Placing a Value on City Driving

Dear Friends,

Here are a few quick reminders on upcoming keynotes from my colleagues.

Javier Anta delivers the introductory keynote address at the EPP AI Summit in London on the evening of September 11th. The next day my colleagues Giorgio Farina and Marcelo Cirelli will give their own keynote addresses.

Javier and our colleague Scott Bradley will then speak at the EPP Global Retail & E-Commerce Pricing Forum on September 26th in Barcelona. In between Javier’s two keynotes, my colleague Steven Greene will deliver a keynote address at Ardensi’s 2024 Pricing Strategy USA Summit on September 18th in Chicago.

In case you missed them, here are other posts since the last newsletter:

How GenAI enables employees: The BCG Henderson Institute researched how GenAI enables employees to go beyond their experience and skills. You can read the post here.

Consumer confidence: BCG’s new Consumer Sentiment Barometer revealed significant differences across countries and segments. You can read the full post here.

Tesla cybertrucks: Why are used ones selling at a premium to new ones? You can read the full post here.

Consumer sentiment: Whether it is rising in the US depends on political affiliation. You can read the full post here.

“Less is more” at Chili’s: They are winning the Choice Game. You can read the full post here.

Picking the right pricing model: Pricing models in any industry are specific to a game and not an a la carte menu. You can read the full post here.

Olive oil struggles: Will customers in Spain come back if and when prices decline? You can read the full post here. 

Congestion pricing remains a contentious issue in New York City, after New York Governor Kathy Hochul announced in June that she would pause the implementation of a program of surcharges for driving into the city. Her rationale for the pause was to “to avoid added burdens to working- and middle-class families.”

In this edition of the newsletter, my co-author Arnab Sinha and I step back and try to frame up the questions in ways that may help the parties find a workable alternative.

Placing a Value on City Driving

To generate much-needed funds for the renovation of its transit system, the City of New York announced a proposal to implement congestion pricing, which is a system of surcharges or tolls on vehicles that drive into certain areas of a city.

New York proposed a flat daily fee of $15 for cars, between $24 and $36 for trucks, and a per-ride surcharge of $1.25 for taxis and $2.50 for ride shares. To ensure a level of fairness, the proposal also included a long list of exemptions and discounts, such as for medical-related trips and trips by low-income residents living within the congestion zone.

This proposed plan is a system of prices, which means that the strategic thinking behind it should follow the framework for any pricing decision. In Game Changer we defined sets of questions for companies to answer as they develop their pricing strategies, and that framework may inspire some interesting ideas when we apply it to New York City’s congestion pricing challenges.

How do you create and share value?

Answering that overarching question derives from the answers to three related questions: What do you do to create measurable value for your customers? What are your main drivers of value and the limitations to value creation? How well do your differentiation and growth objectives justify how you share value with your customers?

New York City is a powerful and geographically concentrated business ecosystem that integrates finance, cultural resources, hospitals, education, and other competitive advantages. Access to that ecosystem is valuable, but exactly how valuable is it?

That varies significantly depending on who is entering the city and for what purpose. They may want access to customers, a job, a source of entertainment, medical care, or any number of other sources of value. Some insights into the value of that access emerged from the deliberations of New York’s six-member Traffic Mobility Review Board. Two members reportedly felt that “many trucking companies will eat the congestion pricing fee and continue traveling into Manhattan because of the savings in both time and fuel saved due to less traffic.” Private citizens, however, may not have the same ability or willingness to “eat the fee” or may consider it unfair if they are entering the city for medical treatment or low-income work. A union representative, meanwhile, asserted that congestion pricing would not reduce the number of trucks requiring access, but rather divert their traffic and pollution into surrounding neighborhoods.

Highly differentiated needs and perceptions of value – both within and across segments - are strong indications that prices should be differentiated as well.

What pricing game do you want to play?

To select the right game, an organization needs to know which game aligns best with the characteristics of the market, with their current pricing approach, and with the market forces and the organization’s competitive advantages.

The market characteristics and the high dispersion of perceived value for access to New York City (below 60th Street) narrow the number of pricing games that come into question. The size and nature of the customer base should rule out the Power Game and the Cost Game, the dispersion of value perceptions should rule out the Uniform Game, and the impracticalities of negotiating individualized solutions rules out the Custom Game.

That leaves the Dynamic Game, the Choice Game, and the Value Game as the most viable options. There is precedent for the first two. Singapore uses dynamic pricing for its congestion fees, with prices varying by over a factor of 10 (37 cents to $4.49, according to the New York Times) depending on the time of day and traffic conditions. The city of Stockholm’s variable pricing model reflects some of the tenets of the Choice Game. With different peak and off-peak prices varying at half-hour intervals, the system leaves drivers with agency and incentives for when to travel into the city.

London appears to be playing the Uniform Game by charging a flat rate of £15 on weekdays and weekends, with reimbursement options for medical patients and staff as well as other possibilities for exemptions. If London were playing the Value Game, we would expect a much higher price coupled with an intensive marketing campaign that explains and justifies why entering London with a motor vehicle is a compelling value proposition.

What pricing model best fits your value creation strategy?

This question breaks down into three other questions: what should be the pricing basis, offer structure, and pricing mechanism? What should drive price variation? And what price adjustment levers – such as customer programs, transaction incentives, and fees and functional discounts – make sense?

Setting a uniform price – whether in the Value Game or Uniform Game – is a challenge because of the differences in perceived value. New York City reportedly considered a range between $9 and $23 for passenger vehicles before settling on $15, an amount which Governor Hochul feels may still be too high.

Would it be better to charge commercial vehicles a price that is significantly higher than the planned $24-to-$36 range, and then offer lower fees to passenger vehicles with certain exemptions? The city would then support the program with incentives that encourage the use of alternative ways to access the city.

As I said in a post earlier this year when the city of Boston considered its own congestion pricing program, these programs exemplify how pricing decisions can reshape society by changing how people make tradeoffs. The complexity makes us wonder whether a fee system for congestion pricing is the best way to accomplish the societal goals of fewer emissions and less traffic while generating money ostensibly for transportation improvements and ensuring equal access to advancement opportunities and self-development.

As always, please continue to share your thoughts and questions with us. If you haven’t ordered your copy of Game Changer yet, you can do that HERE. Thanks for your interest and support.