VIA Rail using Revenue Management to Maximise Sales

Train fares used to be predictable with the lowest fares available for passengers booking in advance and conversely, rocket high if you were to buy a ticket on the spot.

However the Canadian VIA-rail has recently adopted a model similar to that of the airline industry, which means that some tickets go high and others low depending on the demand.  The aim of this revenue management is to get as many people on a trip as possible, at the highest fare possible in each category. Since VIA implemented the system last year they have seen an increase in ridership of 10.4 per cent between the Montreal-Ottawa-Toronto route.

This type of computer software price optimisation is based on several variables such as current market conditions and historical booking data. The revenue management allowed VIA to eliminate advance purchases discount fees and introduced a new economy fare to attract customers who otherwise would have travelled by car.

Pricing management is increasingly used by car rental agencies and hotels and this pricing strategy is now accepted by the general public as it gives more flexibility, a win –win situation where customers can adjust their budget and time according to the various options available.

The Link Between Pricing and Profits

While most CEOs realise that pricing improvements can drive profit gains, failure to implement a sustainable pricing infrastructure often occurs due to a lack of know-how.

The international food and beverage corporation PepsiCo recently demonstrated this link and reported that their operating profit increased by 8% as a result of a price increase.

This PepsiCo example highlights the trade-off that must be considered when increasing prices which will inevitably lead to a loss in sales. However, as Pepsi have shown profits can still be increased. While this will satisfy senior management and shareholders, it can lead to disharmony in sales teams, in particular where sales bonuses are volume-based.  Often salespeople will respond by offering additional discounts to their customers to try and retain their volumes.

There are several methods to address this issue. The first of these is to make salespeople aware of the change and the reasons behind it, before the increase is implemented. This will help gain their acceptance.

Simulation tools that highlight the increase in profitability will demonstrate to salespeople how the increase will improve profitability of their own customers, even if volumes fall.

Of course businesses can remove the main cause for concern by changing sales bonuses to profit-based bonuses – so they are less concerned with volumes.

Finally, simple rules on discounting can be implemented. Setting maximum and minimum or floor prices for a product line will help ensure that the sales people cannot discount too heavily.

Whichever approach is chosen, a software solution will further allow you to track the effects of the increase, and importantly the discounts given by sales teams. The best pricing tools can collect, analyse and report on discounts and rebates and give increased visibility of the key parts of the price waterfall.