Pricing policy of a Car Service Company

Envoy American Inc. is a growing company that specializes in providing seniors with convenient and safe transportation. The company subcontracts drivers to provide the service.

The company has the following cost structure:

Fixed cost: Salary for a dozen employees ($50,000/month), office expense ($16,000/month), marketing cost ($7,000/month)

Variable cost: $18-20/hour for the driver based on their location and thereafter paid by $1 for each 3 minutes. The driver pays for all costs related to the car (e.g., insurance, maintenance).

The company has a revenue of $2 million in 2018 with about $100,000 net profit.

Current pricing policy:

Round trips (2 one ways):

-$39 per hour while driving, minimum one hour, then billed by the minute after the first hour at the rate of $0.65 per minute ($39 divided by 60).

-$20 per hour while waiting, minimum one hour, then billed by the minute after the first hour at the rate of $0.33 per minute ($20 divided by 60).

30% of revenues come from round trips including 10% of revenues coming from trips that the 2 hourly rates apply too.

One way trips:

-Trips less than 25 miles one way: minimum $39 per hour charge, minimum one hour, then billed by the minute after the first hour at the rate of $0.65 per minute ($39 divided by 60).

40% of revenue

-Trips between 25 and 35 miles one way: minimum $58.50 per hour charge, minimum one hour, then billed by the minute after the first hour at the rate of $0.97 per minute ($58.50 divided by 60).

20% of revenue

-Trips between 35 and 45 miles one way: minimum $78 per hour charge, minimum one hour, then billed by the minute after the first hour at the rate of $1.30 per minute ($78 divided by 60).

10% of revenue

Problem Statement

The current pricing and driver pay methodology, having one hourly rate for driving and a different hourly rate for waiting, with numerous restrictions, is complicated.

It is hard to explain to existing clients, prospects, drivers and our own staff. It leads to confusion, mistakes and wasted time dealing with client/driver issues/complaints.

Billing clients and paying drivers is a manual process, prone to human error, takes 3-5 minutes per trip, or approx. 30 hours per week to manage. Technology isn't available to automate the process.

New pricing policy:

A $39 per hour flat rate for client billing for all geographies, minimum one hour, then billed by the minute after the first hour at the rate of $0.65 per minute ($39 divided by 60).

The new policy is expected to increase the revenue by 10% for all types of trips and to cut the employee cost by $3,000.

Question (1): what will be the impact of the new pricing policy on the firm's net income? Please feel free to make any necessary assumptions.

Question (2): How to price short trips while being competitive and profitable. Specifically, how much to charge or pay for short trips where the one hour minimum for billing/pay is putting the company at a competitive disadvantage? This is an open-ended question and any answers are welcome.