Pricing of Tourism Services - Case Study Example

Case Study One: Pricing Tourism Services: Interview with Geoff Rollason, CFO Story Bridge Adventure Climb Brisbane. According to the speaker, Geoff Rollason, the purpose of undertaking the market research study is two-prone. In the first instance promoting tourism related services such as adventure climbing in Brisbane depends on the pricing strategy of the firm because people take price as the first and foremost indicator of affordability. So the attitude of the people to price must be ascertained first. Secondly the comparative advantage that Sydney in particular has over Brisbane has to be taken into consideration. Demand for and supply of a product depend on a number of endogenous and exogenous variables. Then there is a set of dependent and independent variables. Price is a dependent variable with regard to demand and so is supply. Thus price plays a pivotal role in determining the equilibrium demand and supply. For instance the dependent variable of demand, viz. the availability of substitutes elsewhere such as those in Sydney influences this outcome. According to this outcome, the ACC must make a special effort to attract a variety of customers. The feasibility study provides just that information. The Adventure Climb Company's (ACC) supply curve is relatively inelastic perhaps because of the fact that supply doesn't respond to price changes and demand variations instantly (Gregory, 2007). In the first instance equilibrium demand for Brisbane Story Bridge climbs is determined by a number of factors such as the price of the product, consumers' incomes, the availability of substitutes, prices of those substitutes, the geographical proximity to the place where substitutes are available, the impact of weather patterns, interstate tax variabilities, supply constraints such as resource-mobility and consumers' preferences for variety. Equilibrium price is determined more or less by some of the same above factors in addition to the level of supply and the elasticity of supply. In other words the supply of Brisbane Story Bridge climbs is relatively inelastic (Rofail, 2002). Figure 1: Demand for and supply of ACC's Brisbane Story Bridge climb Price ($) S D P2 P1 D S Quantity Q2 Q1 Q3 This is illustrated by the above diagram. The market equilibrium is identical to the firm's equilibrium here. On the other hand the demand curve is rather elastic because consumers are able to respond to price with instantaneous effect. Thus the market equilibrium for the ACC is shown by the price, P1 where the quantity demanded and supplied is equal to Q1. This outcome would solve the problem of the ACC by identifying the consumer's willingness to pay P1 in Brisbane. Sydney and Brisbane are two separate regions and therefore the impact of selling walks across the Sydney Harbor Bridge on the business in Brisbane can be summarized as economically varied. For example when resources are separately managed to provide services in two different locations there can be quite strain on the scale of operations in each location. Assuming that the demand for walks in Sydney is constant or growing at a steady p0redictable pace, then the existing resources can be combined to produce the best output. However, demand for walks in Sydney might be influenced by other external factors such as the existence of the Harbor as a place of extra attraction (www.igougo.com). Landmarks such as harbors with an international reputation are more likely to have a greater impact on the demand fluctuations thus leading to uncertainties in planning future demand. The Company's Sydney operations might require it to adopt a different pricing strategy like a market skimming one in which the firm might charge a higher price for its service depending on the demand and the level of competition. Assuming that the price elasticity of demand for Sydney Harbor walks is lower (i.e. inelastic) the firm might be able to increase price and sustain a longer term service provision facility in Sydney thus affecting the level of operations in Brisbane. This would increase production costs in Brisbane so that the prices would have to be increased in Brisbane. This in turn would make the firm's Brisbane operations uncompetitive. Even though there wouldn't be many substitutes in Brisbane itself, pricing strategy might go haywire thus negating the firm's original idea of increasing sales by reducing price. Market concentration of climb service providers in a given locality can increase with each club deciding to have an additional business. If this trend were to continue in Brisbane the ACC would be affected by growing competition even before it could get a foothold in the market. Finally the ACC's decision to provide walks across the Sydney Harbor Bridge could impact on the firm's Brisbane operations by way of enhancing scale of operations. Indeed when scale of operations expands there would be some economies of scale available to the firm. But nevertheless the extent of the scale economies depends on the firm's ability to manage its production costs. Since the firm operates at two different locations, with expanding scale there can be decreasing returns to scale rather than increasing returns. Labor and managerial economies of scale can be expanded with associated gains though. These implications for the firm's Brisbane services have to be taken into consideration before launching the Sydney service facility (Ninness, 2002). Figure 2: Elasticities of demand for the Story Bridge climb Price ($) XED YED PED Q Quantity The elasticity of demand is defined as the degree of responsiveness in demand to a given change in the price, incomes and/or prices of related products such as substitutes and complements. Thus price elasticity of demand for the Story Bridge climb can be elastic because unlike in Sydney where there is a huge presence of international communities as tourists, Brisbane has very little appeal to international tourists. As for interstate tourism too Sydney has a much bigger degree of attraction. The above diagram shows three different elasticities of demand, i.e. price elasticity of demand (PED), income elasticity of demand (YED) and cross elasticity of demand (XED) for the Story Bridge climb. PED is shown to be elastic in Brisbane for the Story Bridge climb probably due to the fact that as the price increases there is a greater possibility that consumers might reduce their demand by a still a larger percentage than the percentage change in price. However, YED is likely to be inelastic because a bigger rise or fall in the consumer's income is necessary for him to change the demand for the Story Bridge climb. Thus YED is relatively inelastic. On the other hand XED is perfectly inelastic. This means whatever the change in price of the Story Bridge climb there would not be any possibility of shifting demand away from it in the total absence substitutes. However it does not mean that the firm has complete freedom to rely on XED because consumers might simply refrain from buying any. On the whole, elasticity of demand for the Story Bridge climb is relatively elastic because it is the PED that pulls the other two towards it (www.storybridgeadventureclimb.com.au) . The supplier sets different prices knowing very well the position of its near monopoly power to segment the market according to consumer demographics. For instance weekends including Fridays brought the biggest change in revenue because consumers demanded more during the weekends. At the same time the cost of providing the service also increased. Thus the firm had to increase the price in its twilight market segment. This approach in placing the service at the center of the marketing campaign to capture the most economically viable consumer segment pays off well (Holecek, 1987). This is shown by the following diagram which segments the market into three according to the supplier's ability to price discriminate among his customers. The second segment of Deluxe climbs enables the supplier to sell a varied service to those who less able to afford it at the higher price. Figure 3: Price discrimination on the basis of income and preference Price ($) D P3 P2 P1 D Quantity Finally the supplier reduces the price further for students and children. This segment is almost catching up with much more revenue promise in the future. This aggregation of market segments and their revenues will only be successful only if the good in question cannot be resold by those who buy it at the lower price. In fact this is a service and therefore it cannot be resold. Secondly it becomes successful only if the cost incurred in the lowest price segment is covered with gains made in other segments partially or wholly. In fact labor costs might rise too fast even in the students' segment thus leading to a loss in that segment ( Swarbrooke, Beard, Leckie, & Pomfret 2003). Number of factors would have to be considered by the firm in determining the market price for each segment. For example the firm has a virtually monopoly position in Brisbane right now though its ability to act as the 'price maker' is limited by a number of factors such as the ease with which competitors can enter the market and supply constraints. The near monopoly power of the firm is virtually there though it cannot be taken for granted in deciding on the price. Figure 4: Monopoly power and monopolist's equilibrium price and output Price ($) P2 X MC AC P1 Y E AR = D Q Quantity MR Thus the price determination process gives less freedom to the supplier. For instance the price is determined in Brisbane by the possibility of other firms responding to the unfolding market developments there. When adequate infrastructure develops in the market newcomers would have a tendency to enter with ease and not to leave even in the face of rising costs. Further supply constraints as in the case of natural monopolies like power supply can be taken into consideration in determining the price. In the case of the Story Bridge climb such circumstances don't exist. As the above diagram illustrates the supplier here acts like a monopolist because of his capacity and capability in price discriminating behavior. He sells the quantity Q at the price of P2 and makes a monopoly profit equal to the amount shown by the rectangle P1, P2, X and Y. This surplus profit would not last long if competitors are able to enter the market with ease. He maximizes profits at the point E where Marginal Cost (MC) is equal to Marginal Revenue (MR). Thus he is a 'price maker'. His Average Cost (AC) and Average Revenue (AR) remain at a point higher than the equilibrium point when he maximizes profits. In fact he can sell to the right of the point E but he doesn't. However it's obvious that the depending on the nature of demand for the Story Bridge climb, the firm is able to price discriminate and therefore at least in the short run competitors are less likely to enter the market. Thus at least in the short run this firm acts as a 'price maker' and not a 'price taker' as in perfect competition. REFERENCES 01. 'A week of adventure in and around Brisbane' , Brisbane AussieWeek ,September 2007 , Retrieved From: www.igougo.com on August 25, 2009 . 02. Boukreev, A.Anatoli Boukreev (Author) > Visit Amazon's Anatoli Boukreev Page Find all the books, read about the author, and more. See search results for this author Are you an author Learn about Author Central , & DeWalt, G. W. , 1999 , The Climb , St. Martin's Griffin , New York . 03. Holecek, D. F. , 1987 , Pricing tourism products and services (Tourism information series) , Michigan State University, Cooperative Extension Service , Michigan . 04. Ninness, G. ,2002 , 'Bridge climb in troubled waters', Sunday Star-Times , 28 April , 2002 , Copyright 2002 Sunday Star-Times. Provided by ProQuest LLC. (Hide copyright information) Retrieved From : www.highbeam.com on August 25, 2009 . 05. Price Structure , Story Bridge Adventure Climb , Retrieved From : www.storybridgeadventureclimb.com.au on August 25, 2009 . 06. Rofail, N. , 2002 , 'Brisbane bridge climb to rival Sydney's ' AAP General News (Australia) , February 1 , 2002 . 07. Swarbrooke, J. , Beard, C. , Leckie, S. , & Pomfret, G. , 2003 , Adventure tourism: The new frontier , Butterworth-Heinemann , Oxford , 351pp . Read More