In my previous life (most of my working life was in IT) I worked in many areas ending up European Commercial manager for an American company.
Among the things I was responsible for was european telecoms law, competitor analysis and pricing.
Where do I start?
Price is a very important thing, it tells us about supply and demand. It tells us about the intrinsic value customers place upon a product or service. It can signal quality. It can be used to control demand.
But it is a very complex creature..... Before we start to debate rate 1,2 or 3 we need to understand something called the price demand elasticity curve.
Every product or service will fall into two categories. Price elastic, and price inelastic.
Water is relatively price inelastic, there are no substitutes for water, without it you will die. Price management will prevent you wasting it, but not drinking it. This is why there is a regulator to ensure the price of our water supply is governed.
Wheat is price elastic, it is a staple food, but there are substitutes Rice, Corn and Potato. So a variation in price will affect demand more when there are available substitutes.
This is the thinking behind the rate adjustments being discussed by the UTG.
So, it seems reasonable to suggest that if we drop our prices, then demand will increase yes?
But how much will demand increase by? if we drop our prices by 10% and we increase demand by 10% as a result (ignore additional fuel etc for now) then we are back to square one.
This example suggests perfect elasticity, But what if we drop our prices 10% and demand only increases by 3% ? or what if it increases by 20% this unknown is called the price demand elasticity curve and every product and service has one.
There are two problems we need to address here.
No one knows the price elasticity curve for a Taxi ride. Because we have only ever had civil servants used to running subsidised buses setting our fares for us. So we have no history of price sampling to plot our price demand curve.
What are the causes of our loss of work levels? Price? over supply? lack of regulation? I contest that although we should seek to understand the price demand elasticity of our service we need to examine the root causes of our loss of work. We have 78k private hire vehicles now and many are acting as illegal hackney carriages responding to hails and touting. This means that supply is the issue here. Over supply! it is intentional and planned. By flooding the street with vehicles plying for hire our work levels have dropped. If you believe as I do this is the root cause of our work dropping off, then we have to ask is price the burning issue….?
If we drop our prices by “X”% and win back “Y”% of the work, (without enforcement) what will the PHVs do when there is less work for them? sit back and watch Taxis filled with passengers and grumble? OR will they respond with a price lower than us?
So we respond with another cut in price? and PHV will do what?
This game goes on for a while and eventually the player with the deepest pockets and/or lowest cost base survives and the other players in the market go out of business (or as an economist would say “exit the market”)
At what point do we start to argue we are a better service than PHVs? before or after the price war?
Here are some more things to consider….
The price stability of a market depends on the ability of players to move in and out of the market thus adjusting the supply of products or services.
The Barriers to entry and the barriers to exit play a significant role. The barriers to entry for a PHV? £300, The Barriers to Entry of a Taxi driver are many times more than this in terms of knowledge costs, loss of earnings etc.
The Barriers to exit are linked to the initial cost of the barriers to entry and perhaps a long term loan to purchase a bespoke vehicle. Many Taxi drivers are stuck where they are. If you have chosen driving a Taxi as a professional career, chances are you have been out of the general workplace for a long time. What skills do you have for the modern workplace? This is a real barrier to exit for many.
So before the trade starts playing pricing specialists, some serious competitor analysis is required. Understand the real reasons behind the decline in work levels. Understand exactly what a drop in price will mean to demand and the response from the PHV industry.
Preferably be freehold on your cab, because you could get in real trouble if you drop your prices and it makes no difference or little difference to demand.
If any of the reps dealing with the pricing/rate issues (of which the UCG are excluded... which given my background seems a pity eh?) want to read about what they are doing, try this book if you can find it anywhere… Product Policy by Yoram Wind. It is the bible of pricing there are newer books, but they are all re-hashes of this.
Len Martin
UCG