Rail: What happens in a world without business travel?
Is your journey really necessary?
A friend of mine used to be an ‘expert’ for a management consultancy. His job consisted of travelling to various towns and cities far from home, answering questions from a client for an hour, then doing some sightseeing. He’d spend the night in a hotel (paid for by the company) and travel home the next day.
He was made redundant last year. Now that it turns out experts can dial into meetings on Zoom, sessions that used to consume two days and require travel and accommodation costs will in future take one hour and cost nothing. As a result, his company will need fewer experts.
I very much doubt that his company is alone. Far more, even, than changes to commuting, changes to business travel look like being one of the lasting impacts of the pandemic.
Given that a typical business traveller was worth (from memory) around twice the income per mile of a commuter, this is going to mean lasting impacts on train companies’ revenue - and is going to require some new thinking if rail revenues are not going to collapse.
Past Price discrimination
Business travellers are only worth so much because of price discrimination. While “revenue management” gets all the glory in rail industry pricing (because it is driven by computer algorithms and that sounds sexy), it is the introduction of price discrimination that was the key to much of the revenue growth of the last 25 years.
Price discrimination means charging two different customers different prices for the same product based on an attribute that one values more than the other.
For example, theatres charge different customers variable prices for the same show by pricing the quality of the view. Restaurants recognise people are willing to pay more for a night out than for lunch by creating lunchtime set menus that, in effect, premium price the evenings. Gyms recognise that people are willing to pay more for access during the commuting window by creating off-peak memberships.
All intercity train companies use price discrimination by offering flexible tickets at a high price, and inflexible fares at a much lower price. This is on the basis that business travellers, who are spending someone else’s money, are willing to pay for flexibility; something that leisure travellers are willing to trade away for price.
Much-touted “airline-style revenue management” is seen as a huge driver of growth in recent years but a significant proportion of those earnings are the function of this price discrimination that would have been achieved with just two price points. Revenue management is a substantial layer of icing, but the cake is a high-priced flexible ticket and a low-priced fixed one.
When’s the next train?
Future price discrimination
Intercity routes have been fortunate to benefit from a traveller base that included large numbers of business travellers willing to pay extra for flexibility, who could therefore be accommodated on the same trains as leisure travellers who were not. But what happens if the supply of the former dries up?
Price discrimination only works if the thing being traded away is inaccessible to the people that have not paid for it. If you have a theatre in which every seat has the same view, then you could not price discriminate (indeed, I am quite sure that theatre architects deliberately put pillars in front of some seats precisely to create price discrimination opportunities). Hence why train company staff have spent so much of the last few decades refusing to allow Advance travellers onto trains they haven’t booked: if you can gain the benefits of flexibility without paying for it, price discrimination no longer works.
Price discrimination also needs the thing that is traded to be of value to the people being asked to pay extra. Business travellers are typically attending meetings of unpredictable length and are keen to return to their families, so are willing to pay extra (of someone else’s money) for these attributes. A shop couldn't price discriminate the colour of the shopping trolley, as no-one cares enough to pay.
It looks possible that the future railway will be far more dominated by commuters (travelling less frequently than they do now) and leisure travellers.
If that is the case, then train companies are going to need to start thinking about new ways of price discriminating.
Here are three ideas for each:
Commuters
1) Price discriminate flexibility:
Offer a reduced price season ticket that allows travel only for a two-hour window each day. This reflects there will be workers keen just to use the train to get to and from work, and higher-paid Execs willing to pay a premium to be able to stay late, go out for drinks or go to a dinner. Currently people who don’t need the flexibility are paying for it anyway, while the extra that some people might be willing to pay for it is being left on the table.
The validity window could be set the day before by app to enable it to be a suitable product for shift workers and those working flexibly.
3) Price discriminate priority.
When something goes wrong, alternatives are often in short supply. So premium price a season ticket that guarantees first access to taxis, buses, helicopters, drones or whatever else is used as an alternative when the railway line is suddenly closed.
This reflects the fact that some people will be willing to trade the occasional late-night home in return for a lower price every day - while others will not.
It might also have customer service benefits, as when 1,000 passengers try to board a 50 seat replacement bus, the current system is rationing by scrum. If some people already know they haven’t paid for access, the crowd will self-regulate.
3) Price discriminate a seat guarantee.
Reduced demand means that even the busiest commuter trains will be able to accommodate all seated and standing passengers without the previous levels of crowding. Instead of reducing capacity to suit, dedicate a proportion of carriages as seated-only carriages and only permit access to people with seat guarantees. The seats could be reserved by app up to departure with an automatic refund on the rare occasions when a seat can’t be reserved.
Some people will be willing to trade a guarantee of a seat for a lower price.
Leisure
1) Price discriminate time certainty.
Advance tickets on leisure routes are a bit back-to-front at the moment. If you look at, for example, London to Chichester going out on Saturday morning and back Sunday evening, you’ll see that it’s £40 for a flexible return but £17 for an Advance ticket. What is the trade here? People travelling this route at this time will almost exclusively be visiting friends and family. And most people visiting friends and family know what time they’re planning on arriving and what time they’re planning on leaving. So there’s no downside to an Advance ticket, which means the price trade doesn’t exist as there aren’t two different segments being price discriminated.
Indeed, in a leisure v leisure trade, Advance fares could potentially work in a reverse way to the way they do now. Instead of fixing you to a specific train, cheaper tickets could provide a three hour time window; with the actual train time confirmed the night before.
Some people will value certainty (so they can arrange their day’s itinerary with their relatives) but others will be willing to trade that for a lower price. Which is how price discrimination is meant to work.
2) Price discriminate destination certainty
People visiting friends and family will always need to go to a certain place and will want to lock in a price in advance. But there will be discretionary daytrippers who may be enticed to pay a low fare on the day if the sun is shining. Let’s imagine someone who’d be up for visiting somewhere ‘nice’ for a daytrip. They’re willing to pay a maximum of a tenner as there’s loads of other things they can do with their time. Pricing tickets to all ‘nice places’ at a tenner would be no good, as people visiting friends and family are willing to pay more. But each week, a bundle of tickets to a handful of selected nice places could be released for the subsequent weekend. Friends and family people will be unlikely to hold off booking when the chances of their destination coming up are so slim, whereas discretionary daytrippers will be fine to choose from a smaller range of options.
3) Price discriminate holidays.
The train journey is a huge proportion of the cost of a day trip, a largish part of the cost of a weekend away but a very small part of the cost of a longer holiday. There used to be a product called the Awaybreak that reflected this, by charging less for shorter-term returns than longer term returns. It was abolished in the name of simplification but it is a valid price discrimination opportunity. Charge less for return tickets for which the return date is less than 3 days after the outward date in order to provide best value to short-term friends and family visitors while maximising the revenue from holidaymakers.
It’s free by car
The other option in increasing leisure revenue is to try to replicate one of the big benefits of the car - which is that, even though the car itself is phenomenally expensive, each individual journey feels free. Are there subscriptions (if you call them a subscription, they are cool and trendy: a season ticket sounds old-fashioned) for leisure travellers that can replicate some of this? e.g. £50 per month for unlimited weekend travel?
There is also a huge potential opportunity around families. Starting a family is one of those milestone moments when people buy a car, and (as a result of charging per person) it’s also the moment when train fares soar. As a DINKY (Double Income No Kids Yet), a professional couple on £80k joint income can pay their two-together train fares without batting an eyelid. But many couples see their income go down when they have kids, and the prices go up. Making kids free would make a big difference to changing that calculus. And price discrimination means you could go one step further and actually make it cheaper for people with kids than without. After all, in a world with less capacity constraints but more need for revenue, this kind of price discrimination may not be so bonkers.
'“When Mummy and Daddy love each other very much, they buy a car”
Monday’s child is fare of face
If Covid doesn’t just look likely to reduce commuting volumes, it also looks likely to change the shape of the peak. It looks likely that the daily peak will be flatter as more flexible working becomes the norm, but the weekly peak will be peakier. Already it looks likely that Friday and Monday are going to be less popular commuting days than Tuesday and Wednesday. So price season tickets that exclude Tuesdays and Wednesdays at a significant discount.
A word on complexity
There’s a danger that solutions like these are seen as making things complex and therefore ruled out.
That would be to miss out on the baby because you’re currently drowning in bathwater.
The reason fares are seen as complex at the moment is partly because a lot of the fares are simply illogical. The current system of rules based around percentage variations on whatever British Rail did back in 1995 overlaid with decades of fiddling has created nonsense. I go on about this at length here.
The previous ‘simplification’ (introduced in 2008) made things worse by retaining the complexity but consolidating every ticket into one of three names. The result can be three different prices for what appears to be the same ticket (as, beneath the surface, they are valid for different times or on different routes).
That doesn’t mean that solutions like the above need to be complex: they just need to be clear.
When you go to a restaurant and are told that the steak is £15 if ordered on its own, £25 if part of the pre-theatre meal or £30 if part of the set menu - you cope, because it all appears to make sense.
It’s critical to get the presentation right but don’t let fear of complexity prevent the creation of growth-maximising opportunities.
Looking at some of the examples above, kids go free as a way of price discriminating families v non-families is easy to understand. A price for a seat guarantee is easy to understand. Cheaper tickets that offer a time window until the day before is only doing what virtually every courier or delivery company does as standard. All of these are perfectly communicable if communicated well.
Obviously, these are only ideas and I’m not the right person to judge which are good ideas. (nor are you, by the way; only the customer is).
What’s certain is that the flexi-season ticket (which is the only post-Covid fares reform frequently discussed) will do nothing to repair the industry’s finances and will only benefit a tiny proportion of potential rail customers. There is a real perception of unfairness from part-time workers but rail operators need to look much more broadly at how revenue can be grown post-Covid.
What’s the “do nothing” option?
The railway faces a financial crisis. That much is obvious. But it also risks a customer crisis. What was good enough before the pandemic may not be good enough to win customers back.
Phrases from economics like ‘price discrimination’ sound harsh, unfriendly and manipulative. But it’s another way of saying that we should give as many people as possible travel for prices they’re willing to pay. Seat guarantees, free travel for kids, priority passes in the event of disruption and low-cost day-trip tickets will all make life better for customers while enabling the railway to earn more income.
So let’s do some of them.
