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Ludhiana City Bus Limited: Pricing

for profits
MBA 631A
By Group - 4
Objectives of case study
After the launch of 11 new buses on March 4, 2013, LCBSL management aimed to
take the project forward from introductory to growth stage with the following as
its objectives:

• Maximizing operating profits and returns on capital by raising bus


tariffs.
• Raising fares with the aim of minimum or zero loss of existing
customers.
• Generate revenues through non-transport activities.
• Reduce break even period by increasing return on capital from 1.9%
to at least 4%.
Introduction
• LCBSL was established under JnNURM in conjunction with Government of
India, Government of Punjab & Ludhiana Municipal Corp. in 2005 with
objective of supporting stat-initiated urban reforms and fast-track planned
infrastructure development.
• Primary objectives was to provide better interconnectivity within the city
with unmatched quality services to local population in the optimum price.
• LCBSL was registered under The Companies Act 1956 in 2007.
• A proposal of 200 buses was sanctioned by GoI.
• Out of proposed 200 buses, project rolled out with 20 non AC buses in
March 2013.
• Ludhiana was a tier-II city and the largest in Punjab, with population of 3.5
M (2011) and area of 310 sq. km.
Project Details
Number of buses proposed
Timeline
SWOT analysis
1. Strength
• LCBSL endeavours to provide better value to its customers as compared to other modes
of transport in the region by providing better quality services at optimum price.
• LCBSL provides better safety, reliability, comfort, convenience, social responsibility
(lowered traffic congestion).
• The service has been enabling it's users to travel to distant, remote and congested areas
economically and safely, even at odd hours.

2. Weakness
• Policy paralysis- Poor execution of policies and implementation of tariffs.
• High operating cost - buses need regular maintenance and high fuel cost of diesel.
• State transport policy that favours private transportation agencies at the cost of the
state-owned transport department.
• Inability to provide door-to-door service and instant service.
SWOT analysis
3. Opportunities
• Proposed Bus Rapid Transit System (BRTS) will favour growth of LCBSL
• Market Development- Can enter into markets by having buses on routes with high
numbers of commuters which are untouched by auto rickshaws and private buses.
• Increase in profit by generating revenues from non transport activities.

4. Threats
• Entry of new giants like Uber and Ola which are penetrating the Indian market offering same
services can pose as a substitute to the services provided by LCBSL.
• Unorganized transport services like rickshaws also pose a threat as they offer competitive prices.
• Unexpected policy changes like ban on diesel run vehicles can highly affect the operations
negatively.
• Fluctuating fuel prices can have a cascading effect on operations of buses.
Low
● Requirement of huge
Porter’s ●
High
Most of infrastructure and
capital investment and
high switching cost
capital on which the service
5 forces depends is given by
government, where
and long break-even
period.
● Government policies
irregularity is an issue.
and infrastructure are
● Low number of private
essential which may
operators and weak
not agree with new
contracts, which put the risk
private entrants.
upon LCBSL while the direct
service is provided by the
operator.

Rivalry among
competitors
Medium
Medium ● Other alternatives
● Huge advantage on Medium are less exciting for
the Perceived price ● Multiple alternatives existing customers
vs. benefit criterion, available but they are on being costlier.
sustainable model the wrong side of the ● Low switching cost,
● Low level of value-equivalence line. multiple
advertisement, ● Possibility of metro in competitors exist
Competitors offer future, increasing income and offer
customizable services may push some customizable
and innovations customers towards services
costlier and more
convenient alternatives.
PESTEL Analysis
Political Economical Social
● State transport policy • Being a business hub, • Disconnectedness of
that favouring private Ludhiana needs well parts of cities which
transportation agencies connected transport are yet untouched by
● ‘Illegal’ autos and system for flourishment
private buses in the city of business . auto rickshaws can be
running without permit • With increasing eliminated by these
and with connivance of disposable income of buses.
officials and political local population there is
support. a scope of increasing • Traffic congestion can
tariffs of bus services. be minimized by
increasing use of
buses.
PESTEL Analysis
Technological Environmental Legal
• Carbon footprint of • Policy paralysis- Poor
• Proposed Ludhiana metro individual can be reduced execution of policies
can pose stiff competition
by use of public and implementation of
to LCBSL
transport. tariffs.
• Anticipated Bus Rapid
• Introduction of CNG • Change of policies after
Transit System (BRTS) will
buses instead of diesel election of new
favour growth of LCBSL
buses will be effective in governing body affect
reducing pollution at the policies in long
some extent. term.
Value Creation

● LCBSL endeavoured to provide


better value to its customers as
compared to other mode of
transport in the region.
● Bus services were better at multiple
frontiers- convenient in remote and
congested areas, comfortable for
large distances, safe even at odd
hours, facilitated traffic congestion,
reliability of schedule and cheaper
than other modes.
Positioning of LCBSL
Brand Positioning
To move leftwards on the value equivalence graph, the customers should perceive the
benefits more, which can only be achieved by proper communication of its qualities to them.
Following are some recommendations in this direction:

➢ With the range of additional qualities it offered, there was an opportunity to advertise
them separately- through posters and taglines highlighting each of the specific qualities-
Reliability,Safety, Convenience, Comfort, Social responsibility, Security,Cleaner city life.
➢ Interior of the bus could be used for posters which would not only provide a sense of
confidence, but also let the travellers feel the benefit communicated to them and help to
convert them to regular users.
➢ Government quotas could be used to expand its advertisement compass to mass media
(Newspaper, T.V. etc.) and hoardings. This would assist to communicate the value to the
masses and also help in attracting new customers.
[1]
Generating Alternatives revenues
• Land monetization-leveraging major asset like land holdings at possible strategic
locations throughout the city. An integrated terminal with adequate facilities and
amenities would cater to the needs of all user groups. (BMTC model, Bangalore)
• A mixed-use development with retail, Food outlets, and other commercial activity
at its centers can be implemented to create revenue. (TTMC model, Bangalore)
• If ample amount of area is available in bus depots, this land can be used as parking
area for private vehicles on a nominal fee. (ASTC model, Assam)
• Additional bus stops (existing bus stops can be revamped) can be erected in places
where connectivity can be established and this will foster towards market
penetration.
• Advertisement - using buses and bus stop walls, which can be used as advertising
hoardings as its a prime spot where an Ad can be spotted and in return promote
further cash returns.

[1] Source: http://wricitieshub.org/online-publications/73-alternate-ways-finance-public-transport


Limitations
➢ Lack of infrastructure at the bus depot[2] ➢ Lack of capital investment
➢ Bus depot situated 15 km from the city ➢ Lack of security at the bus depot

● Lack of infrastructure and large distance from do no provide much hope for land
monetization/leverage or commercialized development.
● Distance, security and space issues restrict scope of revenue through parking as
travel distance are often small and parking is often inconvenient.
● Additional bus-stops or other long-term solutions require capital investment in a
situation where only 10% of the project has been rolled out.

● Therefore, the only profitable solution left is through advertising, which we explore
next.

[2] Source: Final state of the Art Review report - Ministry of Urban Development, Govt. of India
Why LCBSL should go for advertisement?
➢ Buses travelling around the city provide a perfect opportunity to earn
revenue through advertising
➢ LCBSL’s contract with private operators did not include its share in
additional revenue sources.
➢ The prospects for advertising had not been exploited to its potential.
➢ Bus depots could also be utilized for advertisement purposes.
Advertisement Cost Calculation
Advertisement Cost assumed, p = Rs 32,500 per month per bus. [3]
For a full bus advertisement in Mumbai, charges are Rs 1,30,000 per month per bus.

No of buses, N = 20

[3] Source: https://www.themediaant.com/nontraditional/ac-bus-mumbai-advertising-1233


Present advertisement share scenario
Advertisement Profit = p X n = Rs. 32,500 X 20 buses X 12 months
= 7.8 M per year
Share of LCBSL = 7.8 M X 0.45 = Rs 3.51 million per year

Contribution towards Return on Capital = Profit/ Total Capital


Employed
= 3.51 million / 265.4 million
= 1.3 %
Pricing
Return on Sales
● Of the annual operating revenue of INR 9.1 M, with 10% of the project being rolled out, the Return on
Sales was just 29%, which was required to be increased.
● Increasing Price was the most profitable compared to decreasing costs. Decreasing costs would lead
to fall in the quality which would be against our ideas of value creation and brand positioning.
● Objective was to determine a zone of indifference where fare increase causes minimal or zero loss of
existing customers.
Pricing strategy
• As Ludhiana is a rapidly growing city, the purchasing power of local
population was increasing.
• Broad distance categories lead to 2 problems:
1) Dissatisfaction in travellers who lie on lower side of a price category and
2) Do not allow smooth and steep price change.
• Management also needed to focus on the distance categories 0-5 km and
5-10 km, as they cover the majority of the customers and Ludhiana was far
behind in charges here as compared to other cities.
• The final prices should be such that they were still competitively
advantageous over its alternatives and stay on the value advantage side of
the value equivalence line.
Profit Calculation with Price Changes
Profit function is given by: = (p - VC)q - PC;
where VC = marginal variable cost
PC = Period cost
After a Δp increase in price, followed by a Δq (= εΔpq/p) decrease in quantity
demanded the final profit function turns out to be (ε is price elasticity)
= (p0 + Δp - VC)(1 + εΔp/p0)q0 - PC
Maximising this profit function gives the optimal increase in price as:
Δp/p0 = (VC/p0) - (1 + 1/ε)
2
From the given data in the case; VC = 3, p0 = 10 (both in INR)

ε = - 0.47 in India for long-run[4] (relatively inelastic)


ε = - 0.77 for long-run and - 0.41 for short-run in U.K
We will assume ε = - 0.5 for our case.
[4] Source : Public bus transport demand elasticities in India - Kaushik Deb, Massimo Filippini
For ε = - 0.5, Δp/p = 65%
For ε = - 0.8, Δp/p = 27.5%

In the following table we have calculated the RoC for different changes in price keeping ε = - 0.5

We restrict the average price hikes to be 22.5% as this is a public sector service and excessive
price hikes will not be approved.
The profit & RoC respectively comes out to be 7.15M and 2.7% respectively.
Pricing for Non-AC Buses
• Current prices are much lower than tier-II cities, especially in 3-5 km range, hence
rise of prices by ~20 % brings Ludhiana close to pricing in tier-II cities.

Proposed Bus fare Current bus fare Tier - II Cities Tier- I Cities % Diff

0-2 6
6 8 20
2-3 5 9
3-5 8 10 12 60
5-7 10 15 0
10 12
7 - 10 12 18 20
10 - 15 15 15 15 21 0
15 - 20 20 24 13
20
20-25 26 18
25-30 29
15 + 0.75/km
30-35 20 + 1/km 33
25 15
35+ 33 + 1/km
Pricing for AC buses
• A section of the city which can afford the luxury of AC buses even if prices were
increased by ~ 35%. The new prices are is marginally higher than other Tier-II
cities, but still much lower than that of Tier-I cities.

Proposed Bus fare Current bus fare Tier - II Cities Tier- I Cities % Diff

0-2 15
12 12 20
2-3 10 20
3-5 15 15 25 50
5-7 20 30 33
15 20
7 - 10 25 35 66
10 - 15 30 20 22 45 50
15 - 20 35 55
25 25
20-25 65
25-30 75
30-35 20 + 1/km 85
35 + 1/km
30 30
35+ 85 + 2/km
The new prices still ensure enough margins to counter price-reduction strategies from other competitors and
position itself at the prices point on the value equivalence graph.
Bookings for Personal purposes
Time slot (hrs) Non-AC fare AC bus fare ● Marriages and other functions
are sparse at individual-level,
therefore, high prices can be
0-3 5478 (4382,25%) 7011 (5393,30%)
charged.

4-6 10955 (8764,25%) 14022 (10786,30%) ● These requirements are also


quite frequent in tier-II cities
like Ludhiana.
7-9 16432 (13146,25%) 21033 (16179,30%)
● Therefore, these prices can
10-12 21910 (17528,25%) 28044 (21572,30%)
be hiked greater than the
required average increment of
22.5%.
Figures are the proposed prices in the given category.
Figures in bracket represent (Current prices, price hike in %)
Passes
● Passes are effective as Customers commute on a daily basis for schools, offices, etc.
● Lower prices on travelling passes also encourage the local population to adopt city bus services
as part of their communication medium.
● Hence these prices are increased by a little less than 22.5%.

Travellers pass bus fares


Students above class 10 Senior citizons more than
Kilometers category Students up to class 10 but up to 21 years 65 age General pass

0-10 246 (205,20%) 204 (170,15%) 381 (305,20%) 396 (330,20%)

11-15 288 (240,20%) 236 (205,15%) 475 (380,20%) 480 (400,20%)

more than 15 324 (270,20%) 282 (245,15%) 556 (445,20%) 564 (470,20%)

all routes 402 (335,20%) 345 (300,15%) 681 (545,20%) 690 (575,20%)

Figures are the proposed prices in the given category.


Figures in bracket represent (Current prices, price hike in %)
Comparison of Target returns pricing
Parameters Current Scenario Recommended Proposal
1 Total capital invested 265.4 M 265.4 M
2 Expected Volume 0.91 M 0.83 M
3 Avg charge/customer 10 12.25
4 Sales (Tickets) (2*3) 9.1 M 10.13 M
5 Direct var. cost/ unit 3 3
6 Direct variable cost 2.8 M 2.41 M
7 Contribution (4-6) 6.3 M 7.65 M
8 Period cost 0.5 M 0.5 M
9 Profits in Sales (7 - 8) 5.8 M 7.15 M
10 Profit margin (9/4) 64 % 70.58 %
11 Advertisement Profit 0M 3.51 M
12 Total Profit (9+11) 5.8 M 10.66 M

13 Turnover (4/1) (Ticket Sales) 3% 3.82 %


14 Return of capital (12/1) 1.9 % 4.02 %
15 Break-even period 52.7 yrs 24.9 yrs

Reference
Thank you

Questions ?