The Price of the Month. Success or Failure?

05/2010: Finnair Flights during Stockmann’s Hullut Päivät Sale starting at 149 € per person

Posted in Pricing by Jouko Riihimäki on 17.5.2010

Finnair advertized flights on crazy-low prices during the Stockmann Hullut Päivät sale. My curiosity was roused by the promise and therefore I decided to look into the statement with more detail. Stockmann’s Hullut Päivät sale was organized between April 14th and 18th 2010.

The travel dates for the flights are: Athens May 3rd – September 30th 2010, Toronto June 6th – September 7th 2010, and Bergen May 23rd – September 30th 2010. The other destinations were targeted for April 19th – September 30th 2010. I used a flight for two adults between June 10th and 13th for this flight price comparison.

Hullut Päivät in general

According to Wikipedia, Hullut Päivät is a sales event of the Stockmann department store chain. It is not an actual sale, as the products sold during the event are acquired specifically for the event and sold at a lower price compared to Stockmann’s regular price level. Hullut Päivät is organized in the Akateeminen kirjakauppa bookstore, as well. Hullut Päivät event may be considered an established event, which is connected specifically to the Stockmann department store. The event was organized for the first time in Stockmann Turku in 1986. Hullut Päivät is organized twice a year, in April and in October, lasting, from the beginning of 2010, five days at a time from Wednesday to Sunday.

According to the Stockmann stock exchange release on May 10th, the turnover for Hullut Päivät increased by 22 %, exceeding all previous sales records in all market areas. I consider the result very good, especially taking into consideration the day-long sales clerk strike during the campaign.

Questions for the review

1. What are the pricing models for flights?
2. Were the flights advertized during Hullut Päivät cheap?
3. How did the parties benefit from the co-marketing campaign?
4. How could the sales campaign be further improved?

Pricing the flights

Generally, the pricing strategies can be divided into three groups in accordance with the picture below. Normally the chosen main strategy is not used on its own but it is combined with the other strategies, supporting one other. For air traffic, for example, this means that the pricing of the core service of Finnair and the entire industry is based mainly on the competitive-based model while other models are used to support it.

For long, air traffic has been in a state of tough competition. To some extent, this is due to the fact that flight prices in terms of the core service have become transparent to the customer; therefore the pricing models of various agents cannot differ significantly from the prices of their competitors. Competition-based pricing in this industry does not equal better profitability, as the general profitability level in the industry is low. In the future, this will result in bankruptcies and reorganization in the industry.

With air traffic, the use of cost-based pricing as the main strategy could lead to a major decline in the utilization rate of the capacity unless the agent possesses clear cost leadership. Budget airlines, such as the American Southwest Airlines and Irish Ryanair, operate using the cost and price leadership model. These airlines have focused their operation efficiently on the best routes and often chosen the most quiet and affordable airports as their destination. In order to respond to the challenges set by these airlines, the airlines with heavier cost structures have cut down their routes as well as cut their core services into smaller pieces (Unbundling Services). Here is a recent quote from Taloussanomat on May 10th 2010: Finnair begins to charge its customers for food and beverages in shorter distance flights, excluding coffee, tea and juice.

Another way to respond to the heavy competition is to use Dynamic Pricing efficiently; this means that the price of the core service is continuously adapted according to the changes in demand on the basis of the set terms (time, utilization rate, class). When taken to the extreme, each offered price will be unique and “tailored” (Differential Pricing).

The third method is to exploit value-based pricing. Indeed, airlines have already developed services which bring additional value to the customer, such as good airport services, delicious food, solutions for additional space during the flight and other similar services. Customers are willing and ready to pay for these value-adding services. Some of the airlines, such as Cathay Pacific and Singapore Airlines, have chosen the path of quality and service leadership. These airlines have been ranked among the top airlines in the world. This path requires focus on the customers, who appreciate bundled services instead of the simple core service.

In addition to the abovementioned, almost all airlines maintain programs for regular customers, offering tailored services to various customer groups (Loyalty-Based Services and Pricing). The purpose of these programs is to commit the customer to the airline and the airline alliance as tightly as possible. The programs are used to direct value-adding services and other benefits to loyal customers.

Hullut Päivät and Finnair pricing

During Stockmann’s Hullut Päivät, Finnair offered 25 different destinations as presented in the picture above. This amounts to 50 % of all direct foreign flights by Finnair (50 destinations total) as stated in Finnair’s homepage. Size-wise, this is a significant co-marketing and sales event with another company. The effects of the campaign are increased by the fact that reservations could be made on a long-term basis (over 5 months). My analysis included a weekend trip between June 10th and 13th 2010 for two adults. I wanted to compare the flight offers between two outside agents (eBookers and Supersaver) and Finnair. The prices of these three agents were retrieved between April 14th and 18th 2010, i.e. during Hullut Päivät. I wanted to see whether it was economical and sensible to go to Stockmann’s department store to get and possibly queue for the tickets. In addition, I searched for Finnair’s prices to the same destinations the week after the Hullut Päivät event. This was done to examine the change in prices after the campaign. The results are presented below. The prices in blue are not direct flights; these flights had either one or two stop-overs. The best offers during Hullut Päivät when compared to other agents are marked in green in the table. The prices in red did not provide significant advantage in terms of the price offers of Hullut Päivät.

For the most part I find the pricing in accordance with the promises made. For the rational buyer, the Eastern European destinations Kiev, Bucharest, Budapest and Prague were especially tempting. As Finnair is strategically strong in the Asian routes, it would not be sensible for the company to lower prices too much in the Delhi or Seoul routes. Finnair did not make this mistake, making the pricing successful for this part as well. Besides, I would not have gone to Stockmann to queue for these flights but bought them straight from my own couch instead. In terms of routes with heavy competition, the prices were quite close to their competitors’ prices. These routes included London, Brussels, Amsterdam and Paris; the benefits of these routes were fairly low. Based on the analysis, the favorite destinations were Venice, Istanbul, Soul and Prague. The prices for these destinations were significantly higher the following week. Based on the analysis, the demand for flights to Rome, Ljubljana and London was probably lower as their prices had come down the following week. However, it must be taken into consideration that the analysis was based on one single summer weekend and the results may not be applied to the entire period. To conclude the price comparison, I would like state that the campaign was a success in terms of prices and no errors were found in pricing. It would have been a clear rookie mistake if Finnair flights would have been available online with a lower price than on Hullut Päivät. Next, I will briefly examine the other supposed benefits of the joint campaign to its various parties (Stockmann, Finnair and customers).

Benefits of the co-marketing campaign

People are interested in traveling and flights are probably one of the best crowd-pullers during Hullut Päivät. Therefore the joint campaign brought customers to Stockmann and they most likely left the department store with other products in their yellow shopping bags, as well. The other party, Finnair, was able to fill its long-term flights within few days with “reasonable” costs. In this modern era of online shopping, it is virtually impossible to gain such a stream of customers in any other way. These flight reservations will ensure a good utilization rate of the basic capacity between April 19th and September 30th 2010. Both parties to the sales campaign must be satisfied with the gained results and the financial benefits of the campaign were most likely significant to both parties. In addition, their customers were able to purchase flights with good prices and they did not have to question the sensibility of their purchase afterwards.

Pricing Stars (1-5):

Developing the Hullut Päivät flight campaign

I would have awarded the campaign with five stars if the customer needs and the ease of making a reservation were taken into consideration. To my personal opinion, most customers would probably wish to ensure the dates and destinations they desire are available prior to the actual queuing. The solution could be a flexible online reservation system using the loyalty-based programs of Stockmann and/or Finnair, for example. Nevertheless, the tickets should still be picked up at Stockmann. Thus the customers could spend the time saved from queuing for making other purchases. Another point of development would be to continue choosing the right destinations for the sales event. The focus should be on destinations for which Finnair provides clear advantages in terms of competitors. This assessment did not cover Finnair’s flight pricing in general; instead, I focused solely on the Hullut Päivät sales campaign.

Jouko Riihimäki, M.Sc, CPP Certified Pricing Professional

Sources

Finnairin Financial Info 10.5.2010

https://newsclient.omxgroup.com/cdsPublic/viewDisclosure.action?disclosureId=401320&lang=en

Benchmark Study 2009

http://www.worldairlineawards.com/main/aoy-2009-release.htm

Finnair Flight Destinations

http://www.finnairgroup.com/group/group_8.html

Advertisements