TRANSFORMING PRICING FREIGHT PRICING MODELS: GLOBAL EXPERIENCE AND LESSONS FOR IR Sh. V.Kalyana Rama, CMD, CONCOR 18.01.2019

Transforming Pricing- Why Transforming Pricing is typically revenue related but focused on generation of value for customers keeping the business environmental factors in consideration. The way we manage price and revenue to drive profitability has fundamentally changed. The age of data, analytics and other IT platforms are driving transforming pricing in every sector. Transforming pricing helps in generation of value for customers.

Traditional pricing model demonstrate that we are not focused on problem solving for our customers but want to cover our cost. Price is the summation of the total economic value we provide to our customers. In Transforming freight pricing strategy, prices frequently change depending upon the product, demand and economic conditions. Transforming freight pricing allows pricing to align with profitability goals.

Pricing Methodologies There are basically two major types of pricing methodologies : a) Cost Based Pricing. b) Market based Pricing.

Cost Based Pricing There are two types of Cost-based pricing : Cost Plus Pricing: In cost-plus pricing method, a fixed percentage of the total cost, as a profit, is added to the cost to set the price. Mark-up Pricing: Variation of cost pricing where mark-ups are calculated as percentage of selling price and not cost price. Mark up price is more common in retail selling.

Market Based Pricing Market Based Pricing is defined as a process of setting prices of goods/services based on the current market conditions. Main types of Market based pricing are as : Competition-based Pricing : Demand-based Pricing Value Pricing: Target Return Pricing: Going Rate Pricing:

TOP 10 GLOBAL RAIL NETWORKS The rail freight industry is currently enjoying somewhat of a renaissance after a period of decline, but on a broader scale the size and breadth of a country’s rail network for passengers and freight is a continuing source of national pride. The Top 10 global rail networks are : USA : 224,792kms. China : 98,000kms. Russia : 87,157kms. India : 65,000kms. Canada : 46,552kms. Germany : 41,981kms. Australia : 38,445kms. Argentina : 36,966kms. France : 29,640 kms. Brazil : 28,538 kms.

Chinese model of Freight pricing Government authorities adjust the nationwide rail freight price under specific circumstances at different stages. However, it ignores the regional factor, which plays a more and more important role nowadays.

European model of Freight Pricing The Regulation concerning a European Rail Network for Competitive Freight entered into force on 9 November 2010. The Regulation requests Member State to establish international market-oriented Rail Freight Corridors to meet three challenges : Strengthening co-operation between Infrastructure Managers on key aspects such as allocation of path. Striking the right balance between freight and passenger traffic along the Rail Freight Corridors. Promoting intermodality between rail and other transport modes.

Russian model of freight pricing The Federal Tariff Service implement the rate policy with respect to the rail transport. Since 2013, the Federal Tariff Service has had a range for more flexible pricing. The cargoes are divided into three types: low-margin, medium-margin and high-margin ones and rates for their carriage are defined accordingly.

Freight Pricing Models by Railroad Operators in USA The Staggers Rail Act of 1980 in USA established a more balanced regulatory structure liberalizing the tariff structure and the prices Railroad operators could charge. Under the Staggers Act, Government regulators retained authority to protect railroad customers against unreasonable railroad behaviour and rates. Most of the productivity gains were passed on to rail customers in the form of lower rates.

Railroads operating in the United States are the most cost-effective in the world. The average U.S. freight rail rates are around 46% lower than it was around 35 years ago. Rail cost effectiveness facilitates massive investments in infrastructure. The key factor for the success of American railroad services is due to offering of Transforming Pricing. By transforming pricing, the rail road operators set their prices as per the market forces.

Allowing railroads to enter into confidential contracts with the specific customers and charge rates based on demand and volume committed by them. Demand Based Differential Pricing - is based on the economic principle that some customers are willing to pay more than others for the same service. Differential pricing allows railroads to offer lower rates to customers who have alternative transportation options by charging higher rates to customers with fewer competitive options. The use of differential pricing ensures that railroads can effectively compete against other modes.

Sluggish Growth of Freight Traffic Rail freight is important to overall development because of its comparative economic advantages. The growth of freight traffic is largely a reflection of derived demand. Compare to GDP growth of 7 to 8% per year the growth in rail traffic segment is correspondingly less. The growth rate in the freight movement by Indian Railways has almost come to plateau. One of the main reason for the lesser than expected growth is the traditional freight structure of Indian Railways.

Traditional Freight Structure Country wide uniformity in tariff. Uniform telescoping of rates for all commodities. No regional, directional or segmental sensitivity. Tenuous linkage with input costs. Cross subsidization across various commodity groups. Subsidization of losses on Passenger services.

Averse to business decisions. Driven by imperatives of revenue generation. Adjustment in tariff, arduous and time consuming. Averse to business decisions. Oblivious to market conditions and business . Unable to respond effectively and timely to customer demands.

Freight Traffic moved by the Indian Railways (Million Tones) from 2010-11 to 17-18 Years

Year on Year Growth(%) in Freight Traffic by Indian Railways %age Years

The Way Ahead Facing stiff competition from other modes of transportation, the government is introducing various transformative measures in order to keep railways on track, such as: Dedicated freight corridors High speed rail High capacity rolling stock Last mile rail linkages Port connectivity and attracting private and foreign direct investment. However, introduction of above investment measures needs to be supplemented with transforming pricing strategies in order to retain/increase its freight traffic shares.

Some of the suggested freight pricing models are : Introduction of differential pricing for the same commodity based on the demand and regional conditions. Special freights for customers offering both ways traffic, dedicated/committed volume of traffic. Implementation of freight trains with committed transit time for serving time sensitive traffic. Focusing on various consumers products in additions of bulk cargo to widen the market base. To capture the piece meal cargo by making container tariff more lucrative.

Thank You!