I make the occasional flight to Cape Town, and usually try and strike up a conversation with the person squashed in beside me. Most times I get a rather strange look and a monosyllabic response, but on my most recent flight my neighbour was more talkative than usual. After a few pleasantries, he asked me abruptly, with a rather smug look on his face, “How much did you pay for your ticket?” When I told him, his smug look turned into one of sheer delight, and he told me with glee how much he had paid. His fare was less than half of mine.
I have just logged onto www.kulula.com. for a one-way flight from Johannesburg to Cape Town. During the next month. I can find prices ranging from R299 to R1 399. Same aircraft, same service, same distance, but one ticket costing only 20% of the price of another?
How do they do it, and why?
It’s simple, really. The answer is computer technology, and an excellent analysis and understanding of the difference between fixed and variable cost. Not only does Kulula understand these cost elements, they know how they break down flight by flight and day by day. Think about it. The cost of running a scheduled commercial aircraft is almost entirely fixed. Whether it flies full of passengers or empty, the difference for the operator is small. The only costs directly related to the number of passengers are maybe a little more fuel due to the heavier load, the refreshments on the plane, and the costs associated with embarking, disembarking and baggage-handling.
With today’s information technology, it’s possible for airline management to know minute by minute the state of bookings on each flight. With this knowledge, and precise up-to-date information on fixed and variable costs, imagine yourself in the position of the manager responsible for pricing tickets and filling the aircraft with passengers.
How would you do it?
You’d probably price early bookings at a figure that covers your total fixed and variable cost and provides a decent profit margin on top. As late bookings started coming in, you’d probably start increasing prices, especially on those popular flights that were filling up. If demand for seats slowed down, you would reduce prices. With only days or perhaps hours to go, and only a few seats still available, you would discount heavily to fill the last few seats, but never sell at a price that did not cover variable cost.
This is a wonderful example of a business using the concepts of fixed and variable cost to price their product. Sure, the great success of airlines like kulula.com, lastminute.com, 1time.aero and now flymango.com has been driven by technology; but if they did not understand the difference between their fixed and variable costs, and monitor these constantly as they change, they could never have done it.
I wonder how well we farmers understand and monitor our fixed and variable costs, and what opportunities we are missing in pricing our products as costs change and supply and demand fluctuate? Contact agribusiness consultant Peter Hughes on (013) 745 7303 or e-mail [email protected]