Operations

Getting Your Prices Right

Martin Romjue
Posted on October 7, 2013

As a follow-up to my column last month on value vs. discount pricing, I’ll bring up the second part of the equation: Static vs. dynamic pricing. Value pricing goes hand-in-hand with dynamic pricing to form the new-school model for chauffeured service rates. Whereas value pricing reflects your rules and standards, dynamic pricing responds to the real-time free market.

Airline Lessons
To understand dynamic pricing, look no further than the passengers on your next flight. Do you want to know if you really got a good deal on your ticket? Then just ask everyone seated around you. It’s guaranteed you’ll get just about as many answers as there are seats. Better yet, see what prices people paid on another flight for the same route – two hours earlier, or five hours later, or the next day. This pricing model works well for airlines and consumers alike, with multiple ticket prices determined by many factors, such as time of booking, purchase venue, seat availability and location within the cabin, non-stop versus connections, competition, month, day of week, etc. The Internet empowers the provider to adjust prices while giving consumers more choices than ever before. Just last month, while waiting at a gate at the Philadelphia airport, I decided to pay $48 for an exit row seat on my pending flight, but not the $96 rate for an exit seat row on the connecting flight. That’s a real-time decision made possible by dynamic pricing.

Why Not?
Three quick questions come to mind related to the industry’s “third rail” issue:

  • Why doesn’t such dynamic pricing work for chauffeured transportation?
  • Why is the industry beholden to flat rates/set hourly rates instead of real-time flex pricing?
  • If road tolls can be adjusted 24/7 via FasTrak Metro Express Lanes here in Los Angeles, why wouldn’t this concept work for ground transportation?

The answers to these questions are obvious: Q1: It can. Q2: Slow to change. Q3: It will.

Technology Advances
The reason dynamic pricing can and will work in chauffeured transportation is due to the emerging technologies, such as mobile apps, the Internet cloud, GPS and sophisticated “anywhere” and “everywhere” versions of software. Meanwhile, Limos.com and Uber.com are the pioneering templates of responsive pricing. Many limousine companies already can handle all the electronic records required for tacking on a host of fees and options, just like the airlines. I recently learned of “holiday fees” and “optional greeter fees,” in addition to the standard gratuities, fuel surcharges, late fees and administrative fees. Many operators also use zones and tiers to set rates based on distance and type of vehicles. It’s only a small step for operators to set hourly and flat rates in real time based on supply and demand via interactive technology. I asked several knowledgeable industry sources what it would take to pull this off.

Solutions
I’m told if hotels and airlines can do it, so can the chauffeured transportation sector. Those industries make good use of yield management, defined as managing revenues based on understanding customer behavior or buying trends in order to maximize profits. For airlines, that means monitoring seat reservations to continuously adjust prices. For business hotels, it’s charging a higher rate on a Tuesday night than on a Saturday night. For limousine companies, it means charging a higher rate for a sedan from Manhattan to JFK airport on a Wednesday at 5 p.m. than on a Sunday at 7 a.m.

Uber has accomplished this thanks to algorithms and real-time information continuously calculated via software and GPS. Chauffeured transportation companies already do modified versions of this by raising rates for special events, such as Super Bowls and political conventions. In fact, we have learned at LCT that there are far more operators now working with Uber than will admit it. Phasing in the real-time dynamic pricing in all situations may take some trial and error, but all the tools and technologies are here, with the potential available to small, medium and large fleet operations.

One source tells me operators should do their research; study Uber and book transactions to see how surge pricing works in individual cities. Dissect it, critique it and milk it. The paradigm shift is underway, with app-based transportation models changing the way people think about getting around. Another source cited Orbitz and Travelocity as viable examples for chauffeured transportation. The industry could build one or more technology platforms even better than Uber. One idea is to have a non-profit platform owned by operators with set parameters and managed by specialists. As is the case with airlines, it would be optional. Southwest Airlines, for example, does not participate in Orbitz.  

I’ve heard the view about high prices correlating with high value, but I know for a fact that is not always true. I booked two chauffeured airport runs (to and from) for my wife last month — one at $127 all-in and the other at $50 all-in — through legal, reputable limousine companies. The $50 ride proved better overall, including the fact there was a bottle of water.

The bottom line for an operator is that technology makes it possible to set prices your way at your pace in a competitive environment with affiliaes and partners of your choice, where profits can be calculated by the hour and minute. And if you think pricing is complicated now, wait until driverless vehicles enter the market. That revolution will make Uber seem like a minor protest.

Related Topics: building your clientele, business strategies, client markets, cost efficiencies, customer service, LCT editor, Martin Romjue, service pricing, staying competitive

Martin Romjue Editor
Comments ( 1 )
  • George Stewart

     | about 4 years ago

    Whoever starts charging for minutia is going to be the first one to lose business to those who keep it simple. Holidays, predictable Bad traffic, after midnight, before 5 AM... All of those are acceptable, but nickel and dime charges are going to PISS people off cause they can't figure it out easily.

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