Imagine stepping onto a floating city

that cost over $2 billion to build. It

has thousands of workers from all over

the world. It has huge water parks, rock

climbing walls, go-kart racing, and even

ice skating rinks right in the middle of

the ocean. Now, imagine buying a ticket

to spend the week on the ship. Believe

it or not, if you adjust for inflation,

the ticket you buy to get on this

massive floating resort is often cheaper

today than a cruise ticket was 50 years

ago.

So, how is this possible?

>> [music]

>> How do big cruise companies stay in

business if they charge so little for

the ticket? The answer is a fascinating

story about how the cruise industry

completely [music]

changed its business model.

Today, we're going to look at the hidden

economics of the cruise world. We will

compare what it was like to take a

cruise in the 1970s to what it is like

today. We will see how these companies

went from struggling to survive to

making billions of dollars.

>> [music]

>> To understand how a cruise makes money

today, we have to start with how the

cruise industry was actually born. We

have to look at what happened when giant

ships lost their original purpose.

In the early 1900s, taking a ship across

the ocean was not a fun vacation. It was

the only way to travel across the sea.

If you wanted to go from Europe to

America, you had to take an ocean liner

like the Titanic. For the companies that

owned these ships, the business was

simple. Charge rich people a lot of

money for nice rooms and pack as many

poor people as possible into the bottom

of the ship. They were in the

transportation business. But, everything

changed in the late 1950s. That was the

year passenger jet airplanes became

popular. Suddenly, you could fly across

the ocean in just 6 hours instead of

spending five rough days on a ship.

Almost overnight, no one needed ocean

liners to travel anymore. The big ship

companies had a huge problem. They owned

giant, expensive boats, but they had

absolutely no customers.

To save their businesses, they had to

change their entire way of thinking.

They realized something very important.

If people did not need ships to travel

to a destination, the ship itself had to

become the destination. This big idea

gave birth to the modern cruise.

In the 1970s, a very popular television

show called The Love Boat changed how

regular people thought about cruises.

The show was filmed on a real ship

called the Pacific Princess. But, if you

compare The Love Boat from the 1970s to

a modern cruise ship today, they look

like completely different worlds. Let's

look at the sizes of the ships. In the

1970s, the Pacific Princess was

considered a great ship. It weighed

about 20,000 tons and held around 700

passengers. To people back then, it felt

like a nice floating hotel. Today, a

modern mega ship like Royal Caribbean's

Icon of the Seas weighs around 250,000

tons. It holds over 7,000 passengers and

more than 2,000 crew members. You can

actually imagine the difference in

sizes. The activities on board have also

completely changed, too. In the 1970s,

taking a cruise was about relaxing at

sea. The ship had a small swimming pool,

some deck chairs for sunbathing, a game

called shuffleboard, and one big dining

room where everyone ate at the same

time. Today, a modern cruise ship is a

giant theme park. The companies are not

just competing with other ships, they're

competing with places like Disney World

and Las Vegas. Today's ships have

multiple neighborhoods, central parks

with real trees, surf simulators, bumper

cars, Broadway-style shows, and 20

different restaurants. You do not go on

a modern cruise just to look at the

ocean. You go there to be entertained

every single minute of the day. So, with

all of these amazing new things on the

modern ships, anyone would think the

tickets are much more expensive today.

Actually, the opposite is true, and this

is the biggest secret of cruise

economics. Let's compare the price tags.

In the 1970s, a cruise was mostly for

the upper middle class and wealthy older

people. A typical 1-week cruise back

then could easily cost over $1,500

per person when you adjust the money for

today's inflation.

>> [music]

>> In the '70s, the ship company needed

that high ticket price to pay for the

fuel, the crew, and the food and still

make a profit.

>> [music]

>> The ticket was the main way they made

money. But today, you can easily find a

commercial for a 7-day Caribbean cruise

that cost just $499.

>> [music]

>> How can they build a $2 billion ship

charge you less than they did 50 years

ago?

The secret is a pricing trick called the

70/30 [music] rule. Today, the cruise

company doesn't make its profit from

your ticket. The ticket price is kept

very low on purpose to get you on the

ship. The money you pay for your ticket

only [music] covers the basic costs of

running the giant ship. Like the massive

amount of fuel the engines burn and the

basic food at the buffet.

So, the question [music] is where does

the real profit come from? It comes from

the other 30% of the business. The money

you spend after you get on the ship. In

the 1970s, there weren't many extra

things to buy on the ship. Your ticket

covered almost everything. You might buy

a few alcoholic drinks or play a little

bit of bingo, but the ship wasn't

designed to squeeze extra money out of

you. Today, the entire ship is designed

to make you spend more. Once you step

onto a modern cruise ship, you're inside

a closed world. You don't use cash. You

use your room key card to buy things.

This makes it very easy to spend money

without thinking about it. Every time

you buy a fancy frozen drink, [music]

pay for a massage at the spa, use the

ship's Wi-Fi, eat a special steakhouse

instead of the free buffet, or play slot

machines in the giant casino, the cruise

line makes a huge profit. Think of it

like buying a cheap video game console.

The company sells you the machine for a

low price, but they know you'll spend

hundreds of dollars buying the games

[music] for years. The cheap cruise

ticket is the console. The expensive

drinks, the short tours, and the casino

games are the video games. Because the

basic cost of your room and the ship's

electricity is already paid for by your

ticket, everything extra you buy is

almost pure profit [music] for the

company. This leads to a crazy rule for

modern cruise companies. It's much

better to sell a room for super cheap

than to let that room stay empty. Even

if they lose a little money on a cheap

ticket, they know you'll probably spend

hundreds of dollars on extra fun once

you're trapped on board. This is also

why modern ships are packed with people.

In the 1970s, a ship was considered

completely full if there were two people

in every room. Today, modern ships add

extra pull-out beds and bunk beds for

kids and families. Because of this,

modern ships often sail at 110%

capacity. They want as many wallets

walking around the ship as possible. But

the biggest difference between cruising

in the 1970s and cruising today happens

when the ship finally stops on an

island. In the 70s, the ship would stop

at regular island nations in the

Caribbean, like Jamaica or the Bahamas.

The passengers would walk off the ship,

hire a local taxi driver, eat at a local

restaurant, and buy souvenirs from local

shops. The money the passengers spent

went directly into the pockets of the

local people. The cruise company made

nothing from this. As ships got bigger

and bigger, this caused a new problem

called over-tourism. Imagine [music]

thousands of people crowding into a

small, quiet island town every single

day. The streets get crowded, and the

local people get annoyed. Because of

this, many islands started charging the

cruise ships higher taxes to visit. The

cruise companies hated this. They hated

paying high taxes, and they really hated

watching their passengers give money to

local businesses instead of giving it to

the cruise line. So, the big cruise

companies came up with a genius modern

idea. They just bought their own

islands. Today, the most profitable

stops for a cruise ship are private

islands owned by the cruise companies

themselves. Places like Perfect Day at

Coco Cay owned by Royal Caribbean or

Disney's Castaway Cay are the smartest

money-making tricks in the entire

industry. The cruise industry has

completely transformed from the days of

The Love Boat. In the 1970s, it was a

simple, relaxing vacation for older

people who paid a high ticket price just

to enjoy the ocean. The ship was a hotel

that happened to float. Today, it's a

high-tech, high-volume, money-making

machine. The ships are floating cities

filled with roller coasters and water

parks. The companies figured out the

ultimate business secret. The cheapest

part of your trip should be getting on

the ship. They give you a deal on the

room because they know the real business

and the real profit starts the exact

second you order your first drink by the

pool.

Thank you for watching and see you in

the next video.