cover of The Undercover EconomistThe Undercover Economist
author: Tim Harford
asin: 0349119856

I'm writing this blog post sitting in first class on a National Express train between York and London.

Now, when I say first class, what I actually mean is that I'm sat on the floor, in a corridor between two first class carriages.

Why? Because there isn't one seat left on the train, and there is no space to stand, let alone sit on the floor in standard class. I have to find somewhere, anywhere, to sit - because the whole idea of travelling by train is that I can get some work done.

The simple explanation for this overcrowding is that the previous train was cancelled, so we've all been piled onto the next train, which was already busy.

But the real reason behind these services being so overcrowded is more complicated - and is known as variable pricing. This is worth us looking at and learning some entrepreneurial lessons from.

(I've written about a previous entrepreneurial lesson learned on this train about The Perils of Portion Control.)

Variable pricing is becoming increasingly common as companies try to get smart at squeezing as much money out of customers who can afford it as possible, whil also still providing a (lesser) service to those who can't afford as much. There are consultants specialising in the science of this, and companies are greedily rushing into it - without understanding the wider impact it has. (I've posted an amazon link to a book which covers this subject below this post on my website).

Hotels now do it, airlines now do it, supermarkets do it, and all sorts of other businesses - including even coffee shops - are doing it.

In this case the train company is well aware that businesspeople need to get to London as early as possible in the day, while others would like to get there earlier, but can put up with a later train to save some money. So a SINGLE standard class fare between York and London, leaving York before 0930 is a staggering £219 , while a single first class fare is £317!! However if you leave York after 0930 you can get a standard-class return ticket for £79.20 .

(Incidentally, I've heard from some business people in the Yorkshire area who have found that if there are two of them travelling to London they can actually save money by hiring a chauffeur driven Mercedes for the day, that picks them up from their homes and delivers them to the doorstep of their meeting, then picks them up and takes them home again. Door to door in a chauffeur driven Merc should not be cheaper than public transport!).

This means that the services before 0930 are relatively quiet, but with the passengers paying a lot more - while the services after 0930 are crammed, but with people paying much less - so the train company extracts the most money possible from each passenger. Those who can afford it pay more to travel at a better time, while those who can't afford it change to a later travel time.

This means that the first train or two of the day on which cheaper tickets are available are always absolutely crammed - because of the artifically high demand created on them by passengers who would have liked earlier trains delaying their journey to save money - and so when one was cancelled this morning, it created a huge overload.

Now in any normal business this variable pricing frustrates and confuses customers. I get driven mad trying to find hotels in London at a reasonable price these days - because they're all pitching for corporate clients with large expense accounts who don't really care what they pay, wheras it's my own business that's footing my bill. I can visit the same hotel four or five times and never pay the same rate twice. Travelodge used to be really easy - whichever hotel, on whatever night, it always used to be £89 a room. It was easy so I always used to stay there, and didn't need anything more fancy - but now they've introduced variable pricing and I feel I'm being confused and conned - and don't stay there anymore.

But in the train business there is more at stake with the overcrowding that this variable pricing creates. On a small scale, I boarded this service with a scalding hot cup of coffee from the station coffee bar. I had to navigate my way down the train, squeezing past people standing in the aisles whilst carrying my coat, my laptop bag, and this coffee. The train was jolting around and the coffee was spilling slightly and burning my hand. I was terrified that a sudden jolt would mean I would spill scalding liquid all over another passenger. But on a more serious level I remember back to the Selby rail disaster that happened on this very line in the 90's. The people who were killed were all standing. Anyone who had a seat got away safely, or with injuries they recovered from. Today's train has many, many people standing.

The greed of variable pricing could have much wider implications than just annoying customers in this instance.