Opinion: Freight pricing alphabet

By: Kim Hassall


With so many pricing strategies to choose from, here are some of the basics

Opinion: Freight pricing alphabet
105 road freight and logistics pricing strategies have been collected over the last 30 years

 

Over the last six months, we have tried to focus on a handful of pricing strategies that may be of interest to readers.

With 105 road freight and logistics pricing strategies collected over the last 30 years, maybe it’s time to walk through a subset of the pricing alphabet before looking at another bunch of regional and geographic pricing strategies.

What two dozen basic strategies will be useful to road freight or logistics operator, especially when a new contract is to be tendered for?

AUCTION-BASED PRICING

This is far more common now in an e-freight environment. The customer will select from a list of bids for a trip, or a number of jobs against a number of bids, possibly taking the lowest, which is often true for urban pickup/delivery. For long distance jobs, the customer may take various other bidder considerations into account. How any future Road Safety Remuneration Tribunal (mark 2) pricing fits with e-freight marketplaces will be very interesting indeed.

BULK PRICING

The more the cheaper? Well it usually works that way as consolidated full loads might be given at a cheaper freight rate. This is usually true. However, for some commodities it may work a bit in reverse, especially for loads that may not be exactly divisible into exact truckloads. Often very odd-shaped items that do not stack or pack well may get charged a premium.

CAPACITY DUMP PRICE

A powerful option for existing or incumbent network operators in filling capacity on existing services. Extra freight can be run at less than full marginal cost as the pricing objective may be to generate extra revenue or even to deter other entrants. However, in doing, this there are dangerous distortions that this strategy may incur, certainly in the medium- or long-term.

DISCOUNT THRESHOLD PRICING

Basically, there are many names for such a strategy. It may be a volume, time of day or seasonal discount that may even be lower than short- or long-term marginal cost.

EFFECTIVE AND/OR EFFICIENT PRICING

A common consideration for regulatory agencies, especially in regard to access regimes for ports, rail and road, for example. Basically, the pricing should recover pretty much what it should recover and do it in a clear and understandable manner. The current National Transport Commission road Paygo system is arguably effective and efficient, although it may not appear so for the man on the street and certainly not for most State treasurers.

FLAT PRICING

Usually a fixed price or fixed card rate, perhaps even for different commodities. Some operators have a preference for a fixed cent/kilometre rate or a fixed/flat tonne/kilometre rate. Usually, this price is escalated once a year at least.

GRADUATED PRICING

This is a tiered pricing structure, which can go up or down. For large shipments, there may be an associated discount. I have observed in bountiful times 40 per cent discounts for large annual lodgements. These days, the pencil isn’t quite as sharp.

HISTORIC PRICING

Basically, a company has a fixed price for some services and this remains steady for a long time. In some cases, the current price could be an annual escalator applied to an historic base. However, this strategy may not be too adaptive or reactive to current market up and downs.

INCREMENTAL PRICING

Most pricing schemes are in fact incremental pricing schemes, as a base price is escalated at given points in time. Alternatively, a fixed increment can be added to a base price over time for a specific contract. However, upward fixed increments may not take account of say downward trends like fuel price reductions. 

JOINT PRODUCT COST PRICING

Allocating specific business rules used to split joint costs is not so simple a task, especially for warehousing and even putting a different price on the carrots vs the beans on the back of a truck. In the warehouse, do you charge two products by their footprint, their throughput time, the number of deliveries made from the warehouse, their dwell time, their level of security needed, etc? Setting rules for splitting joint costs should be somewhat logical so it can be explained to the client.

LOSS-LEADER PRICING

This is quite common with new tenders. Quotes are given slightly lower than marginal cost. So, there is a loss. But, on say a five-year contract, a well calculated agreed escalator can bring the contract into profit say after two or three years. Again, the fault with the customer agreeing to fixed increments/escalators is that the contract may not be market reactive, especially is some costs move drastically up or down.

MASS-DISTANCE PRICING

Very well known in the industry. Effectively a tonne/kilometre price. Trains often get charged on a gross t/km price, however, road clients almost always are charged on a net t/km price. This author has often argued road use, like rail, should be dominated by a gross t/km charge.

NETWORK DENSITY PRICING

Similar to capacity dumping, except it operates for only certain network links (explained in detail in Pricing instalment 1 of this series).

OPERATIONAL SEGMENT CONTRIBUTION PRICING

Pricing operational segments of a business in such a way that at least the segment makes a contribution to the business and hopefully to its profit. Sometimes, a large lost contract can render the business segment unprofitable. So, better go out and get more business. Also, the misallocation of overheads and joint costs can, on paper at least, put a business segment, or specific operation, into the unprofitable side of the ledger.

PREMIUM PRODUCT PRICING

High value and high cost services are often charged at a premium. Express services are an example. Certain dangerous goods will be handled at a premium. Not just for the explosive hydrocarbons, but the handling of organs for transplant is an example that comes at a hefty premium.

RAMSAY PRICING

Raising prices move inversely proportionately to the product’s elasticity of demand. Tell a truckie that one. Actually, Ramsay is an example of what the market will bear if the elasticities are correct in a perfect world

SEASONALITY PRICING

This can cut both ways. If nothing grows in winter, cargoes might be low, so cheap rates. During summer, there are tonnes of grain, therefore loads might command a premium. Then again, the level of competition may not allow for too much fat in the summer freight price.

TRANSACTIONAL PRICING

In the e-commerce space the use of platforms and maybe, in an effort to recover some development costs, the transactional cots of an order can be significant. When scanning and tracking are thrown into the mix, one British specialist online grocery store said that it charged up to £5 (A$9.35) for special handling and tracking. A guy called Herbert Simon got a Nobel Prize for proving transaction prices are in fact highly significant. And he was before the arrival of the internet.

UNIT PRICING

This is somewhat self-explanatory. Moving a specific unit has a set price for a set period to a particular destination, and/or for a particular time of day. The unit can be a parcel, carton, pallet, drum or even a one tonne unit up to even a single truckload. The truck’s capacity may also impact on the price of a unit of cargo on board.

VOLUMETRIC PRICING

A lack of a volumetric (or cube) strategy has brought many operators down. Filling a truck with large light cartons may weigh very little so the cubic volume must be taken into account. The actual volume of the parcel or carton is calculated and a pricing factor applied as the weight might only be a fraction of say a normal pallet, and yet it takes up the same room. For air cargo operations, volumetric considerations are imperative.

WHAT THE MARKET WILL BEAR

Irrespective of great costing and an associated profit margin, there are other operators as well as modal competition to consider when you think you are on a winner. This can essentially either cap what your operation can charge or even better, because of a lack of competition, you have greater flexibility with your price and therefore have the potential to up the price and increase the profit margin. Always be aware of what the market rates are though!

X-FER PRICING

Often a shorthand way of expressing a transfer price

YESTERDAY’S PRICE

Not a recognised pricing scheme but added for humour. The scheme was named after a particular large airline operator went broke and their competitors picked up the air cargo component of the failed airline. Almost each day the other air cargo operators changed their card rates. One customer was shocked when he was quoted a new price a day after he got what he thought were the new cargo rates. The airline operator’s response was, "Sorry ‘bout that mate, but what you have, well those were yesterday’s prices!" Oh for competition.

ZONAL PRICING

One of the geographic pricing strategies. Particular areas within a city or trips to a particular State or Province, or especially to a nasty international destination may carry a ‘zonal’ premium.

And folks, that’s the pricing alphabet for today.

Dr Kim Hassall is chair of CILT-Australia and director of the Industrial Logistics Institute

12 FREIGHT PRICING STRATEGIES SERIES

Part 1: Network link (density) pricing

Part 2: Moving club pricing

Part 3: PAYGO

Part 4: Price escalations

Part 5: Transfer pricing

Part 6: Big A's in logistics pricing

 

 

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