Channel Tunnel and Market-penetration Pricing Strategy
Eurotunnel vs. the Ferries Case Analysis Marketing Problem: The main problem faced by Eurotunnel’s senior management is that they have not developed a competitive pricing strategy to increase its passenger and freight travel market share. Case Solution: Eurotunnel should use a market-penetration pricing strategy at all times to gain freight customers. It should use a market-penetration pricing strategy during non-peak periods and a premium pricing strategy during peak periods with passenger car customers. Rationale:
This strategy works best for Eurotunnel to gain market share for three main reasons: * Passenger preference among Le Shuttle users * Patterns among peak travelers * Price elasticity of freight traffic Among users of Le Shuttle passenger car service, it was noted that the top three important factors in crossing included reliability (70%), value for money (65%), and speed (30%). As reliability is assumed equal between the tunnel and ferries, the next biggest factor in customer value is price.
By offering even a slightly reduced price than the ferries, many customers will switch to using Le Shuttle.
Off-peak car travelers also placed a high value on speed. By offering a lower price than the ferries along with quicker speed in crossing the channel, the tunnel will be the more valuable choice among passenger cars. In the minds of the customer, the price will be lower than the perceived value of the amenities offered and this will cause a significant amount of customers to switch. Passenger car customers in peak periods tend to book ahead for ferry trips and have specific travel dates due to work and holidays.
The customers traveling in peak periods are fairly cost inelastic because they prioritize availability and schedule above travel cost. Regardless of the price to cross the channel, if Eurotunnel proves to have capacity available for customers even without making reservations, customers will perceive the tunnel as a reliable travel service for their families. Eurotunnel will be able to offer a premium price to peak period passengers and still gain market share because these customers will willingly pay a premium for a convenient schedule and speedy ravel. During the common peak travel periods, Eurotunnel will be able to compete on its capacity and speed competencies rather than price. Freight users in general go out of their way to get the lowest cost of trip and are very price elastic.
Since trucking companies would take a longer ferry route in order to reduce the cost, it can be inferred that by offering a cost even slightly below that of ferries at all times to freight transporters, Le Shuttle will be their preferred choice.
By entering the market with a price lower than the ferries, the trucking companies, which have an estimated price elasticity of demand of -3 to -4, will flock to the lower price and will unlikely ever return to the higher priced provider. Paired with other factors valued by the truckers, it is likely that a low price offer from the tunnel would quickly make it the first choice in channel crossing among truckers themselves as well as trucking companies. Eurotunnel will be able to support the increase in customers as well as the market-penetration pricing strategy.
Eurotunnel currently has the capacity to accommodate 105% of the channel crossing market. Thus, even in peak periods, Eurotunnel will be capable of accommodating the influx of passengers without compromising on schedules or service.
Eurotunnel also has low marginal cost per customer, operating expenses, and capital expenses relative to the ferries. These factors allow Eurotunnel to be competitive in price as well as remain viable as a business. By offering a lower price than its competitor, Eurotunnel will be able to steal many of the ferry customers and lock in a solid customer base.