Dynamic Pricing in Indian Railways: Concept & Issues

In the month of September, 2016, the Indian Railways came out with the policy of Dynamic Pricing. Under this policy, the fares of the railway tickets are to increase by 10 per cent after every 10 per cent of berths or seats being sold. But a cap of 50 per cent has been put on the hike of fares, so that it does not become unreasonable for travelers. The target of this policy right now is only the top trains like Rajdhani Express, Duronto and Shatabdi. This move has been vehemently criticized by all sections of the Indian population calling it a way of extorting money from the common public. In this scenario, one needs to look into the whole premise of the concept of Dynamic Pricing and then its advantages and disadvantages in order to analyze the concept in its true sense.

When did the Concept of Dynamic Pricing Emerge?

One can find the introduction of this concept in 1988 by the American Airlines. With this concept, in the year 1990, the Airlines had estimated a profit of about $1.4 billion in three years and a steady state of contribution at $500 million after its implementation. Since then, a new area of research and application in Revenue Management had emerged. It has also been adopted by a lot of other industries like hotels, online retail stores and railways. In fact, one of the online retail store giants-Amazon uses the method of Dynamic Pricing for enhancing sales. Seeing these developments, the railways in India have also thought of coming out with a similar idea to increase revenue.

What is Dynamic Pricing and how does it work?

Dynamic Pricing is a strategy adopted by businesses to set flexible prices for their product or service depending on the current market demands. The prices are based on few factors like pricing of competitors, time-based pricing etc. This helps the business organization to reduce losses by selling at a low price in a situation of low demand. The small losses can then be made up by charging a premium during times of high demand.

Objective: This pricing method is adopted by organizations with the sole objective of increasing occupancy factors along with maximizing revenues. This objective is achieved by DP by dividing the resources available into three categories or buckets: low fare (deep discount), regular fare and premium fare. The point to be noted is that the three levels of pricing apply to the same class of travel and the same facilities being provided.

The first bucket is aimed at achieving high occupancy by charging only 40-50% of the original fares of the tickets. But a minimum occupancy factor is kept in mind to make the services viable (it is fixed at 10 per cent of seats by railways). One of the problems with this category is that the fare once paid is non-refundable. As the aim is to maximize occupancy, the organization will not bear the loss of selling the tickets at a low price. After this cap, the regular fares come into play (it is reached slowly and steadily by increasing 10 per cent fares after each 10 per cent occupancy). The third category is used when the regular fare is also exhausted. A problem with this category is that prices are no longer fixed at this stage and the organization is free to charge any price. It is possible that a person buying the ticket one day later may have to pay a higher fare than one who bought it a day back. It can also happen on an hourly basis (time-based pricing). But this extreme strategy is adopted only in case of high demand.

Features of Dynamic Pricing in Indian Railways-How is it Different?

Although there are various features of dynamic pricing as we could see in the objective itself, the case of Indian Railways is slightly different. These grounds of differentiation include:

• No additional advantage of low fare bucket- The Indian Railways at present do not provide for a low fare advantage. The regular fares are the starting fares, travelers do not get any discount. However, the tickets are refundable.
• The 10 per cent cap- This pre-determined increase in the price after every occupancy of 10 per cent berths is against the concept of Dynamic Pricing, which relies on price flexibility based on market demands.
• No dynamism in prices-Unlike the DP concept, where prices increase or decrease, prices here only increase. There is an assumption that the demand will always be greater than supply.
• Bureaucratic approach- The Indian Railways being a government organization in a Welfare State, is required to adopt a welfare approach than a profit earning approach. So all its actions have to be certain and based on reason. So, fixing certain rate is demanded, fixing quotas and prices.
• Any action against this approach is considered to be a violation of fundamental rights guaranteed under the Constitution of India.

Advantages of Dynamic Pricing for Railways

Though the benefits for this pricing for passengers are not much at present, it may be a necessity considering the abysmal conditions of the railways. Some of the situations which necessitate this step include:

• The Railways have suffered from low investment for almost a decade now. The finances in this sector have been perennially low on account of all freight earnings being diverted to providing subsidies to passengers. The estimated losses per annum have been Rs 30,000 crore.
• The move is not going to affect the passengers to a great extent as these are intended only for the few trains carrying passengers of higher economic status. But not doing so can affect the railways seriously.
• In the past few years, one has heard about several complaints regarding the conditions of railways-food, sanitation, hygiene etc. If these are to be maintained, the railway budget has to be increased to some extent.

Disadvantages:

The major disadvantage of this move is that providing for higher pricing may have a reverse effect on occupancy. People may choose to travel by other means than pay an uncertain premium fare.

Conclusion

This move is a really welcoming one, seeing the necessity of developing our Railways to make them suitable for commuting. One good step could be to stick to the concept of Dynamic Pricing to some extent by giving some discount which may encourage people to come over for this policy. These deep discount fares can help the people of lower middle class to a great extent who travel very infrequently. One should give the government a chance and cooperate with the government for the betterment of the Railways. An analysis can be done at a later stage.