Tag Archives | business

Running empty coach services

Readers Question: Why may it still make economic sense for the company to put on a coach for just one or two passengers, rather than turning them away?


Recently I again had to travel to London by coach and discovered that it was a good idea to book early in case the coach was full! Was the coach company being more sensible now?

If a bus has a capacity of 80 seats. It might need an average of say 30 customers per trip to break even.

If the company are averaging less than 30 customers per journey, their fixed and variable costs will be higher than their revenue and eventually they will go out of business.

Can it make sense to run coaches that are nearly empty?

Running a coach service early in the morning or during winter may mean the bus company can expect less than 30 passengers. From one perspective, this does not make sense. It is below the break-even point – average revenue less than average cost. It may even be a case where the marginal cost is greater than the marginal revenue from an extra service.

In fact running services at unsocial hours of the morning will be unpopular with drivers, and the company may have to pay night-time rates.

However, there can be a good long term profit maximising logic behind running these services – even if only a few passengers use them.

  • Marketing. It is a strong marketing ploy to be able to offer 24 hour, 365 days coverage. If people know you run a service all around the clock, it will give them confidence to choose coach journeys as their preferred choice of transport.
  • Attract and hold onto long term customers. Only a few people may use an unpopular service. But, the 24 hour service will encourage many to get the coach in the first place. If customers fear they may turn up and no coaches are available, they may choose other forms of transport, such as car and trains and the company loses the business of customers.
  • If you lose a customer for one journey, the company might not lose very much. But, if the customer would make 50 journeys a year, that is different. Companies have to be aware that one bad experience could make the company lose their services for a long time.
  • Barriers to entry. If an existing coach company is running a 24 hour service, it may deter a new coach company from setting up. They may feel that they couldn’t compete with this all round performance, which makes the industry less profitable. On the other hand, a new company could be sneaky and just cherry pick the busiest times of the day to offer services.
  • Costs. Running a coach service will have both fixed and variable costs. Once you have bought coaches and given drivers an annual contract, the marginal cost of extra services will be relatively low – just the petrol and maintenance. Since you have already paid for many fixed costs (drivers annual salaries, buses, marketing) the marginal cost of an extra journey may be covered by just 10 or 20 passengers. Another way to think about it the topic. Would the company want to lay off drivers for a quiet time in winter? It may lose its drivers. The company might as well keep going through quieter periods.
  • Non-profit maximising decisions. We may assume every company is a profit maximiser. But, there maybe an element within the company, that they want to provide a good, all round comprehensive bus service, and they don’t mind if a few services are loss making.
  • Market share vs Profit. Another issue is that firms often concentrate on gaining market share, rather than profit maximisation. See: Profit vs Revenue maximisation

Continue Reading →


Waterstones cafes and lessons in specialisation

I’m a big fan of Waterstones. It’s a good bookshop. It’s not Amazon; it even pays UK taxes. I like the atmosphere of bookshops and would be sad if they disappear from the High Street to be replaced by drones delivering books from anonymous warehouses somewhere off the M4. Even though Amazon is often cheaper, I do like to buy books from a proper bookshop like Waterstones because I enjoy browsing, and don’t like being a complete free-rider (enjoying the atmosphere of a bookshop to then go and save a couple of pounds ordering online)


I also used to spend a lot of time in the Costa coffee shops in Waterstones. It’s a good place to work and write some economics.

A while back, I noticed Waterstones were replacing Costa Coffee shops with their own brand of coffee shops. It makes sense to try it as a business idea. Selling coffee is, at least, one area free from the internet.

I don’t consider myself a coffee connoisseur like some of my Italian friends. But, I know what I like and I can tell the difference between good and bad coffee. I was interested to see how they would do because Costa Coffee have really got it down to a fine art. I though it would be really hard to improve on the coffee shop experience of Costa Coffee.

How did Waterstones get on as a coffee shop?

The first thing is that the Waterstones staff are unfailing friendly. You can tell they mean well and are trying hard. But, they don’t seem to have been on a barista course. When I ask for a ‘dry’ cappuccino they all look flummoxed. I try to explain it is a cappuccino with froth instead of milk. It makes it more like a macchiato. Maybe I’m not very good at explaining, but they always end up making it like a traditional cappuccino. I’ve been in two Waterstone cafes in Oxford and Bradford. It’s interesting you get the same experience in both places. Also the coffee (especially first thing in morning, isn’t as hot as I would like.) At a Costa coffee I once noticed a file with the menu for all possible drinks. Barista’s have to learn these menus. I’m pretty sure Waterstones staff haven’t been given a similar folder and expected to learn the menus.

Often you get the sense that they are really trained booksellers who have been asked to make coffee on the side. Interestingly the former Costa manager was offered the job at Waterstones, but she turned it down because she wanted to specialise only in coffee and not also be responsible for selling books. Continue Reading →

Effect of the exchange rate on business

Readers Question: What are the effects of the exchange rate on UK businesses?

The exchange rate will play an important role for firms who export goods and import raw materials. Essentially

  • A depreciation (devaluation) will make exports cheaper and exporting firms will benefit.
  • An appreciation makes exports more expensive and reduces the competitiveness of exporting firms.

Effect of depreciation in the exchange rate

If there is a depreciation in the value of the Pound, it will make UK exports cheaper, and it will make imports into the UK more expensive.

In this example:


  • At the start of 2007, the exchange rate was £1 = €1.50.
  • By Jan, 2009, the Pound had fallen in value so £1 was now only worth €1.10 (a depreciation of 26%)

Impact on British exporters

Suppose a British car costs £4,000 to build and sells for £5,000 in the UK.

  • In 2007, the European price of this car would be €7,500 (5,000 *1.5)
  • In 2008, the European price of this car would be €5,500 (5,000 *1.1)

The 26% depreciation means that European consumers now find British goods much cheaper. The cost of producing the car stays the same, but the effective market price in Europe has fallen. This should increase demand for British goods.

Increase profit margin or reduce foreign price?

A British firm has a choice, it can reduce the European price from €7,500 to €5,500; this should lead to an increase in the quantity sold, and increase UK exports.

Alternatively, the firm could keep the price at €7,500 and just make a bigger profit margin. It is a good choice for exporters to have – reduce European price and sell more or keep price the same and make a bigger profit margin.

Impact on importers of raw materials

The downside of a depreciation is that British firms who import raw materials will see an increase in the cost of buying raw materials. If the British car company imports engines from Germany to make the car, it will have to pay more to buy the engines. This will reduce its profit margin.

Suppose an engine costs €1000 to import from Germany. In 2007, this costs £666 (1,000/1.5). In 2009, with the fall in the value of the Pound, they will have to spend £909 (1,000/1.1) to buy the same German engine.

Impact on incentives

In the long term, it is argued that a depreciation may reduce the incentives for exports to cut costs. The depreciation enables an ‘easy’ increase in their profit margin. There many be less incentive to cut costs and boost productivity. If a firm is facing an appreciation, then they may face a greater incentive to cut costs. Continue Reading →

Examples of Price Discrimination

Price discrimination occurs when firms sell the same good to different groups of consumers at different prices. There are often different types of price discrimination offered. Often they are categorised in the following way:

  • 1st degree price discrimination – charging the maximum price consumers are willing to pay.
  • 2nd degree price discrimination – charging different prices depending on the quantity consumed.
  • 3rd degree price discrimination – charging different prices depending on a particular market segment, e.g. age profile, income group, time of use.
  • 4th degree price discrimination – when prices to consumers are same, but the producer faces different costs. Also known as reverse price discrimination.
  • Premium pricing. In many examples of ‘price discrimination’ consumers are charged different prices for a similar goods. In these examples, consumers pay a premium for a slightly more expensive option. For example, ‘premium unleaded petrol’ may cost the firm an extra 1p over standard unleaded, but the firm may sell this premium unleaded at 5p. This is not true price discrimination, but uses the same principles – finding customers with more inelastic demand. It’s use is widespread, such as first and standard class.

Examples of Price discrimination:

1. Time of Purchase


This petrol station is offering cut price fuel for two days a week. The petrol station isn’t even telling you which days have cut price fuel. The logic is that only the most price sensitive consumers will take the trouble to find out which two days have cut price fuel and then drive to the petrol station on those days. This takes planning and only the most price elastic consumers will buy on these cut price days. Most consumers will not take the trouble to visit the petrol station on those two days. They will continue to buy when most convenient.

It is also a clever marketing strategy because from a distance, it is advertising ‘cut price fuel’ you only notice the ‘2 days a week’ on closer inspection. This is a type of third degree price discrimination.

2. Airline travel and time of departure

Airlines charge different prices depending on the season and day of the week. During the peak holiday season in August and Easter, the price will be higher because demand is greater and more inelastic. Flights which occur during the week e.g. Mon to Fri, will be more expensive because these are typically taken by business travellers. If you stay for over the weekend, the price will be lower, as business travellers will not want to stay over the weekend, just to get a cheaper flight. I often go to New York for a week in October. For a flight from Mon to Fri, the price quoted is usually around £1,500. If I change dates to leaving or arriving on the weekend, the price falls to £450.

Continue Reading →

Pricing Strategies

A look at different pricing strategies a firm may operate to try and increase profitability, market share and greater brand loyalty.


Types of Pricing Strategies

General strategies

  1. Profit Maximisation. One strategy is to ignore market share and try to work out the price for profit maximisation. In theory this occurs at a price where MR=MC. In practise it can be difficult to work this out precisely.
  2. Sales Maximisation. Aiming to maximise sales whilst making normal profit. This involves selling at a price equal to average cost.
  3. Gaining Market Share. Some firms may have a target to increase market share, this could involve setting prices as low as they can afford, leading to a price war. A similar concept to sales maximisation.

Pricing strategies to attract customers / increase profit

  • Premium pricing. This occurs when a firm makes a good more expensive to try and give the impression that it is better quality, e.g. ‘premium unleaded fuel’, fashion labels.
  • Loss Leaders. This involves setting a low price on some products to entice customers into shop where hopefully they will also buy other goods as well. However, it is illegal to sell goods below cost, so firms could be investigated by OFT.
  • Price Discrimination. This involves charging a different price to different groups of consumers to take advantage of different elasticities of demand. There are different types of price discrimination from second degree to third degree.
  • Reference Pricing. This involves setting an artificially high price to be able to later offer discounts on previously advertised price.
  • Price Matching. The purpose behind price matching is making a promise to match any price cuts by your competitors. The argument is that this discourages your competitors from cutting price. This is because they know there is little point in cutting prices, because you will respond straight away. Very clear price matching stance’s can thus avoid price wars and give the impression of being very competitive. For example, Tescos are offering £10 voucher to customers who can prove their shopping basket would have been cheaper at other supermarkets.
  • Retail price mechanism RPM – when manufacturers set minimum prices for retailers, e.g. net book agreement. Continue Reading →

Mobile Phone – Product Life Cycle

When did you get your first mobile phone?

I got mine in 1999, which it turns out was the year of most rapid growth in mobile phone use.


Mobile phone subscriptions in UK. Source: World Bank data

Mobile phones looks to have the classic product life cycle of introduction, growth and maturity.


A long slow period of introduction from 1985 to 1997. I remember in this time that a mobile phone was considered to be the preserve of fancy ‘yuppies’ (Young upwardly mobile people) e.g. city financiers.

When I was at university in the 1990s, if you wanted to meet up with a friend, you would generally go and knock on their door. There was no mobile phones, (no one ever answered the  telephone shared by the whole corridor) There was definitely no facebook and very few had email. If you did have email, you probably only checked it in the computer room once a day. (Goodness me, this is making me feel nostalgic for the good old days!)

Continue Reading →

Profit v Revenue Objectives for Firms

Readers Question: Is it better to sell more services/products with less profit, than sell less with high profits? What are the pros and cons to the employer, worker, and customer? i.e high revenue low profit, vs low revenue high profit.

Classical economic theory suggests firms will seek to maximise profits. The benefits of maximising profit include:

  • Profit can be used to pay higher wages to owners and workers. (though if firm has monopsony power, the profit may not be shared equally amongst workers)
  • Profit can be used to invest in research & development. This investment can potentially benefit consumer. For example, without large profits, drug companies would have less ability to develop new drugs. High profit is often a justification for pharmaceuticals to have a degree of monopoly power (e.g. patents) because ultimately it is essential for creating the incentive to develop new treatments. However, this argument about research & development may depend on the industry. For example, it is now clear how much supernormal profit supermarkets need to be able to invest in research & development.
  • Profit enables the firm to build up savings, which could help the firm survive an economic downturn. For example, in a recession, a firm could see a temporary loss, but if the firm has a reasonable level of savings and history of profitability, the bank will be more willing to keep lending. However, profitable firms don’t necessarily save this profit for an economic downturn. Profit is often paid to shareholders in the form of dividends or used to finance expansion, such as mergers or takeovers. For example, commercial banks were very profitable in the boom years, leading upto 2007. But, when the credit crunch hit, they had very little resources to ride out the financial crisis.
  • For firms listed on the stockmarket, high levels of profit will make the firm less susceptible to takeoevers. If profit is low, sharedholders may be dissappointed in the low level of dividends and willing to sell to a takeover bid. You could argue this incentive to be profitable is good for consumers because the firm has incentives to be efficient and cut costs, which can lead to lower prices for consumers. However, you could argue, that the pursuit of short-term profit has drawbacks because the firm may not invest sufficiently in the long-term development of products and services. For example, train operating companies listed on stock market may go for short-term profit, and ignore long-term investment for industry.

Benefits of Pursuing Revenue Maximisation

Some firms don’t make profit maximisation as their ultimate goal. They seek to maximise revenue or market share. Seeking to increase market share and sales will lead to lower profit, but can have advantages for firms, consumers and workers.

  • Increased brand loyalty. If a firms is able to cut prices and gain more customers, it will gain bigger exposure and brand loyalty. This enables the firm to be more prominent in the market. For example, in supermarkets, price is very important and getting a reputation of being cheapest supermarket can help attract customers. Continue Reading →