Simon-Kucher Case: GST Cruise Company

Problem Definition

Cruise company German Sea Tours (GST) is a successful operator of international cruises. GST currently offers several cruise trips, lasting between 5 and 24 days. Additional services can be booked on board (e.g. excursions at each destination, onboard leisure activities). Customers tend to book their tickets several months in advance. GST has had a long history of revenue growth, but in the past five years, it showed lower growth rates. Board members are not sure whether the market, in general, saw lower growth or whether the problem is specific to GST. GST recognizes that winning new customers and stimulating existing customers to book their vacations with GST is crucial for future growth and therefore has always focused on keeping a close relationship with its (potential) cruise-trip bookers. GST’s chief commercial officer (CCO) Ms. Brown has hired Simon-Kucher & Partners to assess the market environment and competitive positioning for cruise ships and to conduct a subsequent evaluation of potential growth options.

Comments

• The bullet points below describe the actions of the interviewer and a good candidate in the case study interview process. In these prompts, “Simon-Kucher” and “the project team” will refer to the candidate.
• Hint: As the case study covers several topics, its length may exceed the typical time allocated to case studies in a single interview. During an interview day, the interviewer may decide to prioritize the topics in this case study depending on what the other interviewers focus on during their interviews. For Preplounge, we decided to provide candidates with a more extensive case study to ensure they can prepare for different types of questions. Given the scope of this case study, the interviewer may – from time to time – guide the interviewee towards the next area for investigation.

Short Solution

Solution

0. Background

The candidate proposes their approach. They may decide to take the following approach:

1. Analyze the overall market environment
2. Determine competitive positioning
3. Assess growth options
4. Present recommendations

1. Analyze the overall market development

• The candidate first assesses whether the board’s hypothesis regarding revenue development is correct.
• To acquire the information needed to make this assessment, the candidate asks the interviewer about the revenue development of GST and the overall market over the past five years.

• Comparing CAGRs is an appropriate methodological approach to evaluate market share development.
• By comparing the CAGR for the overall marketand the CAGR for GSTthe candidate determines that the overall market has grown more in revenue than GST has.

If the candidate tries to calculate each of the CAGRs, the interviewer may provide guidance by informing them an actual calculation of the CAGRs is not required and that a simple comparison of the first fraction of the CAGRs is sufficient, i.e..

• The candidate’s first finding (1) is that GST has lost market share to its competitors over the past five years.
• Alternative approach: The candidate compares GST’s market share in 2015 (18.75%) and in 2019 (16.5%).

2. Determine competitive positioning

• Finding (1) implies it is very likely that GST has a competitive disadvantage.
• The goal of step 2 is to identify the underlying drivers.

• There are multiple purchase criteria for cruise trips that the candidate may think of:
  • Number of destinations/stops
  • Cabin types offered
  • Attractiveness of route
  • Scope of leisure offers on board
  • Travel agency’s capabilities
  • Scope of food and drink offered on board
  • Ticket price
  • Size of cruise ship
  • Sustainability
  • …

• Based on the survey results, the candidate determines that GST has a competitive disadvantage in terms of ticket price, scope of leisure offers on board, travel agencies’ capabilities, and the scope of its food and drink offer on board. However, the improvement potential for the latter two drivers can be ignored, as they aren’t as important to customers.
• The candidate concludes it’s worthwhile to take a closer look at the ticket price and scope of leisure offers on board.

3. Assess growth options

Part A – Evaluating customer segments and making initial recommendations

• The candidate recognizes that GST cannot offer the same trip to both segments, as customers in these segments have different preferences regarding trip duration. The candidate proceeds to evaluate the willingness to pay of Explorers and Frequent Travelers, using the prices stated in source 4.
• The expected revenue from Frequent Travelers totals €1,620,000 per trip (12 days x €150 x 900). In a full year, the ship can conduct 30 cruises, generating €48,600,000 in revenue.

• The expected revenue from Explorers totals €1,071,000 per trip (7 days x €170 x 900). In a full year, the ship can conduct 52 cruises, generating €55,692,000 in revenue.
• The candidate concludes that GST should focus on Explorers to optimize revenue from their new ship.
• A very good candidate may instantly state that the Explorer segment is more profitable because the daily ticket price is 13% higher than for the Frequent Travelers, while the two other variables (demand, annual cruise days) are equal.
• A very good candidate may suggest offering a mix of 7- and 12-day trips and pooling the demand of two subsequent trips in one cruise, helping to drive up utilization to 100%. The interviewer should respond that this is a very good idea but, for operational reasons, not feasible.

Part B – Fine tuning the price level recommendation

• The candidate recognizes that, when adjusting pricing, the resulting volume implications are usually subject to price elasticity effects. The candidate requests more information on the price elasticities.

• A very good candidate concludes that a price elasticity of -2 indicates there is potential to reduce prices (as the volume effect should make up for lower price) and an elasticity of -0.5 suggests potential to increase prices.

Frequent Travelers:

1. To ensure there are at least 810 passengers on board, the price can be increased until demand drops to 810. This condition is met if the price increases by a maximum of
2. The new price would therefore be €180, instead of the previous €150.
3. The resulting revenue would total €52,488,000, compared to the previous €48,600,000.

Explorers:

1. As the maximum capacity is 990, the price can be reduced until demand reaches this limit. The required price decrease needs to be
2. The new price would therefore be €161.50, instead of the previous €170.
3. The resulting revenue would total €58,198,140, compared to the previous €55,692,000.

• For the Explorers, i.e. the new target segment, the results prove that GST has a competitive disadvantage in terms of price (which is in line with the results from the customer survey in section 2 of the case study). By lowering the price, GST would attract more customers, see an improvement in customer evaluations of its performance over time, and increase its market share.
• A strong candidate would (qualitatively) address other possibilities for further, more sophisticated pricing solutions, such as dynamic pricing based on capacity utilization.
• The candidate may also address the abovementioned additional services on board, such as leisure activities. The segment that contributes the most ticket revenue will not necessarily be the one that contributes the highest revenue from onboard activities and excursions.

4. Present recommendations

• The interviewer should make sure the candidate articulates their points concisely using a top-down communication approach, e.g. “Considering the market shares of GST, they have indeed been declining over the past few years despite the revenue growth. The key factors behind this decline are GST’s ticket prices and the scope of leisure offers on board. For your new route, you should focus on seven-day trips for customers in the Explorer segment at a price point of €161.50 per day of the trip. This would generate €58,198,140 in revenue.”
• A strong candidate may also point out that the trip duration, customer focus, and price point they are proposing would generate €9,598,140 more in revenue per year than GST’s initial plan to launch a 12-day trip at €150 per day targeted at Frequent Travelers.