Cruise Pricing Strategy in 2021 🚢 Podcast Ep. 82

In the first episode of 2021 – we discuss cruise pricing strategy in 2021.  

 

Clearly given the continuing restrictions on everyday life in 2021 -whether you will ever sail on that cruise is doubtful – and if you do – will it be the way you remember?

 

Aidan and Joanna discuss promotions, overbooking, revenue management and if people are just buying a bit of sunshine!

 

 

 

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TIME-STAMPED SHOW NOTES

 

[00:00] Introduction 

[01:22] Do people still buy holiday cruises in 2021? Is the promotional email effective?

[02:17] When you paid for a cruise, what are you really buying?

[03:17] 45% of people are willing to pay with something that likes not to happen, that includes paying the cruise holiday

[06:34] As part of cruise pricing strategy, they are doing time-based promotional programs and loyalty programs

[09:06] Does the cruise pricing strategy now is considered price gouging?

[14:22] With COVID, how will social distancing affect cruise ships? Does it also affect cruise pricing strategy?

[16:32] In line with cruise pricing strategy in 2021, they need to consider the strategic business model and business strategy

 

 

 

 

What is the cruise pricing strategy in 2021?

 

We want to wish all our listeners, a happy new year! This is our first episode of 2021 which I am sure you also hope would be a much better year than 2020.

 

Yeah, happy new year! And for some, it’s been very difficult in different areas with the hotspots, shutdowns and lockdowns been quite tough, especially over Christmas. So we’re hoping for a really good positive New Year this year.

 

On that note, maybe you’re yearning for a holiday, yearning for a vacation and you’ve been tempted. If you’re like me, you may be getting promotional emails from cruise companies, people like Carnival or Royal Caribbean.

 

Maybe you’re receiving those sorts of emails in your inbox. And thinking, “you know what I really could do with cruising the South Pacific”.

 

I know a lot of people have been saying, “gosh, I wish we could go on a proper holiday one in which you don’t have to worry about COVID virus shutdowns, lockdowns, restrictions, wearing masks, putting on hand sanitiser”.

 

The SDS holiday, where we’re sort of not thinking about any of those things. It was actually a holiday seems like many years ago.

 

Is it a dream or do you think they’ll come back? Now in terms of cruise ships, we’re just like thinking when talking about it the other day.

 

We’re getting all these promotional campaigns through emails from Royal Caribbean, Carnival cruises.

1. Is it actually working?
2. Are people actually buying cruise holidays now, even in spite of COVID?
3. Or is it just sort of last calls to just drive promotional strategies and hope for demand increases?

 

I don’t know.

 

 

Cruise Pricing Strategy: What are you buying when paying for a cruise?

 

If you get a promotional email into your inbox from Royal Caribbean or any or any of these big companies. I know there are maybe five or six major companies in Australia and globally.

 

When you book that cruise, let’s be honest, you don’t know if that cruise is actually going to happen. Right now, it’s very difficult to forecast more than two weeks out.

 

So say you snap up one of the special offers. A  discounted price or extra stuff is added in and you pay your money across.

 

What really are you buying?

 

I suppose today we want to really just play around with this idea. Think, what is the transaction there? Because to be honest, you’re not going on that cruise anytime soon.

 

Certainly not in the next 30 days, 60 days, 90 days. The reality of it is, why are people coughing up good money to go on potentially a pipe dream or something that so far in the future? They don’t even know if it will happen.

 

Well, let’s look at cruise ship buying, who buys cruise ships and cruise holidays?

 

People that go on cruises tend to be quite fanatical about cruise ships. You can see this in the loyalty program structure. They’ve got gold, silver, bronze, platinum or you name it all colours and segmentation on customers.

 

This is because they know that their customers really like cruising for various different reasons. Now, just because we’ve experienced a huge like I suppose cruise ships have been impacted by COVID.

 

It’s been a disruption to the cruise line industry. That doesn’t mean that people aren’t still fanatical about cruise ships.

 

They’re actually dreaming about going on cruises, even though they know that the reality is they’re unlikely to go. Now cruise ship lines know this too.

 

They know that the customers are loyal, committed and love to dream. They even broadcast the fact that people buy maybe seven or eight cruises in a row. Just to fill the whole year with cruise ship travel.

 

So will this be any different with a pandemic?

 

Logically we’d say yeah. That they’re not going to go on a cruise. Who would pay in their right mind a lot of money a big deposit for something that’s not going to happen?

 

Well, looking at the stats, 45% of people are willing to pay for something that is likely not to happen. So there’s a real split here between rational buyers and irrational buyers.

 

 

Cruise Pricing Strategy: Intangibles

 

I think on a lot of our podcasts and obviously blogging we talk about the intangibles. The other things that you’re buying when you buy something.

 

That could be a television set. It could be the status of having the biggest TV. Or it could be even in the in this instance of buying supposedly a holiday or a vacation, what are you really buying?

 

And what I look at it, I think, I can see from a very negative perspective from the cruise company and the cash flow aspect. Which we’ll cover in a little bit. But from the actual purchaser, they are getting some sort of utility.

 

Some sort of happiness. Some sort of value from investing in this upfront. On some future date, they will go on a cruise. Maybe it’s just something to look forward to. Or, maybe it’s just it gives them hope.

 

Maybe they’ve got a mark in the calendar that all this pain will end sometime soon. And there’ll be off on the Jolly Holiday, packing their bags just like the old times.

 

And to some extent, I think there is hope. There’s a bit of hope over reality there.

 

As Joanna said, are they being rational? Maybe not.

 

Is it the greatest investment in the world? Maybe not.

 

When they get there and they do and the cruise. Will the cruise be the way they expected and remember to be? Again, who knows?

 

So, there certainly is an aspect and there’s no rush, no requirement for these people to pre-book these cruises. I can’t imagine they wouldn’t be able to get a cruise when they want one.

 

So there is an aspect of hope over much more and giving them that something to look forward to. And maybe a light at the end of the tunnel. Yeah, it’s the hope for the future.

 

Cruise Pricing Strategy: Time-based promotional programs

 

Well, it’s interesting that you mentioned that. Actually, I’ve done a little bit more reading into what cruise ship liners are doing at the moment to ignite demand now after COVID.

 

They are actually designing time-based promotional programs and loyalty programs to drive demand.

 

Now, just take one example of the Royal Caribbean. They’ve actually got some type of cruise loyalty program designed specifically for this where the cutoff date is the 31st of April 2021.

 

So arriving shortly. Pretty much they’ve designed this from around June 2020 when things are pretty bad with COVID to this cutoff date to drive demand.

 

Now how they’ve done this is by introducing bonus credit points. Which pretty much enable them to forward.

 

Say if say the cruise ship is cancelled, which is probably likely. Then the customer can then push their cruise ship on like in a year’s time, in a month’s time whenever there’s the next schedule of the cruise liner. But it has to be the same type of cruise.

 

What they’re trying to do is to drive demand now to get locked in cash flow. But also not to have to give back, the money cashback, money refunds. If you can push the date back of the particular cruise line that they were buying.

 

Then they don’t have to give the money back to the customer. This helps with the cash flow. Also, everyone’s happy that they got something to look forward to in the future.

 

So they are actually providing promotional strategies using time-based exclusivity.

 

Or, those types of price fences and value fences drive demand at the moment. Some people are working to some degree.

 

They’re not particularly dropping price points. If they are using discounts, promotions, again, it’s time-based.

 

For instance, they’re giving like some 60% off for the second passenger if they buy within up to January the 31st obviously that’s expired now. But they are trying to do that by locking people without giving away too much value which is good to see.

 

 

Does the cruise pricing strategy now is considered price gouging?

 

You could look at this also from the seller’s perspective. We’ve covered in previous episodes, about pricing and what is price gouging?

 

I think we made the definition that price gouging was exploitation or taking advantage of somebody in a weak position.

 

Like I’m not suggesting that that’s what these cruise companies are doing. But I would if I was a manager or an executive in those companies, I would suggest tread carefully.

 

Because theoretically what you’re doing is you’re selling a product or service that you don’t really know if you can deliver at a point in time in the future.

 

Again, from a financial perspective, clearly, cruise companies have massive fixed capital costs, huge ocean liners. There’s clearly costs and maintenance and all that stuff ongoing.

 

I’m also sure, I haven’t checked the exact details. But the chance of a cruise ship borrowing money on the open market now will be much harder now than it was two years ago, for example.

 

So getting access to cash right now when cash is incoming or a cash flow is probably very close to zero must be very important for these companies.

 

So there is an old accountancy concept, and again, I’m not suggesting this. But there will be an aspect of the need cash in now and they want that cash in.

 

To a large extent, they’re getting this cash in prepayments for future bookings and they’re not paying interest on it. There are no debt covenants, etc.

 

As a purchaser or a customer, I will suggest you should look at the small print about, what would happen if you’re not there to go on that cruise?

 

In the future, if you’re not able to do it because of, X, Y and Z. Let’s be honest, there are lots of things that could prevent you from going on that cruise. Either through your own choice or government regulations.

1. Have you had the right vaccinations that they may require?
2. Are you prepared to wear a mask all day every day?

 

These sort of things that it’ll be probably you will not really make your mind about until the last moment. Then would you qualify?

 

The other thing I’ll say is, can you really get travel insurance covering you for a cruise that is 50/50 would have happened?

 

It really is debatable. We talk often about you pay for the security of supply and guaranteed to play. Will the cruise company really be able to guarantee that this cruise will happen? Like 100%? No.

 

Obviously, some jurisdictions will be much more likely. Florida looks much more likely than say Australia. I know that some of the Mediterranean ports even sailed last summer.

 

So we’re expected to happen again this summer. Also, there are some who sailed from Singapore.

 

So, it does depend on place by place. But to some extent, we’re getting into the territory of small print, legalese. And, is that somewhere that any company who sailing holidays, really wants to be?

 

I know what you mean. I think people just don’t know on either side.

 

The businesses just don’t know, they can’t forecast.

 

Everybody’s hoping for the best. It literally is based on hope and positivity. COVID to 2020 was a bad year. It was an unprecedented year. And it was new to people this type of disruption across markets.

 

So I think, you’re right, in a way they’ve got to be cautious. But I think it’s good to have to try new things. Try to ignite demand. Try to get things back to not normal while still safeguarding the value that you provide to customers.

 

Because the last thing cruise ship wants to do is train their customers to want or lookout for discounts and promotions. We’re already seeing how what happens there in FMCG. It is not a good story there.

 

And there’s a lot of value in cruise ship liner. I think obviously cruise ship liners know that customers know it. Hence, the massive loyalty programs and segmentation strategies we’ve discussed.

 

So, fencing off that value is important.

 

Yeah, making sure that you can actually deliver on what you promise is extremely important.  I think you made a really good point about customer experience.

 

Like nobody knows what the next cruise line experience is actually going to look like.

1. Is it going to be like we imagined it?
2. Or, how we had it before?
3. Would we be really willing to pay for the new price cruise line experiences if we have to walk around decks with our masks on sanitising every 20 seconds?
4. And, just feeling very self-conscious about being too close to people?

 

That doesn’t sound like a relaxing cruise line experience that we’re used to. Especially if you think about the buffet, dining in the formal dining hall, where the tables are maximum of 8 to 12 people.

 

Cruising is a very sociable event.

1. What will COVID do to that?
2. And, what will that do to the willingness to pay overtime?

 

These are questions where you get to find out and all based on how society and governments and even us respond to COVID.

 

 

How does social distancing affect cruise pricing strategy?

 

I think I have a couple of more. Just general thoughts about this topic. I think Joanna touched on it there. Social distancing on a cruise ship, to some extent it’s a misnomer.

 

Like I think I read the paper today that some Indian cities which are very crowded populations are almost at crowd herd immunity they’re saying. This is recorded in early February.

 

So, a cruise ship and social distancing are like probably people are kidding themselves. It is probably the most populated place on earth. It’s much more populated than any city.

 

So, even if we divide the population of the boat in half and only sell half the tickets. It still will be very, very crowded.

 

Are they going to double the prices?

 

The cruise ship certainly needs to make a certain amount of money to cover the fixed costs, to have the staffing, to run the boat.

 

There’s a lot of that will be fixed.

1. So, are they just going to up the prices?
2. Will people be willing to pay those prices?
3. Will cruise go back to much more of a luxury 1950s and 60s? Sort of Love Boat era television shows that in recent years has become much more egalitarian.
4. Will the entire business model focus, marketing strategy change from where it is?

 

And just another point I’d make is, you’re thinking about it from a revenue management perspective.

 

Obviously, cruise ships are a classic revenue management capacity constraint. But in theory, you’re selling a pipe dream now. You’re selling a cruise that may happen at a certain month in the future that may change at any point in time.

 

So we all know airlines are overbooked because a certain percentage of people don’t turn up. If you are a smart revenue manager, to what extent would you overbook your cruise?

 

Realistically the percentage of no shows will be much much higher for a cruise running from Sydney, Australia in September this year.

 

The no shows will be much higher for whatever reason than say, a red-eye flight out of Denver going to wherever.

 

So, you think about that what would a smart revenue manager do? To what extent would you turn up the overbooking?

 

Looking at Terms and Conditions loyalty programs and promotional tactics and emails coming through now.

 

I don’t think people are actually thinking about that. It’s very much tactical pricing and just driving people to think about cruising now.

 

But we’ve just mentioned it here at the end. All these more strategic business model considerations, business strategy considerations need to be addressed, and you can see how they really do.

 

How pricing and business strategy for cruise liners go hand in hand here. Then really think about the new revenue management and pricing mechanisms that drive that.

 

Because simply relying on these promotional tactics, price match guarantee and all these bonus extra points and terms and conditions to validate to a certain point.

 

They’re good, but they’re short-lived. They’ll run out and what they’re going to do if you book a cruise line and it goes over the cutoff date.

 

Are they just going to, again, just extend the deadline? That makes everything else sort of seem invalid and then promotions don’t mean anything.

 

It actually destroys brand and business strategy.

 

So look, there are lots of considerations. Good work has been done. I really do hope that for the best in the cruise line industry. It’s a great business but we all are yet to see what real cruises line in 2021 and anomalous will look like and whether people are really prepared to pay for that.

 

I think we all need a bit of hope, a bit of positivity for the future. I personally will be really excited when I see a cruise ship sail out of Sydney Harbour.

 

They used to hit the old folk horn and it was a lovely sighting and head off. I really look forward to the day when it’s full of tourists from other countries who are chatted in.

 

Borders are open and we’re back to a sensible happy approach to life and this whole period and in the background.

 

So I think we’ve highlighted some risks certainly in booking a cruise in advance. But at the same time, I hope to see many happy tourists heading off on those boats as soon as possible.

 

 

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