It was May 25,2009. Gail Beck Souter, chief executive officer (CEO) of Beck Taxi (Beck), the leading taxi brokerage with the highest number of cabs in the city of Toronto, Canada, was facing a pricing challenge. The summer season, lasting three months, was about to begin. Summer was a lean season for the taxi trade because education insitutions were closed, people were on vacation and many in the community perferred to walk, cycle or take public transport. "Is this the time," Souter wondered, "to reduce the radio fee?"

The radio fee was required in exchange for Beck's providing radio dispatch service to individual taxi drivers driving vehicles bearing Beck's colors. The fee could be restored, she thought, at the beginning of the fall season. Simultaneously, Souter was weighing a few other options. One options was a simple increase in the fees. Another option was to move to a two-part fee structure, wherein the drivers would pay a fixed fee in advance and then pay a variable fee for each Beck dispactch.

Souter knew that any decision on her part, other than status quo, would have ramifications for the whole cab industry in Toronoto. Taxi drivers, competing taxi brokerages, vehicle owners and license plate holders would all be affected by a change in Beck's radio fee.

Cab Industry in Toronto

Toronto had a total of 4,851 cabs. At one cab for every 500 Torontonians, as opposed to one cab for every 1,000, which was the ratio in most metropoloitan cities around the world, Toronto's cab industry had a supply overhang. Beck was the largest among the Tonto cab companies (more commonly known as brokerages), with a fleet of 1,476 vehicles. The cab service in general was commoditized because the vast majority of customers wanted no more than the first available vehicle. However, individual brokerages sought differentiation through personal touch points and brand value. For example, Beck had started, two weeks earlier, airing a commercial in city's TV channels to reinforce its brand equity.

The cab industry in Toronto consisted of 35 brokerages operating a total of 4,851 vehicles. A brokerage played two roles: operating a dispatch service and managing a number of plates, each attached to a vehicle.

Each brokerage attracted plates, fleet and drivers because of the radio business it offered and the company's brand value. The radio business consisted of a 24/7 dispatch service (through either a two-way radio or computer disptach). The brokerage also hired a pool of customer service repersentatives (who generateed corporate clients) and road supervisors (who ensured that vehicles were in good running order). Although driving a cab was a large component of the business, considerable back-end work was involved inn not only getting the customer into the cab but in keeping the customer loyal to the brokerage.

A total of 9,898 licensed drivers operated 4,851 vehicles 24/7 in two 12-hour shifts. Because cab drivers were considered self-employed, they were not entitled to either a minimum wage or benefits. They were also not on the payroll of the cab companies and had the freedom to move from one cab company to another at will. Most drivers did not own the vehicles they drove.

A cab driver would usually receive 12 to 15 fares in a daytime shift. The average fare was between $10 and $15. Drivers often received a tip of approximately 10%.

Drivers needed to have a sense of where potential passengers would congregate in the city on any particular day. Toronto was a phone-order market. Cruising for a fare was therefore not common among drivers. This situation did not, however, pre-empt idle time because drivers incurred unpaid mileage when picking up a phone order or when returning to a stand after a drop-off.

Beck Taxi was founded by Jim Beck in May 1967. In 1980, Beck ceased to own vehicles and became a sole radio dispatch service, charging a fixed raido fee of $375 per month, setpping it up to $400 per month in 1989. The company had not increased the fee since then. The fleet has vastly expanded under the leadership of Souter. By processing more than 22,000 calls in a 24 hour period, the company was making more than h alf a million dispatches per month.

Ceck had four categories of account holders: corporate, government, insurance and personal. Account holders required no minimum charge and were charged only for the services recieved. The company had four full-time customer service advisors on the road, ensuring that all Beck vehicles were washed, clean and in good mechanical condition.

Beck had between 2,500 and 3,000 drivers on call, at any time, averaging two drivers per vehicle in its fleet, coveing a 12-hour shift each. Approximately 35% of drivers were transient, leaving a pool of approximately 60% as the core group of drivers. They were independent contractors, each paying $450 per month to the company, comprising $400 for radio fees, $20 for GST and $1 for Beck's Drivers' Assault Fund (all of which were mandatory fees) together with $19 for a pager and $10 for a point-of-sale (POS) terminal (both of which were optional).

Several factors affected the economic viability of Beck as a brokerage. Beck provided radio service to each of the 1,476 plates in managed. Independent owners owned 576 plates, and 900 plates were part of a larger fleet of vehicles, each fleet consolidated into a single agency, often a garage. The largest brokerage had a fleet of 155 vehicles, and the smallest brokerage had two vehicles. To increase the number of plates it managed, and, thus, generage higher revenues through the monthly radio fee, Beck targeted the fleet owners with some incentives. For example, it would provide every tenth car, from the same pool of consolidation, free service by way of dispatch. Thus Beck offered a 10% price discount to grow its fleet size by an additional 10 vehicles.

Although crusing for fares was not common among drivers in Toronto, they commonly "plyaed the street" rather than "playing the radio," as the trade terminology went. These drivers would bypass the dispatch service and pick up fares from cab stands outside traffic terminals. Pickups were a major part of a driver's earnings, often 70%, if the zone of operation was downtown where the traffic was not only dense but had several designated pockets aggregating the demand for cab service. This bypass did not reduce the brokerage's earnings from each driver, which were fixed. However, this practice had led Souter to consider that the driver's earnings could, in some way, be linked to the usage of the dispatch service, which was specific to Beck. One way to link earnings to the idspatch service would be to charge a fixed fee, of say fifty cents or a dollor, each time the driver used Beck's dispatch service. The amount would be irrespective of the fare on the meter.

Such a linkage, however, had an element of contradiction. A major part of building revenues was to ensure that more an dmore plate owners moved to Beck (from other brokerages), and more and more drivers used Beck's dispatch service. Such a context provided no rationale for charging a usage fee. A fee could, in fact, likely reverse the flow. Drivers could leave Beck and seek partnerships with other brokerages, defeating Beck's larger goal of building a pool of core driver's.

Souter believed the situation could be rectified if the fixed fee could be reduced, even with a fee charged each time the dispatch service was used. A reduction in the monthly radio fee -- a major cost for the driver -- would be an incentive for drivers to sign up with Beck. Such a reduction would also open up several options for pricing the radio fee.

Souter wondered, however, whether charging a radio usage fee would create a logistics "nightmare" for Beck's internal operations. Keeping track of each individual usage of dispatch service of 1,476 vehicles driver by 2,500 to 3,000 drivers on call in every shift, day and night, and crediting their accounts monthly appeared a daunting task. The issue was compounded by the fact that drivers paid the radio fee in advance every month. The payment was conditional to activating the radio for usage in the vehicle.

Beck was already the market leader. Its fleet size was more than three times the size of its nearest competitor, Diamond Taxi, which had 475 vehicles. Continuing with the current pricing structure would not in any way dilute, in the foreseeable future, its near-total control over the taxi trade in Toronto. The brokerage had also released a TV commercial in May 2009, which would reflect positively on its brand equity. The commercial would influence not only consumers but also potential drivers considering a switchover from their existing brokerage. But, at the same time, Beck could afford, as the market leader, to take the risks, if any, of altering its pricing structure and thereby changing the dynamics of the cab industry in Toronto.

Souter is not comfortable with the idea of introducing a sheme that would make money for the company but hurt the taxi drivers during these difficult economic times. Perhaps the radio fees could be structured in a manner that would benefit both the drivers and the company.

1) Perform a "What-if" analysis on the two-part fee with a variable percentage of the fare option. Specifically display Monthly Income created by different values for the fixed radio fee and the radio fee dispatch percentage. Use fixed radio fee values that range from $250 to $400 with increments of $25. Use radio fee/dispatch percentage values ranging from 0% to 15% with increments of 5%.

2) Perform a "What-if" analysis (similar to that described in question 1 above) on the two-part fee with a fixed charge per dispatch option. Use fixed radio fee values that range from $250 to $400 with increments of $25. Use fixed dispatch charges that range from $0 to $1.50 with increments of $0.50.