The transport industry is at an inflection point — companies need to embrace a new digital world order now, or risk being left behind. Independent, startup competitors from low-cost airlines to carpool services are the norm and a future of self-driving vehicles is on the horizon. The pressure is on like never before to maintain profit expectations but also to outperform competitors.
New entrants often have disproportionately lower start-up and operating costs, more labor flexibility, and fewer constraints than public or government-backed organizations. And new analytically-driven entrants are pursuing the Amazon-model, which is changing industry dynamics and raising customer expectations.
Capitalizing on demand
Enter dynamic pricing. Dynamic pricing is a straightforward concept: prices automatically fluctuate based on data about supply, historical demands, prevailing market conditions, and competition to quickly adapt to changes in the marketplace and improve profitability.
For transport, the advent of mobile technology and embedded sensors make dynamic pricing possible based on variables such as time of day, road congestion, speed, occupancy, and even carbon emissions. It’s not just a case of looking at booking levels and adjusting pricing according to obvious ebbs and flows of demand of one variable — rush hour or lunch hour as the only input, for example — but to taking a far more rigorous, scientific, data-driven approach to flexible pricing.
Obviously, dynamic pricing results in more efficient cost-income forecasting. But dynamic pricing in transportation could also be leveraged to customize better services. Single “order” management — as pioneered by some airlines — could be used to create seamless end-to-end journeys combining multiple services, such as booking for a customer a taxi + train + hotel package, online, or from a mobile device.
Rather than changing the base fare of the ticket, dynamic bundling works by generating individual offers with a tailored package of ancillary extras based on known customer behaviors, e.g., prefers first class tickets, needs assistance with a pet, or requires wheelchair service. And it could be generated in milliseconds. Such services, to a greater or lesser extent, are already in place in piecemeal. But, they can and should be more robust.
Adopting dynamic pricing would help companies:
- Improve customer segmentation: Research finds few companies have a good handle on customer segmentation. Typically, it isn’t data-derived, or evidence based — at least not to the granularity needed to design effective pricing strategies. And if they do, it’s likely to be operationally or geographically driven — few are measuring behavioral segmentation. For example, an occasional rider may be more likely to change schedule because of a rate discount compared to an everyday business rider.
- Adopting sophisticated forecasting: Many companies rely on only one forecast or forecast model, rather than a segmented application with multiple models to verify accuracy. Companies also tend to use internal data rather than also incorporating external and competitive data sources, meaning they can struggle to scale forecasting for complex business needs.
- Reversing spiral-down discounting: Without data analysis, customer segmentation, and enhanced forecasting capabilities, untargeted spiral-down discounting can lead to margin loss, industry-wide price erosions, complete price transparency, annual price-shopping on long-term contracts, and a race to the bottom — without driving incremental demand.
- Accelerating digitization: Today’s rail businesses require new data sets and advanced analytics. But while legacy technology and lack of modernization erode incumbents’ competitive posture, new entrants are gaining ground by deploying the sales and merchandizing tools customers and passengers increasingly expect, which can typically be accessed on their smart phones.
- Embracing personalization: Rail companies have been late to personalization. Even in freight, they have struggled to dynamically design a tailored “product.” With base pricing becoming completely transparent, personalization around bundling and ancillary sales — plus curated loyalty offers — open new routes to drive revenue.
For this to happen, transportation companies need to embrace disruptive digital tech — the Internet of Things (IoT), smart products, real-time intelligence, and connectivity, plus artificial intelligence and data analytics — to form the backbone of rail and transit travel.
Using dynamic pricing strategies can boost profits — most executives know that — but it should also be embraced because it can create positive customer experiences. That’s because the data required to implement it also can be mined to create new offerings that customers want.
Alden Cuddihey is a managing director overseeing rail and transit global business for Accenture