Charter Bus Pricing 101's
Exploring Pricing Fundamentals for Charter Buses
In this piece, I want to go over some “Pricing 101’s”, which may be a useful refresher for charter finance and sales staff.
We have safety fundamentals (vehicle and driver non-negotiables), we have service delivery fundamentals (clean, punctual, quality equipment and drivers), and in much the same way, we have, or should have, pricing fundamentals.
I do a lot on inventory management and pricing and I frequently pull out my notes from years ago to remind myself of pricing fundamentals. They apply across all aspects of bus pricing operations, but we’ll focus on charter today. Let’s get into it.
First, what is pricing?
In charter bus, it’s the price charged for providing transportation. There are several categories of pricing types – cost plus, value-based, dynamic, mileage based and a few others. We’ll look at these four here, as they’ll have relevance for most charter businesses.
Cost Plus:
This calculates prices based on operational costs plus a markup for profit.
Example Calculation:
Driver cost (hours x wage rate)
+ Vehicle cost (mileage cost x miles)
+ Overhead allocation (tricky, but could be based on annual overhead divided by annual expected miles x miles)
+ Target margin.
Advantages:
It ensures that costs are covered and it’s easy to explain internally and externally as a ‘fair’ price.
Disadvantages:
It may not bear any resemblance to what the market can bear or is willing to pay.
You may underprice in high demand periods (leave money on the table), or over-price (trying to cover all costs, when it may make more sense to not attempt to cover all overhead allocated costs).
Useful When:
You’re unsure of how to price but want to price conservatively.
Value Based Pricing:
Value based is a perceived value of the service to the customer. It’s more of a ‘what’s the value of what we’re providing’, irrespective of cost.
Example Calculation:
The value-based price of a bus with wifi, satellite tv, power outlets and extra legroom may be higher for transporting a tour group, but lower for a field trip of school kids.
Advantages:
It can help align prices with the perceived customer value and/or willingness to pay – which can get you a much higher price than, say, cost-base pricing.
Disadvantages:
It’s a difficult one to put into numbers, often requiring trial and error, and success and failure to learn the value across different market segments.
Useful When:
You’re trying to differentiate yourself in the market, although you’ll need strong marketing to deliver your messages.
Competition or Market Based Pricing:
This form of pricing is based on competitors’ pricing. Typically, a charter company will have a generalization of “always x% more or less than Company ABC”.
In some respects, it employs a little value-based thinking into the equation, like "we’ve newer equipment, so always stay a little above company abc”.
Example Calculation:
Simple – Company ABC's rate plus or minus x% for the same job.
Advantages:
Easy to determine and change and easy to place yourself as a premium or discount player in the market.
Disadvantages:
Too much reliance on competitor pricing can result in a downward spiral, or a race to the bottom as the market players undercut one another to keep market share. Margins can suffer when moving down. Sales can suffer if moving up too quick.
Useful When:
You’re in a highly competitive market with little differentiation (commoditized market), but the method should be used in conjunction with dynamic pricing to ensure high demand periods are monetized correctly.
Dynamic Pricing:
This is pricing usually done in real-time and based on demand, availability and booking momentum. It typically involves some degree of automation and information gathering to establish the rate of change in inventory (how quick is a day selling), what the market prices are (how much are others charging) and what is causing the spikes. At it's very basic, it's a set of automated 'if' and 'then' rules.
Advantages:
It can maximize revenue during peak demand periods and conversely offer competitive prices (like those minimal contributing rates mentioned in cost-plus pricing above) during quieter times.
Set up correctly, it 'catches' anomalies and can quickly adjust pricing in response automatically (for example, at this time of year, if you're in the Washington DC charter market, and don't follow the Cherry Blossom predictions, you'll be glad of dynamic pricing kicking up rates as bookings surge just as those 'full bloom' dates are released).
Disadvantages:
Customers may resent the surge effect at peak periods – although the like of airlines, and more recently the Ubers and Lyfts out there have made this a more common and accepted practice these days.
For larger companies, dynamic pricing can require sophisticated software and analytics, particularly for larger fleets. I saw a demo of The Bus Network software capabilities recently which is tackling this challenge head-on. I'm sure there are other products out there. In the absence of those, you can make some decent starts and use-cases by building some clever Excel spreadsheets for smaller volumes.
Useful When:
As demand fluctuates, the pricing formula can ramp up or down the pricing, reducing overpricing in quieter periods and seizing opportunities of higher demand early by maximizing revenue with higher prices.
These are just a review of the pricing types out there, but there are also some pricing strategies worth a brief mention:
The '99' effect. $999 feels much more than a dollar less than $1000.
Bundling - maybe you charge a higher than market rate because other products and services are included (free cancellation/amendment, no surcharges for wifi, tv, food/beverage etc).
Market segmentation - different prices to different markets (e.g. instant quote and book online may price differently than a sales agent managed booking.
There are dozens of books on the topic and well worth a read. My latest read is Game Changer by Jean-Manuel Izaret (JMI) and Arnab Sinha (Wiley, 2023). It's easy to read and not overly technical.
Finishing Up
A number of years ago, we invited Tim J Smith, owner of Wiglaf Pricing, to run a week-long workshop at Coach USA on pricing. We were joined by colleagues from sister and partner companies at the time from the UK, Poland, Sweden and New Zealand, all involved in bus operations.
At the time, all companies were very much married to competitor prices in their geographies as a means to setting their own. Tim regularly throughout the week, asked the question of competitors prices:
‘Why do you care?’
To the point that we realized that many of our competitors were winging it. When we began taking a more deliberate approach with other pricing types particularly the value based and dynamic approaches, we quickly found ourselves well out of sync with competitors at times, but gained immensely in market share, revenue generation, asset utilization, and increased contribution dollars towards overheads.
As you lead your charter operations, ask yourself, or your team, every once in a while:
What are the pricing types and strategies out there?
What are we doing today?
Have we reviewed the pros and cons of each recently?
Have we overlooked other strategies?
Do I care what the competition is doing, and if so, why?
Like a frequent oil change on your bus will keep its engine healthier for longer, so to will a frequent check in on your charter pricing strategy keep your revenue opportunities from slipping. Good luck!