Limo Economics 101

Posted on December 1, 2003 by LCT Staff - Also by this author

The basics * Yield management, prevalent in the airline industry, is a pricing strategy: in its simplest form, prices are based on what customers will pay.

* Have a detailed knowledge of your fixed and per-hour/trip costs.

* Determine which clients will pay more and which are most interested in price.

* Establishing a set of rates that takes into account your costs, what clients are willing to pay, and anticipated demand.

As ground transportation providers, we can often learn valuable business strategies from industries that invest millions of dollars in market research to understand the behavior of their customers. The airline industry, despite recent financial challenges, is a case in point. Airlines have nearly perfected the technique of yield management since the Airline Deregulation Act of 1978 forced them into full competition.

Yield management, or price discrimination as it is known to economists, is a pricing strategy that companies use to distinguish among their customers and charge them different prices according to their willingness to pay.

For an airline, this often means charging a business traveler, who had to take a short-notice business trip, five times as much as the college student sitting in an adjacent seat who bought his ticket three months ago.

The airlines maintain these seemingly unfair practices because they know that the business traveler’s employer was willing to pay what it takes to get that traveler to an important meeting. And they know that charging the student any more would have resulted in a lost sale.

While this may be a great idea for an airline with millions of dollars to invest in market research and technology, how can you use it to increase profits from your limousines?

You are probably already using it every day. Every time that you charge a bride’s father more per hour for a Saturday afternoon wedding than you charge the best man for a Thursday night bachelor party, you have distinguished between what these customers are willing, and often able, to pay.

Almost every operator does this, but here’s how to really understand yield management and use it to put your company ahead of the competition.

Know your costs, fixed and monthly Becoming keenly familiar with your fixed (monthly) and variable (per hour or trip) costs is one of the most important rules of running any business and it is especially pertinent here.

One of the easiest mistakes that an operator can make is to send a vehicle out for less than cost – in other words, at a loss – in order to undercut the competition.

Obvious costs include fuel and chauffeur’s wages, but you must also consider the subtle costs of cleaning the car, providing beverages and napkins for the bar, and wear and tear on the vehicle, which are largely dependant on the type of service.

For example, wedding and funeral services often put few miles on the vehicle’s odometer while airport service is quite the opposite. Bar-hopping trips, meanwhile, can put both miles on the odometer and years of wear on the interior.

Knowing each vehicle’s marginal cost – the cost for one additional hour on the job – can also help you determine an appropriate price if a client wishes to purchase extra time.

Since the costs of cleaning and providing extra beverages are eliminated and fuel consumption is at a minimum, you may wish to charge significantly less in order to make the sale.

Similarly, you might want to offer your chauffeurs a higher wage during the extra hour as an incentive to encourage the sale. Each additional hour of service, even at a discounted rate, is likely to yield your highest profit margin because costs are so low.

Clients: One price doesn’t fit all Once you have determined your costs you know your breakeven point, or how little you can charge without losing money. Then you must determine which clients will pay more and which are more interested in price. Clearly, someone who asks for a 10-passenger white limousine on a Saturday afternoon is likely to use it for a wedding and will pay a premium for that type of service at a peak time.

While you can ask of customers their intended use for the vehicle at every reservation, it may make sense to have pre-established different rates for white and black cars, in addition to having a surcharge for service on Saturdays.

If this seems too obvious, you can certainly be more creative. If you take calls after normal business hours, you should be able to charge a premium for that 1 a.m. airport pickup booked at the last minute.

Similarly, other last-minute reservation requests present unique opportunities for yield management. It is likely that a Friday request for a Saturday wedding is an indication that a reservation with another company fell through. Here’s an opportunity to charge more.

However, a last-minute request for a vehicle to go bar hopping suggests a customer looking to get a deal. The customer, in this case, could easily decide to forego the rental if the price quoted is too high.

Base your rates on willingness to pay The ultimate goal of yield management is to let customers who are willing or able to pay more subsidize transactions with customers who are less willing or able to pay top dollar, while gaining the business of both.

Prepare rates ahead of time, perhaps one set for Saturday weddings, one set for nighttime events, and one set for corporate service.

Especially in today’s economy, corporations are likely to have the lowest willingness to pay and the greatest ability to shop around for competitive rates. It is also advisable to prepare rates for special events during which all of your fleet is likely to be in high demand.

If several school districts are having their proms on the same night, or if the Superbowl will be in your city, you can be assured that these clients will have very high willingness to pay. Whether you answer your own phone or have a staff of 50 receptionists, allow for some modification of the price, perhaps 5% to 10%.

Additionally, charge substantially more for the first hour than for the last. A client’s willingness and ability to pay for the first hour of service is always greater than for the seventh or eighth hour.

Often a gut feeling during the course of a reservation process can be the best way to determine a client’s willingness to pay and this is when a well-trained reservations staff earns their weight in gold. Further, give your chauffeurs the same latitude to discount or increase prices for additional time.

Your chauffeurs are in the best position to judge whether those prom kids are just dying to spend an extra hour cruising around the diner or whether the bachelors need a little encouragement to make it to a few more bars. In this way, your staff can work as a team to maximize the company’s profits.


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