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Time‐based zones: an alternate pricing strategy

Document Cited in Related
DOIhttps://doi.org/10.1108/10610429910258020
Pages73-82
Date01 February 1999
Published date01 February 1999
AuthorBrendan Phillips,Peter Sanders
Time-based zones: an alternate
pricing strategy
Brendan Phillips
Lecturer, School of Marketing and Tourism, Edith Cowan University,
Churchlands, Australia
Peter Sanders
Senior Lecturer, School of Marketing and Tourism, Edith Cowan
University, Churchlands, Australia
Keywords Cost drivers, Intangible costs, Pricing, Pricing strategy, Public transport,
Segmentation
Abstract Service industries, such as public bus transport, are time-bound, which makes it
impossible to inventory their service output. The potential revenue from an empty seat on
a bus is lost for good once the service run is complete. Conversely, when demand for a
seat on a service run exceeds supply, the revenue is also lost. As public bus transport has
a high fixed to variable cost ratio, these demand and supply imbalances have a significant
impact on cost recovery performance. Addresses a number of factors that influence the
cost recovery performance of public bus transport using data from one of Australia's
largest operators. It considers the shortcomings of current fare price structures and how
these may be changed to reflect operational cost drivers in a way that improves cost
recovery performance. The various non-monetary costs passengers incur when
purchasing and using public transport are also considered along with methods of
reducing these to increase the revenue-generating performance of operators' fixed
capacity.
Introduction
Pricing in public transport organisations is often based on a mixture of
internal operational costs, customer demand patterns, and political
acceptability. The major considerations in determining pricing approaches in
the marketing literature are cost as a foundation, buyers' willingness to pay,
and the price of perceived substitutes involving competitors' pricing actions
(Lovelock et al., 1998). The problems associated with the allocation of fixed
and variable costs to a service such as transportation highlights the difficulty
in using costs as a foundation in determining the price for selling one more
seat. The variable cost of the additional passenger is likely to be very low if
not non-existent. This situation offers considerable flexibility in pricing
strategy when cost recovery and patronage objectives are major operational
issues.
Public transport is essentially a service where customers hire the services
of the bus and its driver for the duration of the journey. The journey is, in
essence, intangible ± i.e. transportation; inseparable ± i.e. customers must
be present to avail themselves of the service; heterogeneous ± i.e. the
quality of the journey may vary; and is perishable ± i.e. if the customer
misses the bus the service opportunity has been missed. From the
customers' perspective, additional key costs include time, physical, sensory
and psychic. Hence, decision-makers need to take into consideration the
total value that a customer will place on the perceived benefits of using the
service minus all the perceived costs that the customer would incur in using
the service. The resultant perceived net value of public bus transport must
exceed that of its substitutes to result in its choice as a mode of transport.
Unfortunately, the operator only ever sees the result of consumer behaviour
and does not have immediate access to each stage of the consumer's
calculation of the gross benefit and all the perceived costs. The services
marketing literature also broadens considerations of costs by defining costs
Public transport
JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 8 NO. 1, 1999, pp. 73-82 #MCB UNIVERSITY PRESS, 1061-0421 73

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