The Effectiveness of Channel Tunnel Built and Operated by Eurotunnel - Essay Example

Marketing Pricing Strategy: Case Study of Eurotunnel Contents Introduction 3 Theory 4 Application of Theory 6 Conclusions 8 Recommendations 9 References 10 Bibliography 11 Introduction The proposal of the tunnel connecting England and France under English Channel has been a matter of planning and cost overrun business over the decades. When it could not be denied that a tunnel would serve significant advantage over the traditional ferry services that were used to operate between Dover, England and Calais, France, the main factor that served as the restraining force was concern for national security and cost issues. It was assumed that building a transport network below English Channel would be a matter of foul play because the construction company would never be able to cover their cost from the freights and passengers. After opening of the tunnel in 1994, huge enthusiasm among people was observed. People interested to cross English Channel in an easier, comfortable and shorter time compared to the traditional ferry services. On the other hand, traditional ferry services were preferred by most of the tourists and traditional customers because of the sense of enjoyment and safety aspects of the ride (Besanko and Stori, 2006). This report is intended to discover the effectiveness of channel tunnel built and operated by Eurotunnel with respect to the traditional ferry services. The analysis is based on the cost and pricing of these two services. A careful analysis of the case study along with the standardized pricing model used by Eurotunnel can give an insight of the relative advantages or disadvantages of one service on another. Theory The pricing strategy used by Eurotunnel is the traditional cost plus pricing where the price is set according to the predicted cost of producing and delivering the product/services. According to this theory, pricing of every product or service is targeted to earn a fair return over all costs that are fully and fairly allocated. Although this type of pricing ensures fair return above any cost figure, it generally results in mediocre financial performance. This is the way of improving the firm’s profit by increasing the production until marginal revenue of the product/ service is equal to the marginal cost. Thus, in this method, marginal cost is an important element and it is assumed that marginal cost of any product results in cutting down the profit figure of a business. There are certain advantages of using this method, for example, in case of handling many products, a firm can successfully implement cost plus pricing by which fair prices of products can be easily achieved. This approach of pricing involves full cost of production and thus, this ensures that the actual cost of production of a product/service can be fully recovered. The cost of decision making can be reduced significantly. In spite of having so many advantages, cost plus pricing ultimately leads to competitive disadvantage. The reason behind is, in modern day scenario, where cost of every raw material is increasing at an exponential rate, it is virtually impossible to predetermine the unit cost of a product. Often the fixed cost component of the product can turn out to be a variable component. This cost tends to ignore the role of consumers in management decision making and thus, consumers’ choices and preferences have a possibility of getting ignored. This is the problem with Eurotunnel’s pricing strategy. Even though they have reduced the price with added services, the exact choices and preferences of the consumers are ignored to some extent. The increased cost of electricity and other transport related expenses makes this pricing strategy infeasible. Application of Theory Price Analysis of Ferry Service It is found from the case study that, prior to the tunnel service; Ferry’s used to charge £180 for one trip of a passenger vehicle. The lowest was £ 77. For passenger transport: of the vehicles were priced at an average price of £ 142 Marginal cost of passenger vehicle = £ 75 per vehicle. Profit = £ 142 - £ 75 = £ 67 Hence it is found that Ferry services make profit of almost same as the marginal cost from their passenger vehicle transport services. For Freight transport: Average price set for a container = £ 170 Marginal cost varies between £ 110 and £ 142 Profit = £ 170 - £ 142 = £ 28/£ 60 The price is set just above the marginal cost. Here the gradual increase of variable cost, for example, amnesties and facilities for the passengers in the ferries are ignored. Price Analysis of Eurotunnel It is found from the case study that Eurotunnel is in marginal cost advantage position due to its high capacity of transport which reduces the marginal cost significantly. Marginal cost/ passenger vehicle = £ 15 If the price is set below the price level of ferry services, then also the company will be able to gain profits because of the low marginal cost. Price set for one passenger vehicle for one trip = 10% below the price level of ferry services, which is £ 142. Hence, price for Eurotunnel = = £ 127.80 / passenger vehicle This is the price set for the frequent travellers with flexiplus scheme. Advanced booking per passenger can be done at £ 23.00 only (Eurotunnel, 2014). It is clearly seen from the above analysis that Eurotunnel is obtaining more profit with offering lesser price to its consumers. Conclusions In the conclusion, it can be said that Eurotunnel is enjoying substantial cost advantage position with their marginal cost pricing as well as customer favouritism from their value added service offerings with added amenities. Still there are some problems associated with Eurotunnel. They are: Price sensitive passengers feel that the charges set by Eurotunnel is higher than the service level. This is the direct result of marginal cost pricing (Quine, 2013). Tunnel rails disrupt sometimes because of the extensive service needed to restrict the cost associated with service (Calder, 2014). Recommendations Eurotunnel should focus more on value driven customer service at price level compared to ferry services. This is the way of competing with the competitors. Complete ignorance of competitors cannot be possible in any business. Thus, a careful internal and external analysis of the competitors needs to be taken into account. The second recommendation would be improvement of service level which can be possible by increasing frequency of trains to cover costs even at lower price level. Additional costs took place due to unwanted interruption during services. Therefore, by any means, unwanted interruption of the service needs to be stopped. References Quine, O., 2013. Eurotunnel must reduce excessive Channel Tunnel charges within two months, says European Commission. [Online]. Available at: http://www.independent.co.uk/travel/news-and-advice/eurotunnel-must-reduce-excessive-channel-tunnel-charges-within-two-months-says-european-commission-8667140.html. [Accessed on April 19, 2014]. Calder, S., 2014. Easter weekend travel: Eurostar and Eurotunnel disruption leaves thousands on wrong side of Channel on Good Friday. [Online]. Available at: http://www.independent.co.uk/news/uk/home-news/easter-weekend-travel-eurostar-and-eurotunnel-disruption-leaves-thousands-on-wrong-side-of-channel-on-good-friday-9269260.html. [Accessed on April 19, 2014]. Besanko, D. and Stori, C., 2006. Eurotunnel vs. the ferries Case Study. Kellogg School of Management. North western University. Eurotunnel, 2014. Tickets and Fares, Prices from £23+ per car, each way. [Online]. Available at: http://www.eurotunnel.com/uk/tickets/. [Accessed on April 19, 2014]. Bibliography Nagel, T. T., Hogan J.E. and Zale, J., 2013. The Strategy and Tactics of Pricing - a guide to growing more profitably. New International Edition. New Jersey: Pearson/ Prentice Hall. Read More