Interview Transcript

Your client wants to build a multilevel parking facility in a densely populated metropolitan area to tackle parking issues. As a consultant help them in formulating a pricing strategy.

I want to ask a few preliminary questions before I begin. Is the area residential or commercial? And how crowded is the market in that region? 

The area is mostly commercial, and the market is usually very crowded.

Since the area is usually crowded, what modes of transportation do people use to travel to this area?

Primary mode of transportation is metro, buses and rickshaws. Private vehicles accounts a small percentage as a mode of transportation.

 Then, even after the availability of the public transport system, why has the client chosen this location? 

There are many offices nearby, and people seem to face parking issues because the area lacks proper parking facilities as needed.

 Alright, then what kind of parking facility does the client want? Does the client have any previous experience in this, or is this a new venture? 

No, the client doesn’t have any prior experience in this area. Assume that the parking facility falls into the economy category and all the amenities are at par with industry standards.

What sets the client apart from other parking facilities? Is there any unique selling proposition for this venture and are there any competitors? 

The major advantage is that this location has no competitors nearby. Secondly, the client wants to build a parking facility with better capacity, staff, and surveillance facilities, along with a chauffeur service. Do you have any other ideas that the client could add? 

Since you mentioned capacity, the client can arrange special parking spaces for luxurious cars. Also, the client can rent out the extra space for cleaning and chauffeur services to a third party, which can fetch him some additional income. 

That’s a very good idea. Please move ahead with the pricing strategies. 

Okay, I would like to explore three kinds of pricing – value-based pricing, competitor pricing, and cost-based pricing. For value-based pricing, the services discussed above would help in determining the service price based on the value offered. Value based pricing would not be as relevant due to lack of the service price based on the value offered. Competitor pricing would not be as relevant due to lack of competitors in the region. Cost based pricing can help in achieving the profit margin desired by the client.

I would like you to go ahead with the cost based pricing approach for this venture.

 Alright, for cost based pricing, I would start by dividing the costs into fixed and variable components. For the fixed cost, I want to know if the client is going to acquire the land for the project or rent it, and what would be the cost for the same

. The client wants to build the facility with the LDO model (Lease-Develop-Operate). Under this agreement, the government retains the ownership of the newly created infrastructure facility and receives payment in terms of a lease agreement with the private promoter. The time period of the lease will be 10 years, and the associated cost will be around 22 crores for 10 years for 4,500 sq meters. 

Is the lease to be paid in installments or as a lump sum? 

The lease has to be paid in 10 equal installments over the 10 years.

 Alright, how many storeys does the client expect in this parking space, and do we have any idea about the parking area?

 It will be a G+4 level parking space. You can assume the area per floor 4,500 sq meters.

 Since it’s a five-storey facility, with each floor covering 4,500 sq. meters, allocating approximately 30% to turns and pathways, 10% to cleaning services, the remaining 60% results in roughly 2,500 sq. meters for the parking area of the vehicles. Do we have any idea about the parking space required per vehicle and any specific proportion to consider for 4 wheelers and 2 wheelers? 

Yes, on average one car requires 18 sq. meters, and one two wheeler needs 6 sq. meters. You can assume a 75% distribution for cars and 25% for 2 wheelers per floor.

 Considering the above parking space requirements and vehicle distribution, it would accommodate around 100 cars and 100 2 wheelers per floor. Therefore, it has a total capacity of 500 for both 4 wheelers and 2 wheelers. Can I go ahead and calculate the number of vehicles that would be parked in the parking facility in a year?

 Yes, you can go ahead. 

For how many hours will the parking facility operate? 

It will operate as a 24-hour facility.

Assuming that the parking facility is open for 24 hours, I would divide the hours into three categories: peak, semi-peak, and non-peak. Considering the peak category for 6 hours with a 100% occupancy rate, semi-peak for 6 hours with a 60% occupancy rate, while the non-peak for the remaining 12 hours with an occupancy of 20%. This would result in a total of 900 for both 2 wheelers and 4 wheelers in a day, and hence 3,24,000 vehicles in a year for both.

 Alright. This number aligns with our expectations.

 Now I would like to find out the total cost that the client will incur in the next 10 years for operating the multi-parking facility. Is there any data available that can help me find out the fixed and variable costs that the client will incur?

 Yes, the total cost of constructing 1 square meter in the area of the client’s multi-level parking facility is Rs. 11,000, and the variable cost is Rs. 20 per 4-wheeler and Rs. 10 per 2-wheeler. The construction costs will be recovered over a period of 10 years.

 Considering the construction cost of 1 square meter to be around Rs. 11,000 for a crowded metropolitan city area of 4500 sq. meters for 5 floors, the total construction cost will be around Rs. 25 crores (4500x5x11000). Yearly payments of construction cost will therefore be Rs. 2.5 crores. Adding this together with the lease cost, the yearly fixed cost would be around Rs. 4.7 crores (2.5 +2.2cr). For the variable cost, it is Rs. 20 per 4-wheeler and half of that for a two-wheeler, amounting to approximately 1 crore a year, considering 3,24,000 vehicles annually in the parking facility. So, for the client to be able to earn a profit, they need to secure an annual revenue of more than 5.7 crores.

Alright 

What profit margin is the client aiming for?

 The clients wants to have a profit margin of 15%

 Considering the profit margin, the client needs to secure an annual revenue of approximately 6.5 crores. May I proceed with the pricing the service? 

Yes, sure. 

I am assuming that the price charged for 4-wheelers will be double that for 2-wheelers, considering the same as it was in the variable cost. I will consider revenue for 4-wheelers as 2x and that for 2-wheelers as x, since the client needs to earn an annual revenue of 6.5 crores, it calculates to approximately 4.3 crores (6.5 cr/3*2) in revenue to be recovered by 4-wheelers and 2.2 crores to be recovered by 2- wheelers. This equates to an average of Rs. 135 (4.3 cr/3,24,000) to be charged from 4 wheelers and Rs. 68 (2.2 cr/3,24,000) to be charged from 2 wheelers. 

That is a fair assumption. You can proceed with your analysis

 I will proceed with a breakdown of parking hours into four distinct categories to calculate the parking service cost. These categories include 0-4 hours, 4-8 hours, 8-12 hours, and beyond 12 hours. For each of these segments I am considering occupancies of 20%, 50%, 20%, and 10%, respectively. I am assuming that since most of the people are office-goers they will tend to park their vehicles for 4-8 hours the most, followed by an equal split for the 1st and 3rd category. The occupancy is at its minimum for those who use the parking facility for up to 12 hours a day. 

Sure. You can continue with these numbers to arrive at the price for each of these categories.

 I would consider that for each successive category of hours, the price would increase by a unit, denoted as y. Here, taking y as the revenue factor for each hour category. Assuming the price for 0-4 hours as y, similarly for 4-8 hours as 2y, 8-12 hours as 3y, and for 12+ hours as 4y. Now, calculating for 4-wheelers by multiplying the revenue factor per hour category with the vehicle occupancy per category gives revenue of 71,200y. Equating it with the annual revenue of 4.3 crores which has to be recovered by 4 wheelers gives us the approximate value of y as Rs. 60. Multiplying y according to the 4 categories gives us an annual revenue of approximately 4.3 crores. 

Alright, what would this equate to as price per category for 4 wheelers and 2 wheelers? 

For 4 wheelers, the price per category would stand as: 0-4 hours – Rs. 60, 4-8 hours – Rs. 120, 8-12 hours – Rs.180 and 12+ hours – Rs. 240. Similarly, for 2 wheelers, the price per category would stand as: 0-4 hours – Rs. 30, 4-8 hours – Rs. 60, 8-12 hours – Rs.90 and 12+ hours – Rs. 120. Using this pricing model during the first year, the client can expect to achieve a profit margin of 15% on their yearly cost. 

Thank you for your recommendation. We can end the case here.

Case Facts

• Overview – The client wants to build a multi-parking facility in a densely populated metropolitan area.
• The project works on LDO model (lease-develop-operate) with a lease of 10 years. 
• The client expects a profit margin of 15%.