Dynamic Pricing in Railways

For Railway transport sector, the advent of latest smart phone technology, mobility as a service (MaaS) concept and embedded sensors make dynamic pricing possible based on variables such as time of day, Passenger congestion, headway, occupancy, and even carbon emissions. Dynamic pricing is making its way in Road transport, airlines, parcel delivery etc in fast manner so why not in Metros, suburban and long-distance railways. Dynamic pricing is a straightforward concept where 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.

Dynamic pricing makes costs highly flexible, based on demand and is used across many industries. Amazon is a leader, repricing millions of items every few minutes. Uber utilises surge pricing to balance supply and demand. Ticketmaster adjusts ticket prices according to the popularity of the artist or venue.

Dynamic pricing is also a mainstay of the travel industry, from air tickets to hotel rooms. It not only results into increase in the price based on popularity but also reduce the price in lean of off period which is helpful for not so urgent user Dynamic pricing uses recent trends, real-time customer behaviour, supply and demand, and competition pricing to assess the price of goods sold. It allows goods to be sold at different price points, such that customer satisfaction is met, and businesses can thrive also. It’s not just a case of looking at booking levels and adjusting pricing according to obvious ups and downs of passenger demand, rush hour or lunch hour but to taking a far more rigorous, scientific, data-driven approach to flexible pricing and it is all possible with disruptive digital technologies as Internet of Things (IoT), smart products, real-time intelligence, digital connectivity, artificial intelligence, and data analytics.

Adopting dynamic pricing would help Railway companies and operators:

Behavioural Customer segmentation: Few companies are measuring customer segmentation based on Behavioural aspects. An occasional passenger may be more likely to change schedule because of a rate discount compared to an everyday business passenger or peak period officegoers in metros.

Improving forecasting: Railway companies need to adopt a segmented application with multiple models to verify accuracy in place of one forecast or forecast model. Organizations need to focus on external and competitive data in place of internal data which can help them to scale forecasting for complex business requirements.

Management of spiral-down discounting: In absence of Passenger data analysis, customer segmentation, and enhanced forecasting capabilities, untargeted spiral-down discounting can lead to loss, price erosions, price transparency, annual discounted cards on long-term and frequent commitment etc.

Managing peak Demand- Dynamic pricing can help in managing peak demand in terms of number of essential passengers and other passengers can regulate their journeys.

Embracing Digitalization: Rail operators require new data sets and advanced analytics. They can get advantage by deploying the sales and merchandizing tools which can make life easy for passengers increasingly by accessing on their smart phones.

Focus on Personalized Product: Rail companies must focus on Personalised product in passenger and even though in Freight services. Personalized product can be developed around bundling and ancillary sales along with keeping base pricing transparent and creating loyalty offers which can open new routes to drive revenue.

Creating positive Customer Experience: Using dynamic pricing strategies not only boost profits but also can create positive customer experience by understanding their expectations. The transport industry and railway are at an inflection point. Railway Companies need to embrace a new digital world order now. 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, raising customer expectations but also to outperform competitors.

Indian Railways came out with the policy of Dynamic Pricing in 2016. Under this policy, the fares of the railway tickets are to increase by 10 per cent after every 10 per cent of berths or seats being sold (UITP India, 2018). This helps the business organization to reduce losses by selling at a low price in a situation of low demand. This pricing method has been adopted with the objective of increasing occupancy factors along with maximizing revenues. The point is that the three layers of pricing apply to the same class of travel and the same facilities being provided. The first layer is aimed at achieving high occupancy by charging only 40-50% of the original fares of the tickets. But a minimum occupancy factor is kept in mind to make the services viable.

In the second layer after the 10% cap, the regular fares come into play (it is reached slowly and steadily by increasing 10 per cent fares after each 10 per cent occupancy). The third layer is used when the regular fare is also exhausted. Prices are no longer fixed at this stage and the organization is free to charge price. The Indian Railways has adopted a dynamic pricing mechanism for its premium trains like Shatabdi, Rajdhani, and Duronto. After analysis, it was found that dynamic pricing resulted into an increase in its revenue but also a fall in number of passengers. It was found that the present system is only a fare hike system rather than a dynamic pricing system as there is no provision for a decrease in prices when the demand is low which is critical for any dynamic mechanism.

The requirement of the dynamic pricing mechanism model is both inter-temporal pricing and demand-based pricing to come up with the dynamic fares along with the provision of having a downside in case of low demand. Few researchers has developed a route selection criteria based on the key parameters identified where dynamic pricing would yield good results (K.Singh et al, 2023). The functioning of dynamic pricing is very closely related to the price elasticity, which might be different for different days of the year or different routes in Railway.

Consideration for price elasticity is critical and a uniform system implementation across the trains should be avoided. It is possible to reduce passenger inconvenience caused by last moment release of tatkal seats by reducing the percentage seats reserved for Tatkal and extracting that increased fare which was captured by it through dynamic pricing (K.Singh et al, 2023). Researchers has proposed customer segment based (i.e. Individual vs Groups, business executive, leisure traveller, Emergency traveller and advance planning traveller), Value based (i.e. berth position, single trip vs round trip, extra luggage, bundle offer for ancillaries services i.e. meals and end mile connectivity within city etc.) and Time Demand based Dynamic Pricing.

Dynamic pricing should be applied based on Train route selection criteria also ( i.e. Short Travel Distance, Low Flight Frequency, High income level of two cities, presence of popular tourist place in nearby area) Dynamic pricing may not be only used for passenger tickets, it can also be implemented on services on rent or other ancillary services provided by railway operating companies. For example- Metro Operating companies may also consider with dynamic pricing in some services like Advertisements in the trains. Peak period where maximum passenger’s footfall may attract higher display rate in comparision to off peak hours where display rate may be lower.

The testing at different places and execution in phased manner is the requirement of time, the model will keep evolving and getting matured, but we should not leave this opportunity untapped. As railways are moving with deployment of Artificial Intelligence technologies in different domains, getting the pricing right could be the difference between making it as a profitable business or missing out on great opportunities. Through AI and Dynamic pricing mechanism, Railways can now align pricing with real-time market demands, customer behaviour, and digital marketing efforts.

While Dynamic Pricing is being used as win-win option for both operating companies and end customers, Railway companies should not be left behind to leverage on the potential of Dynamic Pricing in mainline, Metros and other suburban railways also.

Reference

1- K.Singh, P.Dhake, and Narayanaswami,S. 2023. A dynamic pricing strategy model for Indian Railways. https://link.springer.com/article/10.1057/s41272-023-0045 0-w

2- UITP India. 2018. Indian railways introduced surge pricing premium trains. https://india.uitp.org/articles/indian-railways-surgepricing.

3- 1606976069464-DYNAMIC PRICING. Pdf (indianrailways.gov.in). https://iritm.indianrailways.gov.in

4- Dynamic pricing is a staple of the travel industry, so why not rail? (capita.com)

5- Smarter and Faster Dynamic Pricing Using AI | LinkedIn


Author:
Mr. Shiv Mohan,

Maintenance Director,
CBTC, Rail Systems
Expert, Operations, Metro,
Monorail and APM

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