John:

In February 2016 Kathy Haley, President of Union Pearson Express (UPX), was being pressured
to lower fares for the new rail link from downtown Toronto to the Pearson International Airport.
Ridership was well below target, it ran at 10% of its capacity and current revenue only covered
35% of the operating costs. The UPX was a high-profile project for the Province of Ontario and
the City of Toronto. The launch in 2015 was on time and on budget and was initially well
received, but there was criticism of both the marketing of the train and its price. So, Haley had
to decide whether to lower the fares or not and what plan to put in place for UPX going forward.
Clearly price was an issue, but there are other factors that contributed to the problems. The fare
by itself was not the only problem, the high-value positioning that led to the pricing strategy and
the business plan did not make sense.
The UPX was positioned as a luxury train for business travelers traveling from downtown to the
airport. Other targets were not included and the high price excluded other potential customers.
Another problem was that the business traveler would often choose the most convenient and
familiar way to get them to the airport and price for them was not an issue. They would easily
pay $ 55 for a taxi, because it was a business expense. They didn’t need the train, they could
walk outside and hail a cab. Walking with baggage to Union Station might take 5 to 10 minutes
and many saw that as unnecessary and inconvenient. UPX was targeting a market that had little
use or need for their service.
There was, however one element that could appeal to those travelers and that was time. The train
took a reliable amount of time and a taxi might and often did take longer. But that positioning
was not emphasized. It would have looked bad if Metrolink implied that only business people
deserved to be on-time. It is possible that the price was set first and the positioning was decided
afterward. The consultant report indicates a $ 15 fare would result in $ 49 million in revenue that
was an initial recommendation and then that recommendation was changed to a fare near $ 30,
which would theoretically result in $ 70 million in revenue. This would leave one to believe that
with a ridership target $ 21 million short of covering operating costs increasing the fare to cover
operating costs was necessary.
If this is true, it is safe to assume the fare was decided first and the product was then designed
around the need for a high price. The decision process appears to be: we need a price that enables
us to breakeven and therefore we need a target that can pay that price and we will position the
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product for that target. One can argue those things all fit, but they did not fit with the market as a
whole. Nothing was based on customer focused market needs or opportunities. The fare was
based on Metrolinx’s needs.
There were other causes of low ridership: entrenched behaviors, poor signage, and low
awareness. But those things did not detract from the fact that 79% of respondents, from the
pricing studies, considered price the driving factor in their decision making. But blaming signage
and awareness was a weak response (see Exhibit 3). Entrenched behavior would not have been
altered by the price, Metrolinx did not provide reasons to change those behaviors.
Whether the price was to blame is a moot point, because all the stakeholders felt that it was the
cause of low ridership. The public nature of the debate made it difficult, if not impossible, for
Haley to sell the high price. Justifying the high price to the public was not something anyone
wanted to do.
In terms of developing three alternative prices it is easy to use $ 20, $ 15 and $ 10. You could
use other numbers, but I will use these. Lowering the price to $ 22.50 is probably insufficient, it
was noted in the consultant report that this “would not work.” I have not used a price below $ 10,
because at this price ridership needs to be 80% of capacity to breakeven. A price below $ 7.50 at
100% capacity would not breakeven.
In this exercise you need to be specific, saying things like set the price around $ 15 doesn’t work.
A price has to be definitive. Having said that it is important to understand that there is a pricing
“system” that includes discounts, the use of the PRESTO payment card and different amounts
charged for traveling to different stops make pricing complex. However, having one publicized
price is rational for several reasons: media almost always reports a single fare and using a range
of fares is complex and difficult to explain.
If you use value to the customer (VTC) to analyze pricing, this uses a comparison price as a
starting point and then examines and quantifies the difference between the comparison product
and the focal product to determine the appropriate price. You were not asked to do that, but a
comparison point could be $ 55 for a taxi. How is UPX better or worse than a cab? UPX takes a
reliable amount of time, a cab does not. But a taxi is more convenient it can be hailed anywhere
or called in advance. You can list those kinds of things as pros and cons and the prices. Things
like convenience, effort, emotions, comfort and other things can all be considered. The broader
point here is that prices should not be just made up. You might compare taxis, Uber, TTC,
private car, etc. Normally price would be based on the value as perceived by the customer. Some
prices are taxi $ 55, Uber $ 35, GO was $ 9.70 and the TTC was $ 3.25. Where should UPX fit
in?
At $ 27.50 the value is insufficiently explained to justify that high price. If, for example,
customers were convinced that paying $ 24.25 (the difference between a UPX fare and a TTC
fare) meant not having to spend a 60+ minute ride on two subways and a bus and they had to
carry their bags and then maybe not finding a seat might justify the price. This is an example of
how communication, price and product need to work together to create, communicate and
harvest value.

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In terms of calculating the breakeven it is relatively simple, there are no real variable costs, the
operating cost is $ 70 million, again capital costs should not be included as that is a sunk cost.
There are more complex breakeven formulas, but this is a simple exercise.
Here are various break-even calculations based on varying prices.

Price Reason for Annual Monthly Daily Break- Break-even

inclusion Break-even Break-even even % of
capacity
$ 3.25 Current TTC 21,538,462 1,794,872 59,009 244
Fare
$ 5.00 Mentioned in 14,000,000 1,166,667 38,356 158
case
$ 9.70 Current GO 7,216,495 601,375 19,771 82
Fare

$ 10.00 TN 7,000,000 583,333 19,178 79

Alternative
#1
$ 12.00 Mentioned in 5,833,333 486,111 15,982 66
case
$ 15.00 TN 4,666,667 388,889 12,785 53
Alternative
#2
$ 20.00 TN 3,500,000 291,667 9,589 40
Alternative
#3
$ 22.50 Mentioned in 3,111,111 259,259 8,524 35
case
$ 27.50 Current UPX 2,545,455 212,121 6,974 29
Fare
$ 30.00 Mentioned in 2,333,333 194,444 6,393 26
case

In terms of the various stakeholders, there are five key ones mentioned in the case and they are:

Metrolinx-one can argue that they did not make an obviously bad decision based on the
information available at the time. Demand would have been similar given both a low and high
price. Their reluctance to change price made sense, up to a point. Given low ridership they had to
question assumptions and perhaps conclude the consultants were wrong. They were caught in an
untenable position, the only way to cover their costs was to keep the high price. A reduction in
price would have made a financial loss certain. Metrolinx probably would favored as small a
price reduction as possible, they would have probably preferred the $ 20 price.

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Haley-she probably would have a similar view as Metrolinx, she was working from the same
perspective and was in charge of the UPX strategy. Most likely she was looking for the solution
that made her look best and would keep her in charge. There were no good options for her, if she
maintained the high price she would have been viewed as being stubborn and not interested in
the opinions of the other stakeholders. Her management approved the plan, so she is not totally
to blame, but, given the circumstances, it is unlikely that she would remain in her position. (She
did not.)
The Ontario Provincial Government-Metrolinx is the face of UPX, the provincial government
was responsible for the train and the decisions regarding it. It had the ability Metrolinx did not, it
could change the train from a money-making operation (or one that covered its costs) to an
investment in infrastructure and repositioned the train as a public good. Making an investment in
it could then be seen as a proactive investment rather than a failure. They needed to be seen as
doing things for the public, so they would have preferred the lowest possible fare maybe $ 10.
The Toronto Municipal Government-has a similar stance as the provisional government and
would opt for the same $ 10 price. The difference between the two is the city had no money
invested in the train and therefore had little to really say about what should happen. If more
people rode the UPX, fewer would use TTC and that helped reduce the city’s costs.
Consumers-looked at UPX as a potential commuter train, but only if the fare was low enough to
justify using it daily. Beyond price this also related to how the train was going to be positioned, a
commuter train has low prices, a luxury train typically has higher fares. This debate was less
about price and more about product and positioning. This is a great example of the importance of
price and positioning and the fact that the positioning and target market should have been
decided first and the price last. Consumers would have liked the $ 10 price as well.
So, what should UPX do? The actual price itself is somewhat irrelevant as long as it fits in
relative parameters. What is more important is how the price is justified, communicated and what
marketing activities will be undertaken to help insure future success. The stakeholder analysis
helps you understand where selling of the price is needed and how to address the issues with
each stakeholder.
Again, what must be decided first is the positioning and the target market. Is it a commuter train
or a luxury service or something in between? The last option is the most dangerous. The
problem is cheap luxury doesn’t work. If it was positioned as a faster more reliable way to get to
the airport, it is not clear what that price should be.
There are some other arguably more creative options, a different fare structure for those going to
the airport and those commuting is a concept. Getting on and off at the two other stations. The
higher price to the airport should not be positioned as a luxury, but as just another cost of
traveling by air. Changing the schedule to cut costs is another consideration. The price again
needs to be part of the overall UPX strategy. A key lesson here is again don’t lead with the price.
What happened? Two weeks after the announcement that the price would be reexamined, the
Ontario transportation minister announced the fare would be dropped from $ 27.50 to $ 12 and

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from $ 19 to $9 for PRESTO. Commuters, who used UPX to go to the other two stations on the
route would pay only $ 5. The family day promotion to ride the train for free was a huge success.
In the week following the fare decrease, ridership doubled and was sustained. The new fare was
below what was required to break-even even if ridership climbed to 7,000 a day, which was what
was forecasted. Haley, not surprisingly, resigned. UPX continued to be criticized for poor
management, as it came to light that each rider had been subsidized to the tune of $ 46.
Metrolinx declared they would need a subsidy and that the fare decrease was a temporary move
to help build ridership.
It is interesting to note that 6% of all passengers that pass-through Pearson’s airport must use
UPX to make it viable. One wonders if that calculation was made if they would have ever
constructed UPX? One can argue the operating costs had forced UPX to have a high-ticket price,
but most public transportation systems of the caliber of UPX have high operating costs. But the
price and the luxury positioning are again also to blame for low ridership.
The high-end service was, as you pointed out, in part the reason for the high price. There is also
no reason to believe that the business traveler, the primary UPX customer target, was viable,
again, because most don’t pay for their expenses and don’t need the train. The luxury positioning
was a key strategic error.
There is no question that the price is an issue. The disconnect between the luxury image and
what the public thought was a reasonable price was a major problem. There were other problems,
the train was difficult to find. The focus by some stakeholders on a lower price made it
impossible to ignore complaints about the high price. Like many government run operations it is
clear that it must be subsidized. (more on that later). The original price is $ 10 higher than some
options, you must look at all options and then compare prices. As an example, buses are cheaper,
but take longer. Price and value should have a correlation. As you indicated, polls made it clear
the price needed to be lower. As you also pointed out, there are potential customer segments that
need special pricing more on that later. Setting the price is obviously an issue and again a starting
point is examining other options and the value of UPX.
As far as your pricing options are concerned: $ 30 is too high that price requires 2.3 MM riders
to breakeven, $ 15 requires 4.6 MM and $ 10 requires 7 MM. Careful of your writing, “…train
only for the business traveler vice the people of Toronto…” is poor syntax. You are correct that
you must consider a range of prices. The problem here is again there is no price that is
reasonable that will create a breakeven. The $ 10 to $ 15 range is more in keeping with the
perception of public transportation and was recommended in research. There are several things
that must be considered in the pricing and one is discounts or prices for different types of
customers, you should also consider senior citizens, students, commuters and others (more on
that later). I did not understand your chart.
In terms of the breakeven, you take the operating cost $ 70 million and divide it by the fare.
Importantly what the breakeven indicates again is that at reasonable fares UPX will not
breakeven and therefore, like it or not, it must be subsidized by the government. You made a

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number of calculations and they were correct. A $15 price should work even though a $ 12 was
selected.
In terms of the stakeholders, you identified most of them, but not all of them, as I indicated,
some have different goals. There are two government entities, The City of Toronto and the
Province of Ontario. The City has no investment in UPX. The City would like high ridership on
UPX that could take some of the strain off their own system. Metrolinx would have liked as low
a reduction as they could get away with to chip away at their losses. Consumers are stakeholders
and so is Haley, who opted to maintain the high price. It is important to remember that UPX
links the airport with downtown, so it is not designed or able to serve the Toronto community at
large.
An equilibrium must be found between cost and image (which I would rather refer to as value).
Even though the eventual price was lowered to $ 12, $ 15 is reasonable given the cost of high-
end competition (cabs and Uber). Again, there is a pricing structure meaning there are discounts
and PRESTO, so you must set up a series of prices. Also, you want to generate commuter use, so
that has to be considered as well. Repositioning again is an imperative, the luxury perception
must be changed. As I said, a series of variable prices and discounts is necessary, senior
discounts, students, commuter tickets, etc. Again, convenience and speed need to be emphasized
and that is a key to UPX’s value proposition and new positioning.
There are several rather obvious lessons here and they are: there is almost always a fit between
price and positioning, price should represent value of a product or service to customers,
stakeholder preferences should also be incorporated into marketing decisions and you often have
to make pricing decisions when there is no ideal solution. UPX is an example. Again, remember
that price can and should not be separated from the perceived value of the product or service.
You understood UPX’s issues and selected an appropriate price and calculated the breakeven
properly. As I mentioned, you could have elaborated more on the stakeholders, it is again
important to recognize that UPX can not breakeven and needs a subsidy, as you indicated. You
need variable pricing for the various customer segments.
Sanford

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