Determining a Pricing Structure For Your Transportation Business

When starting your transportation business, determining the price you will charge for your service is a huge decision.

Your fare rate will determine how many customers use your service. And just as importantly, how much of each fare goes to your drivers will determine how many driver-partners you'll be able to attract.

Essentially, pricing is a three-way balancing act where you need to account for:

  1. How you price your rides. This will affect how many customers use your service.
  2. How much you pay your drivers. This will affect how many potential drivers will want to work with you.
  3. The percentage of each fare you keep for your business. You'll use this for operating expenses, marketing, etc.

In this article, we'll discuss the factors to consider when determining your pricing structure. Along the way, we'll share some strategies you can employ to help you land on a pricing structure that works for your business. We'll discuss

  • Conducting pricing research
  • Calculating Cost Per Mile
  • Calculating Duration Rate
  • Calculating Wait Time
  • Determining operating costs: weighing fixed & variable costs
  • How defining your business will determine your pricing structure
  • Testing / staying flexible

Conducting pricing research

Understanding the market in which you want to operate your rideshare business is critical to your success.

One of the quickest ways to do this is by examining your competitors in the area. If Lyft or Uber is inside your local market, sign up for the services and start performing searches to common destinations to get an idea of what rates they charge.

Compile your findings in a spreadsheet.

Break each ride into miles traveled, cost, and time of day. Then divide the total cost of each ride by the miles traveled to give yourself a clear idea of how much each ride costs per mile.

Example: A $15 fare divided by 5 miles traveled equals $3 per mile. $15÷5=$3

Next, you'll want to find the average cost per mile of all the trips you've compiled. You can do this by adding the per-mile cost for each trip you've recorded, then dividing that number by the number of trips you've recorded. The more rides you log, the more accurate your calculations will be.

Example: Say you’re recording three trips:

Trip#1=$3 Cost Per Mile.        Trip #2=$4 Cost Per Mile.        Trip #3=$5 Cost Per Mile

Add each trip’s cost per mile together: $3+$4+$5=$12

Divide $24 by the number of trips you recorded: $12÷3=$4

$4 is your per mile average

Calculating duration rate

Adding a duration charge to your fares is a simple way to ensure drivers make more during times of the day when they might run into more traffic. The duration charge helps balance out the fact that drivers will not be able to deliver as many rides when streets are busier.

Large rideshare apps generally charge about 50 cents for every minute a passenger is in a vehicle.

Example: 0.50 per minute x 10 minutes=$5.00 duration charge

Calculating wait time

Adding a wait time change encourages passengers to get to their rides faster and helps drivers earn while they wait for their fare.

Typically there is a grace period of a few minutes from when a driver arrives to when wait time charges begin to apply.

Example: 0.75 per minute x (10 minutes total time - 3 minute grace period)=$5.25 wait time charge.

Paying your drivers

Entering the market with a lower price than your competitors is a great way to attract clientele, but remember, riders are only part of the equation. You need to account for how much you pay drivers.

Three ways to pay drivers

  • Fare percentage: This is Uber and Lyft's model. They pay drivers a share of the fare of every ride they give. Because big rideshare apps take 20-25% of the fare of each ride, it is possible to pay drivers competitively and reduce prices for riders by lowering the percentage your business earns from each ride. E.g., If you only take 15% of each fare.
  • Salary or hourly: This payment model pays drivers based on time. Payments don't fluctuate based on how many rides drivers give.
  • Subscription-based: This payment model allows drivers to set their own rates and take 100% of their fares in exchange for paying a provider business a monthly subscription rate.

How you pay your drivers is up to you. The more you pay drivers, the more likely they are to drive for you, but keep in mind your business needs to be able to cover operating expenses and turn a profit.

Determining your operating costs

The goal of your business is to make a profit.

Before you can make a profit, you need to get a firm grasp on how much it costs you to be in business.

If your gross profits are higher than your operating costs, then congratulations, your business is profitable.

Your operating costs can be divided into fixed costs (any cost that doesn’t fluctuate month to month) and variable costs (expenses that fluctuate every month).

Fixed cost examples

  • Internet bill
  • Rent
  • Car payments

Variable costs examples

  • Fleet management software
  • Gas
  • Vehicle maintenance
  • Vehicle Insurance

Variable costs increase with output, but fixed costs broadly stay the same: the more business you do, the higher your variable costs. As your business grows and variable costs increase, you’ll want to keep an eye out for new ways to save. For example, EverTransit has different tiers for organizations of different sizes. The Pay As You Go plan costs $0 a month but charges $1 per ride, whereas the Business pricing tier has higher per-month costs but only charges you 50 cents a ride.

Since fixed costs broadly remain the same, it is easy to predict how many miles your business will need to bill each month to cover them. E.g., If your rideshare business makes $2 for every mile one of your customers travels and your internet bill is $100 a month, then you know that after you bill 50 miles, your internet bill is covered.

By tracking your expenses, you will be better equipped to land on a pricing structure that works for your business.

Understanding your market fit

A big part of determining your fare rate is understanding who your target customers are.

If you aim to go after large groups of riders, in the same way Uber or Lyft do, you have to be price-competitive to carve out your niche.

But price isn't the only way to differentiate your business from your competitors. If you offer a premium or specialized product, you can charge a premium price. For example, if your service caters to parents traveling with young children by offering vehicles with children's car seats, then you will be able to charge more per mile.

A simple way to look at this is by determining the need you fill in the marketplace. If the need is great and you are the only one fulfilling it, you can ask more for your services.

Testing your transportation pricing structure

An exchange of a product takes place when buyers and sellers can agree upon a price.

By experimenting with fare rates, you can work to find the most profitable pricing structure for your business.

You can set your prices as high as you like, but you may find that potential customers are not willing to pay excessive fares. If this is the case, you need to lower your prices until you find a point where customers will pay for your services. Of course, the lower your price, the more potential passengers will look to take rides with you.

You'll want to test to find your Goldie Locks zone—a price that's not too high or low but just right.

For example, if you billed 1000 miles at $5 a mile. That's $5000. Pretty good, right?

But if you lowered your price to $3.50 a mile, and the reduced price attracted more customers, resulting in 1500 billable miles, you would have collected $5250.

EverTransit: The Best Fleet Management Solution for Growing Businesses

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Final thoughts about pricing your transportation service

A few things to keep in mind when pricing your rideshare business

  • Big rideshare apps take 20-25% of the fare of each ride, and the driver gets the rest. A good way to attract new drivers to your service is to give them a higher percentage of each fare.
  • Consider flat rate vs. metered pricing.
  • Decide if you would like to include surge pricing based on time of day, or day of the week.
  • Rates can vary significantly from area to area. Be sure to consider what consumers in each region you plan on doing business in are willing to pay.
  • Lower pricing can help incentivize people to use your service, but lower prices can also signal lower quality to consumers.
  • Survey rideshare drivers and ask how many riders they get on average in your area. Use this data to help you determine how high your rates and percentage need to be to turn a profit and keep riders and drivers happy.
  • Pricing can be adjusted, especially as your service is just starting out. Experiment, when you can, to find a pricing structure that works for your business.

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