Thai Air Asia Limited
...ey are the least price-sensitive segment. They seek for convenient value from airline service. Consequently, their purchasing criteria depends on flight schedule whichever matches with their agenda. These unique purchasing behavior and value of frequent flyer allow the opportunity for low-cost airline to satisfy the needs of this target customer by its frequent flight schedules and prompt purchasing process. The ability to purchase plane ticket via internet or call center will enhance the convenient value offering. Customers no longer have to wait for ticket delivery. Rather, holding solely identification card and confirmation code is adequate to get them ready for boarding. Section 3: Competitive Analysis Competition of Air Asia can be aggregately defined into two levels, macro and micro. At macro level, the competition includes those of conventional airlines who offer similar destinations to Air Asia such as Thai Airway. As for micro level, the competition lies in the low-cost airline industry, comprising of four key players: Thai Air Asia, Nok Air, One-Two-Go by Orient Thai and Tiger Airways. Essentially, the other three budget airlines pursue same market segment and offer similar values as Air Asia, and hence are considered as Air Asia・s direct competitor. Thai Airway, on the other hand, offers wider range of services with higher price. Therefore, despite similar destinations provided, Thai Airway can be perceived merely as an indirect competitor of Air Asia. Yet, it is the indirect competitor that is too strong to be overlooked and worth taking into consideration when implementing strategic planning. Note: The further information can be referred to Appendix 5 and 6 Section 4: Customer Understanding 4.1 Total Economic Value In order to effectively determine the pricing strategy Air Asia chooses to implement, the total economic value should be analyzed. Appendix 7 illustrates that the total economic value is the combination of reference value and the differentiation value, which can be both positive and negative. Since the information regarding cost and differentiation values is not numerically available, the values will be analyzed qualitatively. Assume that this economic value was analyzed when Air Asia started its business in Thailand; the reference value was the price of full service airfare, which the customer viewed as the best available substitute such as airfare of Thai International Airways. As for the positive differentiation values, Air Asia possesses several advantages that could positively differentiate itself from other competitors. For instance, the price of its airfare is much cheaper than full service airfare. Moreover, the customers have more flexible choices in arranging their schedule due to the more frequent flights. Besides, the more early the customers book air ticket, the cheaper the price of airfare is offered. However, with the attempt to offer the airfare at the much cheaper level, Air Asia decided to cut out several services that are believed as unnecessary for the customers. These reflect variety of negative differentiation values, which reduce the total economic value of Air Asia for the customers. For example, there is no frill, no assigned seat (no boarding pass). Also, the customer cannot change travel date and flight, once they have already booked it. Furthermore, the airplane is the small second-hand airplane, which has physical risk in traveling. The accidence possibly occurs if the plane lacks of maintenance. Table 1 summarizes the reference value and differentiation value (Refer to appendix 8). 4.2 Factors influencing perceptions of values It is certain that economic value discussed in previous section reflects the value of flying with Asia airline for the customers. However, in reality, there exist the gaps between the customers・ willingness to pay and the value they receive. One main reason that determines the willingness to pay as well as creates the gaps is the sensitivity of the customers to price level of products when making purchasing decisions. Nine ．effects・ that can influence such sensitivity along with the tactics that Air Asia apply to reduce the gaps will be discussed in the following paragraphs. It is worth noting here that all the ．effects・ are subjective and differ widely among customers and across purchase situations; therefore, the analysis here will be based on the target market of Asia airline. • Reference Price Effect The reference price effect refers to the situation when the customers are more price sensitive when the price of products they want to buy are high relative to the prices of their perceived alternatives. In this case, budget airlines, especially Air Asia, choose to increase the sensitivity of customers by acting as their perceived alternative. Consequently, the customers will feel that the price of the full service airline they currently use is high when compared with the price of Air Asia and, eventually, become more price sensitive customers. Firstly, Internet is one of the selected methods of airplane tickets distribution for Air Asia so that customers are more informed regarding the prices offered from several airline ticket providers and; therefore, more sensitive about the price. Recall of prices seen in the past is another application. Air Asia has implemented several promotional programs, such as tickets from Bangkok to Chiang Mai is priced at 99 baht at a certain period, to attract the price sensitive customers as well as set low reference price in order to associate low price image with Air Asia and increases the barriers to new entry Lastly, the reference price expectation depends on the future price. The price level offered by Air Asia is varied by the time of purchase and demand of the air tickets. For example, the price will be more expensive when the time is closer to the flight date. As a result, the customers that use future price as the reference will be more price sensitive at a time and tend to buy the tickets as early as they can. • Difficult Comparison Effect As for budget airlines, it is relatively easy to compare between the offerings of each airline, customers, hence, increase their level of price sensitivity. Air Asia chooses to respond to this effect by trying to reduce the cost of sampling of the products to induce the customers to try flying with Air Asia. The example is, at the beginning, Air Asia offers promotional package from Bangkok to Phuket at very low price. • Switching Cost Effect Switching cost effect will decrease the price sensitivity of customers when high cost is incurred in the process of switching from one product to another. With regard to budget airline, there is low switching cost as no customer loyalty programs, such as membership or mileage collecting program, offered to the customers. Therefore, it is easy for customers to consider switching the airline. By considering such factor, the low price is used to influence the customers to choose Air Asia since the customers are more price sensitive. • Price-Quality Effect Generally, in airline industry, customers tend to use price to indicate quality, as the airline with the higher price will normally offer better service, compared to the ones at lower prices. However, it is different when it comes under the scope of budget airline. Regarding the nature of budget airline, low price does not always mean low quality. It is also depends on the time to purchase of customers. The example can be seen as when the customers purchase early, they will get a low price ticket from budget airline while the quality is the same as the ticket with higher price that the customers buy closer to the flight date. As a result, when the price does not always reflect the quality, customers tend to be more price-sensitive, spending time to find the airline, which give them the highest benefits at the lowest price. • Expenditure Effect According to the expenditure effect, the customers tend to be more price sensitive, when the expenditure is large compared as the percentage of their income. Concerning the nature of Air Asia・s target customers, an airfare is considered as a big expenditure, therefore, the airline has to offer an attractive price as the customers highly concern on price factor. • The End-Benefit Effect The end benefits of people who choose to travel by plane are the time saving as well as the safety. It is apparent that traveling by plane is a lot faster, when compared with traveling by car, train or ship. The time saving is very valuable to customers; especially in today・s hectic environment that time is seen as a scarce resource. Besides, enjoyable time and safety of life are also considered as the end benefits of traveling by plane. It is obvious that safety of life is the most significant factor that customers require when they travel and, thus, perceive as enormously valuable. Consequently, the more important the end benefits to each customer, the less they become sensitive, regarding the price. The customers are more likely to pay more to exchange for such an important end benefits as their lives and time saving. This effect can dramatically affect the sales volume of Air Asia, as well as other budget airlines, if the full service airlines use the point of safety as the selling point with the attempt to reduce the price sensitivity of customers. • The Share-Cost Effect The airfare is generally seen as the personal expense; therefore, the customers have to pay the whole amount by themselves. According to the share-cost effect, in this case, the customers are more likely to be price sensitive as there is no shared cost with others. Nevertheless, the exception always exists. In the case of business trip, the company agrees to pay partial or the full amount of the airline fee, the customers, here, will be a lot less price sensitive because they have to pay only a small amount of fee or even not to pay at all. In this case, Air Asia can try to attract the company by offering the package for the company, as they will be the ones who pay and concern more about the price of the travel not the travelers themselves. • The Fairness Effect Several customers, who always travel by plane, especially within domestic area or at short distance, may feel that the price for full service airline is out of the fairness range of price. They may feel that they are forced to pay for the service that they do not actually need such as the food offering on plane. In this case, the customers tend to be more price sensitive. These groups of customers are the target market of Air Asia. Since Air Asia will cut out the service that are not perceived as necessary by such customers and offer the airline tickets at lower price to attract price sensitive customers. • The Framing Effect The framing effect refers the situation whereby the customers are more price sensitive when they perceive the price as ．loss・ rather than ．foregone gain・. In relation to Asia Airline, there is no outstanding application that is influenced by the framing effect. In conclusion, by considering the nature and characteristics of Asia Airline・s target customers, it can be concluded that most of the effects, such as reference price effect, difficult comparison effect, switching cost effect, price quality effects, expenditure effect and fairness effect, refers to the customers as possess high level of price sensitivity. Even though some effects, such as end-benefit effect and shared cost effect, highlight the insensitivity of customers but they also leave the opportunity for Air Asia to develop appropriate tactics to overcome those gaps and increase the sensitivity, regarding price level to the customers. Consequently, it is crucial for Air Asia to consider all these effects, which in turn determine the willingness to pay of the customers, in developing their pricing strategy. Section 5: Pricing Strategy By carefully analyze all the factors that determine the perceived values of customers along with their willingness to pay for low budget airline, Air Asia spot the customers・ need that has not been fulfilled by any airline yet. Air Asia is the first budgeted airline in Thailand, which aims to capture the price sensitive segment in the market. The company chose to pursue the penetration pricing strategy by setting the price below the total economic value or the price level that the customers willing to pay for one air flight. The reason behind the fact that Air Asia can offer such a low price to the customers is that the company has the sustainable cost advantage over the competitors because it cuts many services. For example, there is no meal, boarding pass, and assigned seat. The company believes that customer values for the lower airfare rather than the full services from the airline. Therefore, Air Asia will gain the revenue from the large base of price sensitive buyers, who are both the switching customers from competitors and those who cannot afford to fly with the full service airline. The company also induces the potential buyer to try the service by launching various promotional campaigns. However, the company will not reduce the price of the airfare to the extent that might initiate the price war because it will unconstructively hurt the company itself in the long run. Section 6: Product Life Cycle Pricing To set the appropriate price to effectively attract the target customers, the stage that Air Asia stands in the product life cycle is also critical to take into consideration. Since Air Asia has long started its business and enjoyed its revenue in the budgeted airline industry, competitors who see the potential in this market started entering into this business such as Orient Thai, Nok Air, and Tiger Air. Appendix 9 illustrates Air Asia・s stage in the product life cycle. At this moment, the company is considered to be in the growth phase because the industry is expanding due to more competitors coming into the market. Customers become more price sensitive in choosing the most appropriate airline because they have more choices and are more educated. Both Air Asia and the later entrants begin to assume competitive positions and prepare to defend them. Therefore, the companies must choose where it will emphasize the marketing strategy between the differentiated product and cost leadership. At the present, Air Asia does not offer any differentiated services that could positively gain advantage over the competitors in the budgeted airline industry. Thus, the company chooses to apply the cost leadership as the marketing strategy to compete with new entrants. In this highly competitive industry, Air Asia possesses the first mover advantage, which helps the company gain large portion of market share. Therefore, it could gain cost advantage from large sales volume, which would drive down the cost per unit of the company. However, cost leadership is not always sustainable in the long run because other competitors could pursue this strategy as well if they have strong market position in the future. Therefore, Air Asia should later consider developing the unique attributes of service that could differentiate it from competitors and create the higher value in customer・s mind. Section 7: Competition Managing Conflict Thoughtfully As mentioned in the above paragraph, at this growth stage, the competition in the market is very intensive. Many competitors cut price of their service in order to gain larger market share. Air Asia thoughtfully reacts to competition by using the framework in Appendix 10. Firstly, in step 1, the company carefully figures out whether there is any responsive strategy that could cost less than the preventable sales loss, which occur from the competitor・s cut price. The answer is no. Then, Air Asia finds out that position in other markets is not threatened when the competitors gain more market share because the scale is different. New entrants usually have fewer destinations compared to Air Asia. Therefore, the competition would not much affect the company・s foreign market. From this framework, Air Asia could derive the way to react to competition by either accommodating or ignoring it. In this case, the company chooses to ignore the competitor・s cut price because the competitor is weaker. It has smaller market share and lower profit, which could cause only small impact on sales loss. Besides, the cost of price reaction is relatively higher than the avoidable sales loss. The reason is that the profit margin in this industry is already thin. If the company starts to compete with competitors based on price, it might initiate the price war and could not even make profit. Section 8: Segmented pricing tactics for separating markets 8.1 Purchasing quantity Large volume buyers of plane ticket tend to be more price sensitive as the price of air ticket accounts for large propor...