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Unlock This CourseImagine you're launching a brand-new holiday package. You need to think about what you're selling, where people can buy it, how you'll tell people about it and crucially how much it costs. These four things together are called the marketing mix, often known as the 4 Ps: Product, Place, Promotion and Price.
In this session, we're zooming in on Price specifically two clever strategies that travel and tourism businesses use when they launch something new or want to grab a bigger slice of the market. These are called market penetration pricing and market skimming pricing.
Key Definitions:
Go in low to win customers fast. Think of a new budget airline offering £9.99 flights to attract travellers away from established competitors. The goal is to build a loyal customer base quickly, even if profits are small at first.
Go in high to earn big from early buyers. Think of a luxury cruise line launching a brand-new ship with exclusive cabins priced at a premium. Early customers pay top price; later, prices drop to attract more buyers.
Market penetration pricing is all about getting in fast and getting noticed. A travel business sets its prices lower than competitors to tempt customers to try them out. Once people are hooked, the business hopes they'll stay loyal even when prices eventually rise.
When a new travel company enters the market say a new low-cost airline or a new online hotel booking platform it faces a big problem: nobody knows who they are. Established brands like British Airways, TUI, or Booking.com already have millions of loyal customers. So how do you compete? You make your prices impossible to ignore.
By charging less than the competition, the new business attracts price-sensitive customers people who shop around for the best deal. Over time, if the service is good, those customers return and recommend the business to others. Market share grows and the business becomes established.
Attracts customers quickly. Builds market share fast. Discourages new competitors from entering. Creates word-of-mouth buzz.
Low prices mean low profits early on. Customers may leave when prices rise. Can damage brand image people may think low price means low quality.
The market is price-sensitive. There are strong existing competitors. The business can afford to make little profit at first. The product/service appeals to a mass market.
When easyJet launched in 1995, it offered flights between London Luton and Glasgow for just £29 one way a fraction of what British Airways charged. This was classic market penetration pricing. By keeping costs low and prices even lower, easyJet attracted millions of budget-conscious travellers. Within a few years, it had grown into one of Europe's biggest airlines. Today, easyJet carries over 90 million passengers a year. The low prices got people through the door and the convenience kept them coming back.
It's not just airlines that use this strategy. When a new hotel opens in a popular tourist destination, it might offer introductory rates heavily discounted rooms to fill beds and get reviews on TripAdvisor. A new tour operator might offer a "launch price" on package holidays to Spain or Turkey, undercutting TUI or Jet2 to win first-time customers.
Online travel agencies like Hotels.com or Trivago also used penetration-style tactics when they launched offering cashback deals and loyalty rewards to pull customers away from established booking sites.
Market skimming is the opposite approach. Instead of going in cheap, a business charges a high price right from the start. This works best when the product is new, exciting and unique something customers can't easily get elsewhere. The business "skims" the cream off the top of the market by targeting wealthy customers first, then gradually lowers the price to attract more buyers.
Think about it this way: when a brand-new luxury resort opens in the Maldives, there will always be some travellers who must be the first to stay there and are willing to pay whatever it takes. These customers are not price-sensitive they're prestige-driven. The business charges them a premium. Once the initial excitement fades and the resort wants to attract more guests, it lowers prices to reach a wider audience.
This strategy works because the business recovers its development costs quickly from early high-paying customers, before eventually competing for the mainstream market.
High early profits help recover costs. Creates a premium, exclusive image. Attracts wealthy, loyal customers. Gives time to improve the product before widening appeal.
High prices limit the number of customers. Competitors may launch cheaper alternatives. If the product isn't special enough, customers won't pay the premium. Price drops later can upset early buyers.
The product is genuinely new or unique. There are customers willing to pay a premium. The business has a strong brand reputation. There is little direct competition at launch.
Virgin Galactic is selling tickets for space tourism flights to the edge of space. Early tickets were priced at around $450,000 (approximately £360,000) per seat. This is textbook market skimming. The experience is completely unique, there are virtually no competitors and the early customers are ultra-wealthy thrill-seekers who want to be among the first humans to travel to space commercially. Virgin recovers its enormous development costs from these early buyers. As technology improves and competition grows, prices will eventually fall making space tourism accessible to more people.
You don't need to go to space to see skimming in action! Luxury cruise lines like Cunard or Silversea use skimming when launching new ships. The maiden voyage of a new cruise ship the very first sailing is priced at a significant premium. Passengers pay extra for the prestige of being "first". Similarly, when a new five-star resort opens in an emerging destination like the Maldives or Dubai, opening rates are high, targeting affluent early adopters before prices settle.
Even theme parks use a version of skimming Disney charges premium prices for new attractions and "early access" experiences, knowing that dedicated fans will pay whatever it costs to be first.
Let's put the two strategies head to head so you can clearly see the differences. This is really useful for exam questions that ask you to compare the two approaches.
In your iGCSE exam, you might be asked to identify, explain, or evaluate a pricing strategy used by a travel and tourism business. Here are some tips to score top marks:
Question: "A new budget airline is launching flights between London and Barcelona. Explain why it might use market penetration pricing." (4 marks)
Answer Plan: Define penetration pricing ➔ Explain it involves setting a low price ➔ Link to the context (new airline, established competition like Ryanair/easyJet) ➔ Explain the benefit: attracts customers quickly, builds market share ➔ Mention the risk: low profits initially but worth it to get established.
Pricing strategies aren't just theory they shape the holidays you and your family take every year. The reason you can fly to Europe for less than the cost of a train ticket is largely thanks to penetration pricing by low-cost carriers. And the reason a suite on a new luxury cruise ship costs more than a family car is skimming pricing at work.
Understanding these strategies helps you see the travel industry with fresh eyes and gives you a real advantage in your exams and beyond.