Price discounting is bad for business! Strategic errors of ride-hailing companies

January 30, 2019

 

Sure, you wouldn't say no to getting a discount code from Grab that turns a $10 ride into a $2 one. This has been the game we have seen played out from when Grab and Uber spent considerable sums of money trying to win in the ride-hailing battle across South East Asia. But does this really translate into a meaningful relationship with customers? Do people endear themselves to your products and services, or are you conditioning them to be highly transactional with you. To what end?

 

Pricing is the easiest element to change in a customer-facing business, and has the largest direct effect on sales volume, hands down. An outward facing pricing strategy is typically used to either bring in new buyers, or bring back earlier ones. However in the ride-hailing space, companies like Grab and Go-Jek are duking it out, trying to battle for market share, primarily in Indonesia and Singapore at the moment. 

 

In Singapore, Grab has a substantial advantage, in that their app is a full on super-app, similar to the way Go-Jek is positioned in Indonesia. So why spend so much on price promotion for ride hailing? Let's for a moment just look at why for ride-hailing, this pricing battle is a bad idea.

 

First of all, it produces ZERO brand loyalty. To the contrary, nobody is using one app over the other due to any feature other than price. So what does this mean on a rainy day in Singapore?

 

Well, you price surf... actively. Whoever is cheaper, and so long as it is still worth the money to stay dry, is the service you go with. In the case of Go-Jek as a new entrant to the market, they generally only need to change their relative cost position, as opposed to a deep discount, to Grab. Slightly undercutting the key market player has the greatest impact on causing a switch. This matters, as in the lull between Uber's departure and Go-Jek's arrival into Singapore, the majority of people I spoke to felt fleeced by the prices of Grab rides. It created an "anyone but Grab" environment which works in Go-Jek's favour. This is also a result of price normalisation which is covered further on.

 

When a ride-hailing service has an extended price promotion, the aim is to boost the volume of rides and gain market share. This should make sense right? You take a hit on revenue and profitability to get more volume. But this generally results in a sharp drop in rides immediately following the promotion period. In essence, it wipes out the gains that the price promotion was meant to generate. It is further compounded as competitors follow suit with their own price promotions. 

 

The fundamental damage that cost promotion has is that it results in consumers completely losing sight of what the normal pricing of a given ride should be. What is the reference point? This results in even normal rides being considered too expensive (resulting in customers feeling fleeced by Grab, as an example). For me, personally, I use the good old Comfort Taxi as my price checker, as their pricing is not significantly impacted by dynamic pricing, and are generally more expensive that their ride hailing services. When comfort is 50% cheaper than a Grab ride, that tells you something about how their pricing models have a tendency to go sideways, particularly around 1am on a Saturday night.

 

 

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