Dynamic Pricing in Revenue Management

Revenue management involves selling the right product to the right customer at the right time and price. Dynamic pricing plays a key role in revenue management, especially when products have expiry dates and fixed capacities. This strategy allows for maximizing revenue by adjusting prices based on demand and timing, catering to price-sensitive customers, and implementing segmented pricing. The concept of dynamic pricing is explored further in the context of industries like airlines and Indian Railways.

• Revenue Management
• Dynamic Pricing
• Pricing Strategy
• Revenue Optimization
• Market Segmentation

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Presentation Transcript

1. Neelam Sanghi General Manager/IT DFCCIL/IR

2. Agenda Revenue Management Dynamic Pricing Industries that adopt dynamic Pricing Airline Industry Indian Railways Why Dynamic Pricing in Indian Railways?

3. Agenda Case Study Scope for Dynamic Pricing in IR IR s Experiment with Dynamic Pricing Benefits Challenges Dynamic Pricing in Airlines Viz IR Food For Thought Interactive session

4. Revenue Management Revenue Management is selling the right product to the right customer at the right time at the right price Dynamic Pricing is one aspect of a complete revenue management programme The technique is most useful when two characteristics co-exist The product expires in a point of time The capacity is fixed well in advance and can be augmented only at a relatively high marginal cost

5. Dynamic Pricing These characteristics create the potential for large swings in the opportunity cost of sale The opportunity cost of sale is a potential foregone subsequent sale The value of a unit in a shortage situation is the highest value of an unserved customer Forecasting this value given current sales and available capacity represents dynamic pricing

6. Dynamic Pricing The customers are price sensitive The aim is to sell the perishable inventory for maximum revenue Giving discounts to price-sensitive customers and charging premiums to less price sensitive customers The customers differ in more ways than just price sensitivity so market needs to be segmented on multiple variables

7. Dynamic Pricing Dynamic Pricing is pricing based on demand and timing . The price is not firmly set it changes based on changing circumstances High demand, higher pricing and vice versa Segmented Pricing: Some customers may be willing to pay more for faster service, higher quality or more features Peak User Pricing: Higher prices for Rush Hour"

8. Dynamic Pricing in the following Airlines Industry Hotels Car Rental Industry Ocean Cargo Industry Retail Industry Fashion Apparel Industry Entertainment Industry ticket pricing Cruise Lines Manufacturing Industry

9. Airline Industry Prices in the Airline Industry were regulated until 1978 Price and quantity changes had to be approved by CAB American Airlines is considered the pioneer in dynamic pricing Advanced software has propelled e-commerce forward with dynamic pricing In America for example One way fares exceed round trip fares

10. Airline Industry Price changes frequently Low fares on a particular flight being available, then not, and then available again Listed fares vary depending on the time of the year, time of the week, remaining seats available and remaining time until departure For example, average prices for round trips between Phoenix and Los Angeles differ depending on whether they originate in Los Angeles or Phoenix

11. Indian Railways 114,500 km of total track over a route of 65000 km 7500 railway stations Carries 30 million passengers daily Transports 2.8 million tonnes of freight daily Fourth largest railway network after USA, Russia and China 1.36 million employees

12. Indian Railways In 1951 the various state Railways were nationalized as 1 unit wholly owned by the Government of India It is virtually a monopoly in medium-long distance travelling passengers in India but for short distance faces stiff competition from Roadways Passenger revenues are cross subsidized by freight earnings Each train has multiple stops

13. Indian Railways There are different types of concessions given to different segments of customers like senior citizens, students, military warrants, members of Parliament, Railway employees Currently static pricing is followed for all trains Same ticket price all the year round for the same train

14. Why Dynamic Pricing in IR? PRODUCT OFFERING CRITERION Product is perishable in nature Multiple product options available over a significant time period Vacant capacity exists across similar product offerings Demand varies across time & similar product offerings FULFILLS ALL

15. Why Dynamic Pricing in IR? IMPROVEMENT IN COACHING EARNINGS Filling up vacant capacities through spreading of demand Increased customer base through below base level fare offering will benefit the EWS Exponential increase in revenue for trains in high demand

16. Why Dynamic Pricing in IR? Currently the loss in the passenger sector is touching Rs 26,000 crore in a year It is being cross subsidised from freight earnings While the waiting list of Passengers is getting longer and longer yet passenger business is making a loss Many passengers are willing to pay for travelling in comfort

17. Why Dynamic Pricing in IR? MARKET FORCES INFLUENCE DEMAND It factors in all variables Categoryof train & class Regional & Seasonal variations in demand Temporary surges / slumps Convenienceof timings Weekend syndrome

18. Case Study %AGE OCCUPANCY: HWH-PUI (OCT'11-SEP'12) 103.18 87.18 12837 95.97 22835 TRAIN 77.9 12895 12881 99.09 12887 92.9 18409 34.82 12277 (CC) 113.48 12821 (CC) 0 20 40 60 80 100 120 %AGE OCCUPANCY (CC/3A)

19. Case Study MONTHWISE OCCUPANCY: HWH-PUI (OCT'11-SEP'12) 140 120 100 12821 (CC) %AGE OCCUPANCY 12277 (CC) 80 18409 12887 60 12881 12895 40 22835 12837 20 0 1 2 3 4 5 6 7 8 9 10 11 12 MONTH

20. Scope for Dynamic Pricing Scope exists for balancing the demand across multiple trains to same destination. Demand varies across seasons and across trains to same destination The definition of season would vary across regions. Even within a season, there could be short surges / slumps in demand. Weekend syndrome is another example of demand fluctuation Demand also varies across classes in the same train Advantage can be derived by smoothening the seasonal fluctuations in demand by accentuating benefits of vacant capacities in off season

21. IRs experiment with Dynamic Pricing Pilot Project For the first time, railways experimented with dynamic fares on the pattern of airlines by operating Rajdhani type AC special trains between Delhi and Mumbai Four trips from 24thDecember 2013 till 2nd January 2014 of the premium AC special trains on the busy New Delhi-Mumbai sector

22. IRs experiment with Dynamic Pricing The fare will vary based upon a pre defined formula Dynamic fare charged for only confirmed and RAC passengers Tickets sold on higher rate than the existing rate as per the dynamic pricing policy to encash the peak demand during festive season of Christmas and New Year

23. IRs experiment with Dynamic Pricing The Premier AC special trains will have only AC-2 and AC-3 classes with Rajdhani like facility including catering The fares to increase depending on demand intensity The train designed to clear the last minute peak time demand There are no stoppages enroute

24. IRs experiment with Dynamic Pricing There shall be no waitlist passengers Advance Reservation for this train would be a maximum of 15 days only No Concession will be applicable on this train Free passes/complimentary passes/warrant/concessional voucher etc. shall not be permitted in this train Adult fares would be charged for all passengers irrespective of their age

25. IRs experiment with Dynamic Pricing Only e-tickets will be permitted for booking through Internet/IRCTC portal The fare applicable each day /transaction shall be indicated at the time of booking on the IRCTC website Hence Modification/Duplicate ticket/cluster booking/BPT will not be allowed Only end to end general quota booking will be applicable Upgradation option shall not be applicable in this train The passengers are required to carry the prescribed original photo identity which is used at the time of booking

26. IRs experiment with Dynamic Pricing Current Booking will be allowed at current reservation counters only after Charting as this facility is not available on internet If current counter is enabled vacant berths left at the time of charting will be offered for current booking at the Originating Station Tickets at Current Counter will be sold at the Base Price (Rajdhani Base Fare plus Tatkal charges) and other supplementary charges like reservation fee, superfast charges,catering charges and service tax as applicable

27. IRs experiment with Dynamic Pricing Coach damage / suspension /addition / profile change will not be applicable within advance reservation period under Dynamic fare policy However if berth cannot be given to passenger by Indian Railways full refund shall be granted to the passenger manually No refund shall be granted. However,full refund shall be admissible in case the train is fully cancelled

28. IRs experiment with Dynamic Pricing The menu and tariff of Catering services for the proposed train will be similar to other Rajdhani trains The days of running of this train and composition of the train shall be as per the notification of the Coaching Directorate of Railway Board / CPTM s of Zonal Railway Zonal Railways to arrange wide publicity through media

29. IRs experiment with Dynamic Pricing There was a 30 percent jump in fares in AC-2 Ticket fares went up by Rs 737 in AC 2 and Rs 627 in AC 3 35 per cent jump in AC 3 fares The trip for Dec 13 was booked to capacity with 746 births sold out in AC 3 and 219 births sold out in AC 2 This train was equipped with 17 coaches. Railways plans to introduce DP in 17 more trains

30. Benefits Increase in passenger earnings by Filling up vacant capacities through spreading of demand. Increased customer base through below base level fare offering Exponential increase in revenue for trains in high demand Reduced burden on PRS due to increased online behavior Touting will get discouraged

31. Benefits The initial frenzy will cause a surge in the DP, resulting in an immediate slowdown in the booking rate The difference in highest and lowest fare as seen by the customer will tempt him to less popular trains The price conscious buyer will shift to vacant capacities in less popular trains, while the price inelastic buyer will continue to book Phenomenon of full booking within minutes of opening may not happen anymore and confirmed seat availability on popular trains will be spread over larger period Fares of highly popular trains will continue to be much over the base fare

32. Dynamic Pricing in Airlines viz IR Airlines Indian Railways Airlines are owned privately They compete with each other for the same route and for the same passengers Airlines decide fares within the framework of guidelines of DGCA Greater flexibility in operations and fare fixation Over 90% Revenue from Passenger Operations IR fully Government owned No competition as it is a monopoly Fares fixed by Railway Ministry Introduction of new trains, routes and fares subject to Parliamentary approval 75% revenue from Freight Operations.

33. Challenges Intermediate Station Quotas Passengers not having access to Internet or IRCTC Portal Credit card /e-banking required for booking Dovetailing with existing PRS Modalities for booking in PRS offices Data mining with respect to customer preferences for different trains and routes

34. Challenges The pilot project confined to 2ndand 3rdAC on premium train plying on premium route The ticket price should be significantly lesser than the low cost airlines Quality of service like cleanliness, safety, security, punctuality would require considerable improvement

35. Challenges Maximum seats in most trains are in the sleeper class Policy of granting concessions not consistent with dynamic pricing Profit maximization cannot be the only goal for a Government run organization Govt has notified a Rail Tariff Authority which will develop an integrated, transparent and dynamic pricing mechanism

36. Food for Thought At many companies, little cost-cutting juice can easily be extracted from operations. Pricing is therefore one of the few untapped levers to boost earnings, and companies that start now will be in a good position to profit fully from the next upturn McKinsey Quarterly, 2003 Dynamic Pricing in IR can be introduced in luxury classes in premium trains during peak seasons

37. Interactive Session

38. Thank You