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OPINION: The price of networking with freight

With the nation debating a new road freight pricing strategies, let’s look at what’s available in a regular series

 

 

The following is the first instalment of 12-part series that examines more than a dozen road freight pricing strategies that may be of interest to readers and even business development managers.

The strategies are selected from some 100 pricing strategies that have been isolated and collected, over a 15-year period, from around the world through consulting and research activities. Generally, however, these strategies have been compiled from Europe the US and Australia.

Pricing Scheme 1: Network Link (Density) Pricing

This pricing strategy is a useful, and even a ‘quasi efficient’ strategy for dense, or not too sparse, freight networks especially urban e-commerce or large urban customer delivery networks

Case example:

A large urban distribution centre (DC) services several major customers, let’s call a selection of them A, B and C. Now a new customer D emerges whose geographic location lies between customer A and B. Currently customers A, B and C are all serviced by direct services from the distribution centre (DC).

The new customer D could be serviced from the distribution centre DC just like the other customers, or is there another way? What about servicing customer D from either customer A or B?  If so what are the different pricing considerations in not servicing customer D directly from the distribution centre?

network link price.jpg

Option 1: If D is not serviced from the DC directly, it is possible to use a larger truck to drop at customer A and then to D. There are extra costs in doing this: extra kilometres, fuel, the capital costs of a larger vehicle. This assumes that time criticality is slightly less for customer D than say for customer A. The additional costs of servicing D from A is cheaper than servicing D from the distribution centre and this could be a serious consideration to service D this way.

Option 2: There is a possibility that an existing customer could be used as a cross dock point, whereby an existing customer’s dock could be used as a drop off/ pick up point for our new customer D. Therefore, delivery to customer D, would occur at a slightly later time slot than the delivery to customer A, B or C. Security can also be an issue if customer A is used as a cross dock. However, if this location is suitable from both safety and security considerations, then this cross dock option becomes possible. Again, if the distance from the cross dock to customer is less than a return service from the distribution centre then a lower price in servicing customer D could be formulated.

What are the problems with setting a network link (density) price?

  • Firstly, calculating a network link price is a bit more complex and the operator needs to have a good handle on their urban operating costs to formulate a new price. An hourly flat price within an urban area could limit the calculation complexity for setting a price for this new network link.
  • There is often a problem when there are differential prices used for similar customers. When differences in pricing strategies apply to different customers there can be some angst when there is an awareness of such differential pricing applied, especially when a customer thinks that another similar customer is getting a better deal on delivery or pickup.
  • If a network link price is lower than a direct and return price to and from a customer who is serviced from the distribution centre, then the operator should still be mindful to retain a degree of profit in the network link price and not give away too great a margin on this new link price.

Network Link Pricing is a conceptually useful pricing method for dense networks, however, some operators who have considered it do face some technical implementation difficulties, and often the complexities of this pricing strategy give way to simpler pricing methods.

Dr Kim Hassall is director Industrial Logistics Institute and a note transport and logistics academic

 

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