. Some industry pundits even refer to Ryanair as “Walmart with wings”!1

Price is the one element of the marketing mix that produces revenue; the other elements produce costs. Price also communicates the company’s intended value positioning of its product or brand. But new economic realities have caused many consumers to reevaluate what they are willing to pay, and companies have had to carefully review their pricing strategies as a result. Pricing decisions must take into account many factors—the company, the customers, the competition, and the marketing environment. In this chapter, we discuss concepts and tools to facilitate the setting of initial prices and adjusting prices over time and markets.

 
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