ITS Assignment – 3 | LCBSL Pricing for Profits

Efforts by : Chelumalla Rishi Revanth, 18118

India today is at a juncture where the distinction between Tier-1 & Tier-2 cities is gradually

disappearing. Economic liberalisation has fostered great growth in globalisation &

urbanisation of the country. This eventually led to innovation in technologies & processes

adopted in the social sector too. This innovation has often trickled down from Tier-1 cities

into Tier-2 cities and with the growing populations of Tier-2 cities their requirements of urban

infrastructure is increasing at an alarming rate. Governments and state authorities are

constantly putting efforts to ease out the living of people in the country by which they can be

more productive and contribute towards the economy of the country. One such hindrance to

allowing the population to effectively contribute to the economy is transportation within the

major economic zones in the country. People should not spend much time in commuting to

their workplaces which is considered as a non-productive effort. Hence it is within the best

interest of the state authorities and the public too to work in a direction which would alleviate

these problems.

One such effort is discussed in the case of Ludhiana City Bus Services Limited (LCBSL)

who are constantly striving to improve the urban public transport of Ludhiana’s City by

investing in modern busses and planning their routes to serve the commuting needs of the

urban population. LCBSL was an initiative started under the Jawaharlal Nehru National Urban

Renewal Mission (JnNURM) in association with the Government of India (GoI), the

Government of Punjab and Ludhiana Municipal Corporation. The primary aim of this state

owned body is to improve the bus infrastructure required for transportation within the city

which includes deploying busses with latest technology to meet the regulatory standards and

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population needs, planning & optimising their routes to cover majority of the city routes &

population. This effort was very much required given the growing population of the Ludhiana

City which is further adding to the congestion within the city. Also the other modes of

transportation available to the public are increasingly becoming expensive thereby burning

their pockets. Hence a robust operating model of public transport which includes busses is

required within the city.

LCBSL is planning to launch a total of 200 busses by mid-2014 amongst which there

would be 4 types of busses : Low floor AC, Low Floor non-AC, Semi-low floor non-AC, Mini

non-AC in the numbers of 40, 40, 80, 40 respectively. In the timeline given as per the case,

10% of the project, i.e. 20 non-AC busses are operational and the rest are expected to be

operational by the end of the year. Hence the project can be assumed to have reached the

growth stage of PLC from the introductory stage. The major threats to the plans of LCBSL

comes from its three types of competitors namely : auto rickshaws, rickshaws & radio cabs.

The threat is in the form of the value perception that the public has for each of these modes

of transport. Value or utility derived from a product or a service in this context is defined as

the summation of two aspects : the functional utility which is the transportation service itself

& the subjective utility of each mode of transport in the form of security, reliability, comfort,

convenience, etc. The major concern of LCBSL’s management is that although the functional

utility provided by various modes of transport is almost on a similar level, the subjective

benefits offered by LCBSL’s service outnumber the ones provided by their direct competitors.

Hence it is in the best interest of LCBSL’s stakeholders to promote themselves by educating

the customers of the intangible benefits being offered by them. This would allow them to

charge a price premium over the existing fares which are not properly accounted for these

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extra benefits being offered. Therefore going forward with economic value pricing of their

services would reap in more profits for the company.

Economic Value pricing (EVP) is a technique used by companies to value their products

and services based on the economic value it offers to the consumers. Such technique allows

the companies to reap the maximum potential or the maximum willingness to pay from the

customers if appropriate segmentation is being done. Hence more would be the profits. This

is different from the cost plus based pricing where the price might be set too high or too low

depending upon the cost incurred in manufacturing the product or delivering the service.

Doing so might lead to low revenue and profitability. EVP technique is nothing but pricing the

product or service exactly at a price point which is perceived by the customer based on the

value he receives from it. The customer would be willing to pay only that amount which he

thinks is the value of that product. Therefore we can define the EVP as the sum of the price

of the best alternative possible in the market and the value differential being offered by the

product or service in question.

EVP = cost of the best alternative + value of performance differential

Procedure for calculating EVP :

1. Determine the value of differential components of the product or service that impact a
customer (both positive and negative)
2. Assign a monetary value for each component by surveying the customer.
3. Determine the selling price of the next-best-alternative to the product or service offered.
4. The cumulative monetary value of the differential component is known as the "total
additional value." Add the calculated "total additional value" to the next-best-alternative
to determine the EVC.
5. Select what portion of the "total additional value" the company will capture. The
remaining value will be passed along to the customer.

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Now as we have discussed EVP, lets move on to the pricing strategy that needs to be adopted

by LCBSL. They desire a return on capital (ROC) of 4%, which is currently at the level of 1.9%.

To achieve the same, they would have to increase the average price charged per customer.

We know that,

ROC = [(Sales- Variable Costs – Period Costs)/Sales] * [Sales/Capital Investments]

= [(Sales- Variable Costs – Period Costs)/Capital Investments]

By keeping the ratio of average no. of customers utilising the services of LCBSL (sales)

constant, we just need to increase the price to make ROC 4%. By substituting the values of

Period Costs = INR 0.5million, Variable Costs = INR 2.8million, Capital Investments = INR 265.4

million from exhibit 10, we get the required sales amount to be INR 13.916 million. Now we

know that Sales = Price * no. of customers. By substituting the no. of customers as 917,946

as given in exhibit 11, we get the required average price per customer as INR 15.16. Therefore

LCBSL has to increase the average fare of their tickets per customer from INR 10 to INR 15.16.

References :

1. https://www.forbes.com/sites/forbesbusinessdevelopmentcouncil/2017/07/27/value-

based-pricing-two-easy-steps-to-implement-and-two-common-pitfalls-to-

avoid/#6d4f77586413

2. https://en.wikipedia.org/wiki/Economic_value_to_the_customer

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