The Price of the Month. Success or Failure?

03/2010: Long Distance Train Ticket starting at 14,40 €

Posted in Pricing by Jouko Riihimäki on 1.3.2010

I start my writing with the setting of objectives for train journey pricing. The main objectives for the train journey pricing are:
1. Supporting profitability and long-term investments
2. Supporting operative efficiency
3. Supporting customer orientation

I evaluate the implementation of these objectives in the present pricing model. I’m using the price information between Helsinki and Turku as an example. Regarding pricing, the products of the Finnish transport company VR are differentiated based on the train type (Intercity 2 and Pendolino) and class (1st class and 2nd class). In practice, the train types are also the tool for differentiating prices at different times. There are also differences between the qualities of service in each class. The first class price includes a cost-free WLAN-connection during the journey and better premises. Price -discounts of train journey are based on customer type discounts. The table below indicates the valid train journey prices between Helsinki and Turku.

VR announced in its official annual report that the profit of 2009 had weakened and there was a decrease in the number of passengers. The CEO Mikael Aro commented in the report, that even though the financial position remained good in 2009, the present income level is not sufficient to cover the necessary equipment investments of the future. VR has used the increase of ticket prices as its main tool for improving profitability. To quote the Kauppalehti on 10th February 2010: ”The only solution is money, of which the railway company has a chronic shortage. The question is, as Aro says, in which circumstances VR has to be able to operate without problems. All solutions cost money. Either the government invests more money or then the ticket prices go up, Aro says. Aro does not specify how much the ticket prices have to be increased.”

I think that the increase of ticket prices without changing the pricing structure may cause the decline of profitability in the long term, because the price increases will take travelling by train mainly to cars and buses. The market share of the car traffic in Finland in 2007 was 85 percent compared to the 5 percent share of the railroad traffic. The earlier comments indicate the structural weakness of the pricing model. The pricing is based mainly on cost based pricing and historical pricing traditions. On the other hand, it has to be noted, that the train journey pricing is not merely cost oriented, because VR has adapted the prices of different routes according to the competition situation (Market-oriented Pricing). For example the kilometer price of the adult ticket (€0,10 per km) in second class in a Helsinki-Oulu train is 32 percent lower than the corresponding table price of the Helsinki-Turku train (€0,15 per km).

Another pricing objective is the supporting of operative efficiency. The optimization of transport capacity and its resources is a central tool for operative efficiency. The present pricing model guides the passengers for Pay-as-you-go purchases, which makes the planning of operations difficult and causes inefficiency in the use of capacity. The prices do not fluctuate based on the time or method of purchase. My opinion is that the current pricing model of VR does not take regular customers into consideration, those who plan their trips beforehand and would like to commit into travelling by train in the long term.

Airlines have developed dynamic pricing in order to rise to the challenge. In this model, the pricing fluctuates based on available capacity, time and method of purchase. The opposite of dynamic pricing is stable pricing which is typical for monopoly companies and industries. The pricing model of airlines is the result of the strong competition situation where every euro is essential for airline companies. The competition for train journeys has not been as strong, but there has been enough for everybody in the business. In this situation there are no great needs to change the pricing logic of the branch, but it has remained in relatively stable models.

Regarding passengers, the VR pricing model is quite simple and clear. The passenger does not have to plan the trip beforehand, but can count on being able to purchase the ticket at the same price regardless of the time or place of purchase. The pricing is made unclear by different discount models, whose bases are partly unknown. As a state-owned company there are many intentions for discounts which may take the pricing to an inefficient direction.

I think that in supporting the central objectives, VR is not successful with the present model. Product-oriented thinking and mechanical pricing still guide the pricing decisions. A clear pricing structure based on customer behaviour is not being used or at least it is difficult for the outsider to perceive.

Pricing Stars (1-5):

Developing Pricing

I think that the developing of the long term profitability of the railroad traffic requires more and more understanding of customers and their willingness to pay for the products and services. VR should forget the public sector pricing traditions and follow more powerfully the new customer oriented methods also when it comes to pricing.

I believe that in the future the only direction for VR is to develop a pricing and service model based on the customer loyalty and orderliness of the customer (Time and Loyalty Based Pricing). An example of a new way of thinking could be for example the German railroad company Deutche Bahn, who has successfully implemented a new and commitment based loyal customer system (price effects underneath). I believe that the effective follow-up of the customer behaviour, as well as planning is the key to the correct pricing of products and services. If it is correctly implemented, the new customer oriented pricing is also simple and clear.

In addition, more and more service elements shall be attached to the core product, for which the passenger is prepared to pay (Value Based Pricing). The dynamic pricing model used by airlines is not suitable for the use of rail travelling as such, as the competition in the market is very limited. Dynamic pricing may remove the present simplicity and clarity from the pricing.

Jouko Riihimäki, M.Sc, CPP Certified Pricing Professional

Articles:

VR Group´s Result Information

http://www.vrgroup.fi/vakiolinkit/VRinforms/news_141.html

Kauppalehti News 10.2.2010 (in Finnish)

http://www.kauppalehti.fi/5/i/talous/uutiset/etusivu/uutinen.jsp?oid=2010/02/30499

Deutch Bahn BahnCard

http://en.wikipedia.org/wiki/BahnCard

Pricing Strategies

http://en.wikipedia.org/wiki/Pricing_strategies

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