Question

International Hotels, or airlines services often.give updates to its customers/employees from time to time without charging any extra fess. For example a person from economy class is upgraded to Business class. This is free of cost for the customer. What cost concepts are behind this decision/strategy? For such an upgrade there must be vacancy in higher class, on the other hand there could be a waitlists in the economy class.

If the economy is going down, should the strategy be to use high variable pay, low fixed pay, or should it use high fixed pay, low variable pay structure for its sales persons? Answer using the concept of Budgetary control systems. How does the concept of customer relationship management play here?

Answer 1

We generally focus on the cost aspect while deciding the sales price but margin plays a very important role in determining which product to sale.

In the airlines, prices of the tickets go up as we near the airlines departure date and so does demand for economy class as business class for many becom unaffordable. Further, airlines keep a fixed percentage of seats of each class to be offered at this situation at higher prices. However, selling business class tickets at lower price may damage the reputation and privelege associated with it. So, airlines promotes or upgrades old tickets to higher classes and offers the vacated economy class tickets at higher prices to meet the demand, Thus, airlines earn goodwill as well as same amount of margin.

If an economy is going down, flexibility creeps in automatically and demand lowering of fixed cost however there are many cost which cannot be curtailed eg. communication cost. Hence, a balanced mix of fixed vs variable cost is required. Moot principle remains same to conserve cash flows by reducing fixed cost as much as possible. Customer relationship helps moving this principle as the customer demand drives how and where to spend. A proper customer relationship can predict the demand with proper order book and helps in budgetting the spending for future.