Paradise Vacation Case

Key Decisions: * Should Leduc agree to Air India’s offer? * What’s the company’s competitive strategy for 2008/2009? * How to respond to FunTours’ expansion and aggressive pricing strategy? SWOT Analysis: Paradise holds strong buyer power which enables it to bargain for lower price and discount. As market leader and Quebec company, Paradise can promote itself through reminding customer about company hisotry to strength their preference and loyalty . The weakness lands at that Quebec is the only market in Canada; the collapse of one location will damage the entire business.The threat mainly lands at pricing competition from FunTours. Competitive Analysis and Consumer Analysis: Because Paradise has its main market in Quebec, Benoix is the main competitor. However, the biggest threat comes from FunTours’ expansion currently. The competitive advantage of FunTours is its low pricing strategy. Travelling is has an elastic demand. With price being the most important determination, FunTours' strategy could drive Paradise out of the market. This strategy targets at mid and base segment of the market. It creates threat to the same segments for Paradise, which represent 90% of the revenue.Nonetheless, Quebec is a brand new market where FunTours does not have supplier connections or customer loyalty yet. FunTours serves no premium market where 10% of the revenue comes from for Paradise. Therefore, Paradise can utilize its bargain power with its suppliers to ask for lower prices, also lower its retail price to keep customers from switching to new brand, and advertise to strengthen brand loyalty. Segment| Focus| Conclusion| Base| Low price| Lower price than FunTours offers| Mid| Best value| Lower price than FunTours offers, and special promotion with higher value. Premium| Luxury service| Lower price to prevent customer from downgrading to Mid segment. Keep agents as partial distributors for better services. | Recommendation : Base and Mid package will be sold through internet solely; Premium package will be sold through both agent and internet by 50/50; at the same time lowering wholesale price by 5%, and asking Benoix Air for 5% discount on the flight. Implementation Plan: Paradise will reject the offer from Air India. We will stay with the original segments of consumers, and lower price to stop FunTours from ntering the market; at the same time, keep the package unchanged to ensure customer experiences; use promotional strategy to re-enforce brand name and loyalty. Product| Travel package provides both service and product. Paradise includes 3 packages targeting at base, mid and premium market. | Price (See Exhibit 4 for detail)| We will be using Value-based pricing strategy. We will set lower retail price to stop FunTours from entering the market, and to provide lowest price for Base segment, best value for Mid, and both luxury service and low price for Premium segment. | Retail| Base: 89| Mid: 134| Premium: 193(Ag ent) 178 (Internet)| | Wholesale| 88| 132| 176| | Tactics| Markdowns| Seasonal discount, coupons. | Markdowns. | Place| Indirect Distribution: -100% of base and mid, 50% of premium package through internet distributor -50% of premium package through travel agents with 10% commission| | Exclusive Distribution: Distribute through good reputation internet distributors only for the purpose of keeping professional brand image, and high-end travel agents to keep Premium customer privileged. Promotion| Objective: To re-enforce the brand image as a local and experienced travel operator who always respond to Quebec travellers' needs beyond expectation. | | Reminder Advertising: TV advertising and internet ad to re-enforce the brand image. Sales promotion: (1)Price promotion is mentioned above at Price section. (2)Loyalty points-collection program to encourage repurchase and creates loyalty; (3)Contests to win trips in order to increase consumer involvements and personal feelings. | Expected Results: See Exhibit 4 – Alternative 5//Recommendation for income statement.Appendixes Decision criteria: * Provide short-term viability * Provide long-term sustainability Alternative Evaluation * Cost cutting through partnership with Benoix and cost structure change to start a price war with FunTours. * Setting pricing strategy as price war and cutting cost through vertical integration. * Sell its packages through Internet distributors exclusively. * Offering packages to more remote and less developed destinations. Base and Mid package will be sold through internet solely; Premium package will be sold through both agent and internet by 50/50; at the same time lowering wholesale price by 5% and asking Benoix Air for 5% discount on the flight. Alternative 1, comparing all other 4, gets the least revenue (32,540,428). Although it is feasible in short-term and might drive FunTour out of the market, it does not concern with the obsolete of travel agents. Giving the negative reve nue for the base segment (see Exhibt 2), it is not long-term sustainable.Moreover, even if the competitor is eventually driven out the market, Paradise will have to raise the price again in order to get back on its previous profitability; Paradise runs into the risk that the customers will feel cheated and uncomfortable with the raising price, and thus shift to other operators. For Alternative 2, although leasing private airline will decrease the variable cost and increase revenue (71,192,907), Paradise runs into the risk of heavy responsibility for flight issues, decrease of flight destination and time flexibility, and high fixed cost, which will eventually be added to the price of the package.In addition to those, same problem with Alternative 1, it does not concern with the obsolete with travel agents. Thus, this alternative is not sustainable in the long-run. For Alternative 3, it addresses the problem of high agent cost, and the obsolete of agent distributor. 5% of revenue is a ssumed from using internet to reach broader customer base with lower retail price. However, the price is still higher for than FunTours’ offer (e. g. $93 vs. $90); therefore provides FunTours the chance to take away market share. It is short-term viable but not sustainable.Alternative 4 increases market variety but turns away from the main market (top 5), which is providing 89% of Paradise’s package sale. It equals to giving up a bigger pie for a tiny one. (Exhibit 2) The recommendation ranks the 3rd place in the 5 alternatives quantitatively. However, it provides both short-term viability and long-term sustainability. Lowering the price from utilizing the buyer power on Benoix Air gives Paradise the ability to win over FunTours price-wise in the short-run, and keep price low in the long-run.Internet distributor addresses the obsolete of travel agents. By offering both agents and internet distributor for premium market helps sustain our competitive advantage on luxury customers. Exhibit 1: Marketing Share, Value and Growth of Canada and Paradise Vacation for 2007 and 2008 Â  | Â  | Â  | Â  | Â  | PR Market Setments| | National| PR Canada | Quebec| PR Quebec | Base| Mid| Premium| Percentage| 100. 00%| 7. 80%| 20. 00%| 39. 00%| 60%| 30%| 10%| 2007| 6,400,000| 499,200| 1,280,000| 499,200| 299,520| 149,760| 49,920| 2008 4. 0% growth| 6,694,400| 522,163| 1,338,880| 522,163| 313,298| 156,649| 52,216| Exhibit 2 – Alternative 4 Market Share, Value and Growth for 2007 and 2008 | National| Paradise Canada| Other destinations other than top5| 8%| 11%| 2007| 512,000,000| 54,912,000| After 25% of expected growth | 640,000,000| 68,640,000| Exhibit 3 – Income Statement for Alternative 1 and 2 (2008) | Alternative 1 i| Alternative 2iv| | Base| Mid| Premium| Base| Mid| Premium|Total Revenue| 313,297,920| 156,648,960| 52,216,320| 313,297,920| 156,648,960| 52,216,320| | Agent| Internet| Agent| Internet| Agent| Internet| Agent| Internet| Agent| In ternet| Agent| Internet| Industry Total Sales| 72%| 28%| 72%| 28%| 72%| 28%| 72%| 28%| 72%| 28%| 72%| 28%| | 225,574,502| 87,723,418| 112,787,251| 43,861,709| 37,595,750| 14,620,570| 225,574,502| 87,723,418| 112,787,251| 43,861,709| 37,595,750| 14,620,570| Retail price| 90. 00ii| 82. 64| 135. 00| 123. 95| 180. 00| 165. 27| 90. 00| 82. 64| 135. 00| 123. 95| 180. 0| 165. 27| Commission| 8. 18iii| 0. 82| 12. 27| 1. 23| 16. 36| 1. 64| 8. 18| 0. 82| 12. 27| 1. 23| 16. 36| 1. 64| Wholesale price| 81. 82| 81. 82| 122. 73| 122. 73| 163. 64| 163. 64| 81. 82| 81. 82| 122. 73| 122. 73| 163. 64| 163. 64| costs of sales| | | | | | | | | | | | | Airline| 40| 40| 40| 40| 40| 40| 30v| 30| 30| 30| 30| 30| Hotel| 40| 40| 50| 50| 60| 60| 40| 40| 50| 50| 60| 60| Contribution| 1. 82| 1. 82| 49. 90| 49. 90| 63. 64| 63. 64| 11. 82| 11. 82| 49. 90| 49. 90| 73. 64| 73. 64| SG&A| 9. 00| 8. 26| 13. 0| 12. 40| 18. 00| 16. 53| 9. 00| 8. 26| 13. 50| 12. 40| 18. 00| 16. 53| EBITDA| (7. 18)| (6. 44)| 36. 40| 37. 5 0| 45. 64| 47. 11| 2. 82| 3. 56| 36. 40| 37. 50| 55. 64| 57. 11| Earning contribution| (8%)| (8%)| 27%| 30%| 25%| 29%| 3. 13%| 4. 30%| 26. 96%| 30. 26%| 30. 91%| 34. 55%| ` Earning| (18,000,390)| (6,840,346)| 30,410,785| 13,271,102| 9,531,852| 4,167,425| 7,063,444| 3,775,013| 30,410,785| 13,271,102| 11,620,505| 5,052,058| Total| 32,540,428| 71,192,907| i. Assume during price war, market share does not changeii.Retail price drops 10% for distributor of agent; wholesale price will shift according to retail price and commission change (Wholesale=Retail/(1+10% commission); internet retail price change according to wholesale and commission (Internet=wholesale*(1+1% commission). iii. Commission for agent will increase to 10%; internet stays the same as 1%. | iv: All assumptions from Alternative 1 holdv: Airline price decreases 25% from$40| Exhibit 4: Income Statement for Alternative 3 and Recommendation (2008) | Alternative 3vi| Alternative 5 – Recommendation ix| | Base| Mid| Premi um| Base| Mid| Premium| 48,271,360vii| 328,962,816| 164,481,408| 54,827,136| 334,445,530| 169,964,122| 43,861,709| | Internet| Internet| Internet| Internet| Internet| Agent| Internet| Segment Percentage| 100%| 100%| 100%| 100%| 100%| 50%| 50%| | 328,962,816| 164,481,408| 54,827,136| 334,445,530| 169,964,122| 21,930,854| 21,930,854| Retail price| 93. 53| 141. 30| 187. 05| 88. 85| 134. 23| 193. 534xi| 177. 70| Wholesale price| 92. 6| 139. 9| 185. 2| 87. 97xii| 132. 905| 175. 94| 175. 94| costs of sales| | | | | | | | Airline| 40| 40| 40| 38| 38| 38| 38| Hotel| 40| 50| 60| 40| 50| 60| 60| Contribution| 12. 6| 49. 9| 85. 2| 9. 7| 49. 9| 77. 94| 77. 94| SG&A| 8. 42| 12. 72| 16. 83| 8. 00| 12. 08| 19. 35| 15. 99| EBITDA| 4. 18| 37. 18| 68. 37| 1. 97| 37. 82| 58. 5866| 61. 95| Earning contribution| 4. 47%| 26. 32%| 36. 55%| 2. 22%| 28. 17%| 30. 27%| 34. 86%| Earning| 14,711,841| 43,283,583| 20,038,677| 7,428,695| 47,885,482| 6,638,907| 7,645,225| Total| 78,034,101| 69,598,308| vi: Because that internet distributor can reach more customer, 5% growth on expected revenue (2008) is assumedvii: Total revenue after 5% assumed growthviii:With internet distributor, SG&A decrease by 10% from before, for agent, it stays the same| ix:. % revenue growth is assumed same from Alternative 3 due to the use of internet distributor. Premium market as luxury will decrease due to the upcoming recession, it is assumed that Premium segment will decrease to 8%, Base and Mid will increase by 1% each. X: From bargaining with Benoix Air, a 5% discount is expected. xi: 10% commission on agent is provided. Xii: Taking 5% off wholesale price|