TTC Pricing comparison

8/9/2019 TTC Pricing comparison

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Executive Summary

Our report compares TTC pricing models to diferent pricing models ollowed by

international Subway systems. This report helps in evaluating the points o

diference between diferent pricing models and understand the efects they

have on the overall user satisaction. We are majorly ocusing on the subway

systems ollowed in U and Singapore as we eel that they are the best

representative o TTC!s operational and strategic structure. " majority o our

ocus is on devising an appropriate pricing strategy or TTC to alleviate it rom

its current situation and boost its bottom line.

TTC is currently acing huge losses to maintain its one price policy and is

heavily relying on the subsidies rom state govt to run its operations smoothly.

Their motive o giving a comortable ride to its customers is being de#ed by the

growing congestion in their networ$. This is causing overall dissatisaction

among its users despite TTC bearing huge losses in terms o revenue and

brand.

"ter an e%tensive study o international subway models& we realised that these

problems can be done away with a simple concept o a 'nd degree price

discrimination. We propose that TC increase the prices to its pea$ hour

customer by () and subsidi*e the of pea$ travel. This strategy would have two

pronged efect. "long with the signi#cant reduction in the readership and hence

congestion during pea$ hours& it would also boost the #rms bottom line. +t is an

embedded assumption that the customers traveling at pea$ hours have a

higher willingness to pay. The other solution that can be implemented to the


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TTC model the smart card model. +t uses the concept o ,rd -egree price

discrimination and charges diferent commuters as per the distance covered

and thereore match the pricing structure in proportion to the utility o using

the system.

Situational Analysis of Pricing

The current TTC are structure is simple and easy to understand reer /%hibit

01. +t charges (, or a single ride irrespective o the distance travelled.

"lthough& it uses third degree price discrimination based on the passenger age

but that!s where its comple%ity ends.

TTC ollows a cost based pricing structure. One important thing to $eep in mind

while understanding the TTC pricing is that TTC is a not or pro#t organi*ation

and one o its major objectives is to provide good connectivity to people& who

belong to low income group and live in the outs$irts o Toronto. To meet this

objective TTC receives subsidy rom both the Ontario provincial government

and Toronto 2unicipal Corporation. The subsidy helps TTC to manage costs and

the remaining is recovered rom the passengers. This is one o the main

reasons why TTC charges a 3at are o (, to all its customers irrespective o the

distance and the time o travel.

On one hand this might loo$ as a smart strategy because o the ollowing

reasons4


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0. TTC is subsidi*ing the low income passengers who live in the outs$irts o

Toronto and have lower willingness to pay WT51 and compensating it

with short distance travellers who have higher WT5. This also serves the

mandate o TTC o providing transportation to all segments o society.

'. TTC is encouraging long distance commuters& who travel by car& to switch

to public transportation thus reducing the congestion on road.

6owever& we elt that this pricing strategy is incompetent due to the ollowing

reasons4

0. Short distance travellers are discouraged to travel by TTC as they are

charged heavily or their journey.'. TTC is not e%tracting the consumer surplus o long distance high income

commuters& who have a higher WT5.,. There is no price discrimination between passengers travelling during

pea$ and of pea$ hours.

Explanation why there should be price discrimination between peak

and non-peak hours passengers

+n a competitive mar$et& we set the price e7ual to the marginal cost 2C1.

6owever in the case o TTC& we cannot aford to ollow this pricing structure.

8irstly& TTC has to $eep the social welare o people in mind. Secondly& the

operating cost o TTC varies throughout the day and so does the marginal cost.

The marginal cost during pea$ hours is high as the high demand re7uires

investment in increased capacity& thus leading to increase in #%ed cost such as

rail cars& street cars and other inrastructure related developments. 6owever&

TTC spreads this cost over its entire customer base when it should actually be


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allocating this cost to small number o passengers who use TTC during pea$

hours.

-uring non9pea$ hour!s marginal cost is low and relatively stable. Under the

current circumstance& we eel that there is limited room or TTC to increase its

capacity as it is already operating at a re7uency o 0 minute during pea$

demands. "lso& the marginal cost has increased dramatically since the demand

has e%ceeded capacity. This even hurts the social welare aspect o TTC as

passenger!s satisaction deteriorates due to crowding. +n the long run& TTC can

increase its capacity by increasing the number o lines. 6owever& there should

also be a proportional increase in ridership or TTC leading to optimal utili*ation

o the new acilities.

To summari*e& pea$ passengers are associated with higher marginal cost than

of pea$ passengers. Currently& the TTC are pricing does not ta$e this into

consideration.

(! "omparison of Alternatives

:ased on our mar$et study o public transports o other major metropolitans

across the world& we ound ' be#tting comparison with the TTC pricing model.

i1 Singapore 2ass ;apid Transport S2;T14 One o the most accredited public

transport systems in the world& which serves as an e%cellent benchmar$ or

variable pricing model.


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ii1 Transport or


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users. +n addition& of9pea$ hours services cost lest to operate and would also

create a positive eedbac$ loop& which would bene#t the entire system.


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spread across the use o length o travel by the commuter spread across 00

*ones. The system& is based on ,rd-egree price discrimination and charges

diferent commuters as per the distance covered and thereore match the

pricing structure in proportion to the utility o using the system. 8ares are

calculated

;ail service ares by T8< is calculated by a *onal are system.


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notices that that usage has hit the limit& all additional commute o bus and

subway travel are ree. This ensures that the commuters do not have to

overpay and still #nd the public transport lucrative.

Using this pricing strategy& the management o T8< believe that that this

strategy increase both ridership and income by 0AD to 'AD.


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%ecommendation& -

We recommend three diferent approaches that would help TTC increase its

ridership and the user e%perience. The new model will be a hybrid o Singapore

and

TTC Pricing comparison

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