Note: This post was co-written by one of Price Intelligently's Community Fellows, and Patrick Campbell, PI's Co-Founder & CEO.
Fare increases for public transportation are far from new. Unfortunately for those that run the world’s transportation authorities, neither is the outrage that comes with them. In fact, in the 1948 Boston mayoral election, a ten cent fare increase incited so much disgust for the MBTA (then called the MTA) that supporters of Progressive candidate Walter O’Brien composed a song about a businessman named Charlie who was trapped on the train, because he couldn’t afford to pay his exit fare. Yes, the mascot through which the MBTA communicates the wondrous merits of the organization that just raised your prices is actually the embodiment of a fare increases antithesis. Thinking about that makes the rhetorical theorist within me super excited.
photo credit: nsub1
Yet, the economist within me notices something quite peculiar about the recent MBTA fare increase. At the announcement of the MBTA's price hike we witnessed absolute outrage from campus and community organizations, the twittersphere, and the general public, but now those gripes have subsided and the MBTA appears to be continuing to crank with record ridership. Why the discrepancy? Well, the answer resides in the data. Utilizing our price optimization software, we ran a pricing study on the MBTA and found that the fare hike was well within the acceptable range of Bostonians’ willingness to pay. In fact, the MBTA could have raised prices even more if they wanted to with pretty much the same result. Of course, the communication and execution of the price change was absolutely dreadful.
To understand why we’re inherently ok with the price increase, but why we saw so much initial hysteria, let's explore the pricing results from our MBTA study before going through the two major price change errors made by Charlie’s keepers.
Pricing the MBTA and why we’re not revolting over the price increase
Businesses, even those run by governmental organizations, serve to create some form of value, and then assign a price point to that value. In the case of the MBTA, the value provided is the ability to efficiently traverse the Boston metropolitan area. When pricing that service though, the MBTA has many factors to consider, including the physical costs of transportation, competitors to the T system, and even the fact that public transportation is looked at as a social good within most major cities. With these inputs the MBTA puts into play a pricing process, but a major fact overlooked by businesses everywhere: consumers don’t care.
Passengers on the T don’t care about the details. Instead, they care about the price they’re paying each month that they exchange for reliable transportation. With this in mind we utilized our value-based pricing software to determine the willingness to pay of Boston MBTA riders. There’s much more on our methodology in the second half of this pricing strategy post, including one of the ways we validated the algorithm by pricing gold. Yet, the gist of the methodology concerns getting input from real customers and computing their input with a value model that determines willingness to pay. Utilizing a market panel of MBTA riders we sent out this pricing campaign that asked them five key pricing questions (the inputs needed for our algorithm). Over a statistically significant number of responses we crunched out the following result.
There’s a lot going on here, so let’s break it down. What you’re seeing is the direct willingness to pay for MBTA riders. The data indicates that of our sample the riders are willing to pay as high as $2.76 per one way trip. Notice though in the lower graph that the elasticity range is narrow, but within this sample a percentage of riders were willing to pay as high as $6 for a one way ticket. Clearly, very few people would be riding the T at that price point. An additional data point to draw out though is the indifference price point, which sits at $2.11. At this point an equal number of respondents believe a one-way ride on the T is as expensive as believe it is inexpensive.
This data is far from surprising, and here's why
These results should come as no surprise when you think through what’s actually happening with market forces and price elasticity. No one likes price increases, but the MBTA’s service remains an inelastic good that individuals rely on heavily day-in and day-out to get to work and back home each night. As such, there are few affordable substitutes for their service, the good is necessary for most, and the cost (even though it adds up) is small compared to owning a car, Ubering everyday, etc. Essentially, we’re hooked on the product whether we like it or not, and only fringe customer segments will be pushed from purchasing their fare. In order for the whole lot of us to push ourselves to revolt in a grander sense, the price increase would have to be significantly higher. We haven't quite developed an algorithm for measuring at what price point customers will come out with pitchforks and torches, but we’re confident in saying that as long as the price increases are gradual and better communicated, wide scale revolution won't happen until the upper $3 mark.
That’s great, but why even the initial outrage over a price we were willing to pay?
Even though we’re willing to pay a price, it doesn’t mean we’re ecstatic to pay that price. Remember, we rationally realize products and services have costs, but we still want to glean as much value for as little cost as possible. People rarely pay more for a product than the number on the price tag (at least willingly).Therefore, the outrage for the MBTA stemmed from their failure in communicating the price change correctly, leading to two important lessons all businesses can learn:
1. Communication Surrounding Price Changes Should Never Involve Controllable Costs
Consumers understand that some costs go up over time, because of market forces (cost of goods, inflation, etc.). After all, it's not Gemvara's fault when the price of gold goes up. In these situations, a company can easily explain the price increase, almost scapegoating the market. Customers will be lost, but the majority will stay intact. In the case of the MBTA though, almost the entire justification for the price increase stemmed from issues where the government had complete control. Union contracts, mismanagement of resources, and the Big Dig were all used as reasons why the T required a fare increase. Hearing this messaging infuriated Bostonian riders, because the fare hike appeared as if it could have been prevented if the government made better decisions. Of course, the actual issue isn’t this black and white, but proper price communication leaves little margin for error.
When changing your prices, regardless of the reasoning (increased costs, you think you can squeeze more revenue out of your customer, etc.) you cannot use justifications that stem from within your organization. It seems obvious, but the number of companies that tell customers their price increases are simply due to “our increased costs of doing business” is daunting. If your business is truly running inefficiently, the customer is the last person who should share that burden. If your costs are truly increasing because of something out of you and your customers control, then you can properly communicate the increase, but be specific and think about boosting your value to them (more on this below). I can’t say you won’t lose customers, but many will understand.
2. When Changing Prices Always Communicate and Boost Value.
Even though the MBTA’s financial troubles were preventable, the price hike still could have gone much more smoothly by communicating the value of the MBTA's offering. Yes, there were forces outside of their control, but consumers only saw the mismanagement. Humbly coming out and admitting there was an issue and putting forth a plan of attack to fix it in the wake of the fare increase would have done wonders for the MBTA’s image. Instead, much of the messaging focused on the increased costs of running the T and the fact that Boston was still cheaper than most other major public transportation systems. Not good tactics. Additionally, the MBTA could have communicated some easy, but significant goals and changes they were going to make around service, being on time, and cleanliness. These cosmetic promises boost value and ease the tension of price increases. Simply, their communication department needs to get the PR flywheel spinning.
You must always communicate price changes in terms of how they’re going to help your customer. Add in features, boost support, or simply reiterate the amount of value you’re already providing them. Never simply raise the price without a thorough and transparent explanation. Value perception within your pricing is key. In fact, it’s everything. Therefore, the small details can make a world of difference when it comes to customer satisfaction, and happier customers are always willing to pay more.
Over time, the voices of those vehement against the recent fare hike will become softer and quieter, at least until the next fare hike. In the meantime, the MBTA clearly needs to get their communication and management acts together. Our public transportation system is nothing less than an asset to our community, but its value must not be degraded by an implosion from within. Similarly, your business must realize that your price must align with the value you are providing and changes in that price must equally adjust with changes in the offering you're giving your customers. You will never please everyone, and you shouldn't try to, but you will grow with many happy, valuable customers.