THE CRUISE LINE INDUSTRY

By The Strategic Pricers:Davis AustinTy Bostain

Nick BaccileDaniel Weisen

GAME PLAN

Introduction Industry Overview Demographics Pricing

Strategies Recommendations

Introduction• Why did we choose the cruise line industry?– Personal Interests and experience in the industry.– Lots of current news events.– Unique and interesting pricing strategies.– Few number of large players.

Cruise Industry Overview• Projected $36.2 billion dollar industry for

2013• Projected 20.9 million passengers for 2013• Highly concentrated market• High barriers of entry mostly due to the sunk

costs it takes to build a cruise ship

Barriers to Entry• Cost of ships– RCL just built $1.4 B Oasis of the Seas

• Access to ports• Large crew – willing to travel away from

families• Government Regulations/Traveling

Internationally

Recent News Stories

• Concordia operated by Costa Cruises a subsidiary of Carnival wrecked of the cost of Italy in January of 2012.

• 30 people killed

Actual Industry Growth

Estimated Growth of Passengers by Continent

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

2013 2014 2015 2016 2017

$

Date

North America

Europe

Other

Cruise Passengers by Continent

60.5%27.0%

6.5%

2.9%

2.9% 0.2%

North America

Europe

Asia

South America

Australia

Middle East/Africa

Cruise Industry Functions• Transportation• Rooming accommodations• Dining• Guest Entertainment– Shows– Teen/Children activities– Casino (not always but common)

• On-shore activities (Excursions)

Market Share by Number of Passengers

48%

23%

8%

7%3% 11%

Carnival

Royal Caribbean

Norwegain

MSC Cruises

Disney

Other

HHI = 48^2+23^2+8^2+7^2+3^2=2,955

Carnival Cruise Lines• Founded- 1972• Headquarters- Doral, Florida• World’s largest cruise operator• 2012 Full Year Net Income- $1.3 billion• Own 11 different cruise line brands including

Holland America & Princess Cruises• 100 cruise ships in fleet – 86,800 employees

Stock Chart

Royal Caribbean• Founded- 1997• Headquarters- Miami, Florida• World’s second largest cruise operator• 2012 Full Year Net Income- $432 million• Royal Caribbean owns five cruise lines

including Celebrity Cruises• 41 cruise ships – 60,300 employees

Stock Chart

Star Cruises• Founded- 1993• Headquarters- Hong Kong, Asia• Full year Net Income 2011- $185 million• Dominates market share in the Asia-Pacific

destinations• 18 ships – 18,000 employees

MSC Cruises• Founded- 1987• Headquarters- Geneva, Switzerland• 12 ships – 12,000 employees• Big presence in Mediterranean cruise market

Disney Cruises• Founded- 1996• Headquarters- Celebration, FL & London, U.K.• 4 boats (Dream, Fantasy, Magic, Wonder)• Subsidiary of The Walt Disney Company

Perceptual Map

ExpensiveInexpensive

Luxurious

Family

Age Demographic of Passengers

7%18%

26%22%

26%20's

30's

40's

50's

60+

Income Demographics

9%10%

16%

19%

39%

7%

1%

$39-50k

$50-60k

$60-75k

$75-100k

$100-200k

$200-300k

$300+

Race Demographic

91%

3%6%

White

Black

Other

ResultNorth

American

40 + years old

Income $100-$200k

White

Pricing Strategies• Second Degree Price Discrimination• Third Degree Price Discrimination• Temporal Pricing– Seasonality– Overbooking• Max Capacity

Willingness to Pay• The Cruise Experience – Tourist’s perception of cruising as safe, social, service-

oriented, and customer friendly.– Some travelers perceive cruising as expensive,

claustrophobic, elitist, seasickness-inducing, and reserved for older couples only.

• Branding– Cruise brands take great care when it comes to their

reputations because it implies a certain standard.– Branding is essential for garnering new business,

encouraging repeat customers, creating brand recognition and defining the company’s approach to operations and marketing.

The Product• Cruises have three different economic features: – Inelasticity - a cruise ship is “perishable” because it

can’t be stored– Heterogeneity - the product consists of a variety of

components that make the cruise experience different for each customer

– Complementary - the cruise is not one single experience but a host of elements that combine to form the cruise experience

Second Degree Price Discrimination

• Two-tier pricing system• First purchase-ticket to get on the boat• Additional purchases during the vacation– Cruise Line Excursions– Alcoholic/Soft Drink Beverage Packages• Classic Beverage Package (beers, wines and soft drinks)

$45• Premium Beverage Package (addition of premium

alcoholic cocktails) $55

On-Board Sales• Top 3 most profitable areas– Casino & Bar – 53%– Shore Excursions – 19%– Spa – 10%

Ticket and On-Board Revenue

Ticket $1,311

Onboard Spending $417

Casino & Bar $222

Shore Excursions $81

Spa $41

All other onboard spending $73

Total Spending $1,728

Third Degree Price Discrimination

• Allows consumers to self-select into their desired price range– Different classes of boats within a cruise liner• Larger/Newer the ship, more “luxurious”

– Different classes of room choice• Interior, Ocean View, Balcony, Suite

Room Class Price Discrimination

Allure of the Seas$0

$100

$200

$300

$400

$500

$600

$126$162

$289

$512

Ticket Price per Night Sale Date - April 14

InsideOceanBalconySuite

Pric

e pe

r Nig

ht $

Temporal Pricing• Seasonality– Pricing jumps in the summer months and

Christmas week– Vacation time– Travel during warmer summer months and colder

winter months

Seasonality

Inter-Temporal Pricing• As cruise approaches, consumer demand becomes

increasingly more inelastic, allowing cruise lines to raise prices.

• However, immediately before the departure date, cruise lines attempt to maximize capacity, leading to last-minute price decreases.

• Brochures are carefully designed to encourage advance booking, through such strategies as making off-season prices look dramatically lower than their on-season counterparts and promising discounts for booking early.

Inter-Temporal Pricing Between Ships

2-Apr 3-Apr 4-Apr 5-Apr 6-Apr 7-Apr 8-Apr0

50

100

150

200

250

300

350

400

Ticket Price per Night Sail Date - April 14

DreamFantasyMagicMariner of the SeasOasis of the Seas

Date

Pric

e pe

r Nig

ht $

Inter-Temporal Pricing Between Rooms

Allure of the Seas$0

$100

$200

$300

$400

$500

$600

$126$162

$289

$512

Ticket Price per Night Sale Date - April 14

InsideOceanBalconySuite

Pric

e pe

r Nig

ht $

Allure of the Seas$0

$100

$200

$300

$400

$500

$600

$700

$240 $254

$320

$626

Ticket Price per Night Sale Date - April 28

InsideOceanBalconySuite

Pric

e pe

r Nig

ht $

Overbooking Strategy• Customers can’t leave once on the vacation• The more crowded the ship, the seemingly

more enjoyable the environment/ambiance• Repeat customers• No business travelers• Long booking periods with large amounts of

third party bookers (expedia, travel agents)

Recommendations• Considerations?– Atmosphere?– Amenities?– Brand?– Room Class?– Season?

• When to book your next cruise?– Take the risk! Closer to departure date

The End• Questions?