How to Master the Fare Structure and Pricing of Your Mobility Service

Establishing the fare structure of a mobility service requires the juggling of many factors, including trip distance, service quality, and rider groups. It can seem tough to determine which pricing strategy will best support those various elements—especially considering their fluctuating nature. One needs to look no further than the pandemic to see how unexpected events can drastically affect fares.

With this guide, we want to put your mind at ease. Spare has been supporting transit agencies and ride sharing services in establishing their fare structures for years, and this post outlines some of the best practices and learnings we’ve discovered along the way to help you confidently determine the right pricing strategies for your service.

The law of demand and demand optimization

Before we get started with pricing strategies, let’s take a quick tour of mobility microeconomics.

The price of a mobility service is the most powerful tool to influence how much ridership a specific service will receive. Simply speaking, the higher the price of a specific trip, the fewer riders will actually take it.

In general, this ‘law of demand’ is the key determinant of how much ridership your service will see as a whole. However, it can also be applied specifically: by differentiating your price by rider groups, location, and time you can encourage or discourage certain trips.

Spare Tip: Using price to influence ridership is a key lever to achieving your services’ goals. Referred to as ‘demand optimization,’ you can use your price to maximize ridership by stimulating demand, minimize costs by dampening demand, and in the most advanced cases, maximize profit by pricing for the trips with the highest margin.

Now that we have an understanding of how pricing determines ridership, let’s go over the two main fare structures and the various pricing strategies they encompass.

Fare structures and pricing strategies

There are two main fare structures that pricing strategies fall into:

1. Flat Fare. Riders are charged a fixed set price for a service.
2. Variable Fare. Riders are charged varying fees based on their trip specifications, including distance traveled, time of day, mode of travel, and rider characteristics.

Free of charge trips, boarding passes, and flat fees are examples of flat fares that don’t change based on the variables of the trip. Whereas, rider group or type-specific pricing, zone-specific pricing, and pay-by-use are all variable fares that are determined by factors such as day and time, zone and area, rider type/groups, and service configurations.

Let’s take a closer look at each pricing strategy.

Flat Fee

Riders are charged a set price independent of their trip specifications.

Flat fees are the most common pricing strategy for microtransit. The fee may be based on a single boarding or by duration (for example, paying for one ticket that allows you to board multiple buses within two hours).

Free of Charge

Riders are not charged for a trip.

Transit agencies typically offer riders ‘free of charge’ trips in conjunction with special services, such as transportation for medical staff during a pandemic or shuttles to vaccination centers. They also generally offer infants and other specific rider groups free trips.

Boarding Passes

Riders are pre-charged for a set number of trips or days.

Boarding passes typically offer riders discounts in exchange for pre-paying for a bundle of trips. This may be time-based, such as daily, weekly, or monthly passes that offer unlimited access during that period. Or trip-based, such as a pass for a certain number of rides.

Zone-Specific Pricing

Riders are charged based on which zones they are traveling in.

Zone-specific pricing strategy is determined by origin and destination and can have a number of different combinations. For example, riders traveling within Zone A may be charged one fare, while riders traveling within Zone B may be charged another fare, and riders traveling from Zone A to B may have an entirely different fare.

Pay-Per-Use

Riders are charged based on the length or distance of their trip. They may also be charged on a use-case, where the price depends on how many riders are included in a single booking (for instance, if someone books for a group of riders).

Pay-by-use is a common pricing strategy for ride sharing services. For instance, riders may be charged based on per-minute pricing or per hour pricing.

Per hour pricing is sometimes adopted by public transit, such as Transport for London’s ‘Hopper’ fare, allowing riders to make unlimited journeys in a set number of hours, as opposed to paying per trip. This eases trip chaining, where the rider would stop at multiple destinations within a brief amount of time

Rider Type-Specific Pricing

Riders are charged according to their rider type.

This strategy offers riders the option to select a fare type when booking or paying for a ride—such as “adult fare,” “senior fare,” “student fare,” and so on. The rider type they select will determine the cost of their fare.

Rider Group-Specific Pricing

Riders are charged according to the rider group they belong to.

As opposed to the self-select element of rider type-specific pricing, this strategy relies on the rider having a profile that exists within a specific group. For instance, if a transit agency collects demographic information when people sign up for their app (such as whether they’re a student or a senior), they can automatically apply special pricing structures to those specific groups.

Promotional Fares

Riders are charged reduced fares (or sometimes even no fares) due to promotional activities.

Promotional fares or codes are often given to riders for special dates or events, to encourage more riders to explore a new service or to reactivate existing riders.

Gamification

Riders are nudged to take more trips through incentives.

Much like promotions, the goal of gamification is to encourage riders to take more trips by offering incentives, such as a free trip for every ten trips they book.

How to choose the right pricing strategy for your service

Now that you have a sense of fare structures, it’s time to zero in on which pricing strategy is best for your service. While flat fares remain fairly static, there are a number of variable pricing strategies that can provide different benefits to microtransit, paratransit, and ride sharing services. Read on to find the right one for your service!

Recommended for Microtransit…

• Flat Fee — to increase the ease-of-use of a certain service. However, flat fees can stimulate adverse travel patterns like long trips which is why it’s advisable to pair it with zone-specific pricing.
• Rider Type-Specific Pricing — to cater to specific groups, such as seniors, young adults, or marginalized groups.
• Boarding Passes — to provide a more cost-efficient way of using the service for recurrent riders that surpass a certain number of daily or monthly trips.
• Promotional Fares and Gamification — to encourage more riders to test the service, or to activate existing riders.

Recommended for Paratransit…

• Flat fee — to increase the ease-of-use for riders.

Recommended for Ride sharing...

• Pay-Per-Use — to recover costs and perform profitable trips.
• Promotional Fares and Gamification — to drive new ridership, retain customer loyalty, and build brand recognition.
• Rider Type-Specific Pricing — to cater to specific rider groups such as commuters.

How fare structures affect equity

There’s been an ongoing debate regarding flat vs. variable fares. With flat fares, riders pay the same amount for a longer-route trip during peak periods as a shorter trip during off-hours, despite the fact that the former is more operationally expensive. This can lead to the shorter, off-peak trips subsidizing the longer, on-peak ones. As University of Oregon Professor Anne E.Brown points out in a 2018 study, the issue with this is that the majority of riders traveling shorter distances are often lower-income passengers who shouldn’t have to shoulder this potential subsidization.

Brown points to non-capped distance-based fares combined with time-of-day pricing as the most equitable fare structure, in terms of affordability, the transportation needs of riders, and operational costs. And while variable fares can be tailored to operational costs to avoid unbalanced subsidization, they can also encourage ridership during hours of excess capacity.

That being said, the reason many services rely on flat fares is that they increase ease of use. At the end of the day, the proof is in the pudding when it comes to the right fare structure for your service: does it fit your budgetary demands and does it allow for accessibility in the community you’re serving?

Stay nimble by continuously iterating pricing strategies

The most effective way to determine which pricing strategy works best for your mobility service is through iterating what works best with your riders.

Rapid prototyping allows transit agencies and ride sharing services to quickly test multiple scenarios, generate data based on those scenarios, and ultimately make informed decisions that encourage improved operational efficiency and rider experience.

Of course, operational efficiency and rider experience depend heavily on pricing strategies and optimizing fare structures so that services are accessible, sustainable, and cost-efficient or even profitable is a major goal.

This is why it was important to us at Spare to create a self-serve platform that puts the power of rapid prototyping into the hands of agencies and enterprises themselves: so that they can update key service parameters such as fare structure in real-time, based on daily and weekly operational insights.

With our Fare Rules tool, customers can manage their fare structures and pricing strategies independently and can create customized fare rules for specific rider groups at a granular level, differentiating their services to a whole new degree.

Check out this case study for an on-the-ground example of how rapid prototyping helped power a Whistler ride sharing start-up!

Ready to join the future of transit? Connect with one of our Spare team members for a live demo today or drop us a line at hello@sparelabs.com to find out why so many transit agencies choose Spare, the world’s leading provider of on-demand transit software, to operate and grow their on-demand transit network. We can’t wait to get in touch with you!

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