Transportation Cost and Pricing

Rates

-A lawful charge that a carrier can impose on a given commodity movement -Determined primarily by considering a carriers costs -All interstate rail freight traffic and much motor freight was moved on published rates

Exception rate

-A modification to the national classification instituted by an individual carrier -Modifications may be made to rating, minimum weight, density group, etc. -There does not have to be an exception rate for every class rate

Commodity rate

-A specific rate published on a specific commodity or group of related commodities between specific points and generally via specific routes in specific directions. -Take precedence over exception and class rates. -Offered for commodities that are moved regularly in large quantities.

In transportation, the scale of operations change by:

-Adding more vehicles to the fleet -Adding more cars to a train -Increasing the size of vehicles -Operating in a larger network

Prices

-Carriers are free to charge whatever rates & operate wherever they choose geographically -Market-driven price -Under freedom from economic regulation, the use of rates set in confidential contracts between carriers and shippers has become prominent.

Rate structure systems

-Class rates -Exception rates -Commodity rates -Special rates

Key considerations in pricing

-Corporate objectives -Competitive strategies -Stage of product or service life cycle -Markets

Social responsibility pricing

-Explicitly price environmental premiums to rates -Emphasize worker treatment -Downside: No one knows how this works

How to achieve Economies of density

-Increasing traffic -Better utilizing vehicle capacity -Consolidating traffic

Sales-based and market share pricing

-Mature or declining industries -Lower price to gain market share and higher sales -Down side: Industry declining

Why are high valued commodities more expensive to transport?

-More risk involved -More expensive equipment necessary -Transportation cost is a small percentage of the final cost

Rule of thumb for making price adjustments

-Must be the result of a reduction in carrier costs because of an action by the customer -May not exceed the cost savings to the carrier

Pricing a new service: Price is too high

-Not enough demand -Attract competitors (low barrier to entry)

Most common mistakes in carrier pricing

-Over reliance on cost-based pricing -Fail to react to or capitalize on market changes -Price set independently of marketing mix -One price for all mentality -Price managed independently of overall strategic plan

Pricing a new service: Price is too low

-Route may not be profitable -Demand may outstrip available capacity

Strategic pricing decisions can be grouped into three categories

-Set prices on a new service -Modify prices overtime -initiate and respond to price changes- concept of price leaders

Three components of vehicle ownership costs

-Vehicle depreciation -Costs of tying up investment funds in vehicles -Vehicle maintenance

How would you rank the different modes in terms of fixed costs?

1.) Pipelines 2.) Rail 3.) Maritime 4.) Air 5.) Trucking

Annual maintenance on transportation vehicles regardless of the amount that they are used are...

Fixed costs

Motor carriers

Government funds highways from taxes; Terminals paid for bu companies

Skimming

High prices based on service quality, uniqueness, and price insensitivity. How do you sell quality?

Pricing according to the value of the product

High prices for the movement of high-valued products, and low prices for low-valued commodities.

Economies of distance

Holding all else constant, flying, driving, sailing longer will have lower cost per unit distance than shorter distances.

Unit Volume Pricing

If you have it already then why not put your slack capacity to use? Typically lower margins, and shippers might come to expect it.

Water carriers

Ports are government facilities usually

Penetration Pricing

Put your name out there, then get shippers to "try before they buy". What if customers balk when you switch back to regular prices

Average-cost approach

Rates are based on average or fully allocated costs

Marginal-cost/ variable- cost approach

Rates are based on the cost of producing one more unit of an output

Profit maximization

Requires a tremendous pricing power and low price sensitivity

Survival-based pricing

Take a loss, but increase cash flow (and hope other carriers go out of business first so you can get their market share)

Air carriers

Terminals and air traffic control systems are owned and operated by states or municipalities

Economies of scale

The cost advantages that a firm obtains due to expansion (i.e. when the average cost is reduced when output increases)

Geographic adjustments

Used by shippers and receivers (not carriers) for transportation costs in the final price to their customer. (ex. FOB origin and destination pricing)

Maintenance costs that depend on the level of use of a vehicle are...

Variable costs

Indirect cost of operation

Vehicle maintenance

Lardner's Law

When transportation cost is reduced, the area where the producer can compete is increased in a directly proportional basis.

Railroads

Pay for their own tracks, stations, yards

Discounts and allowances

A reward to a buyer for doing something that is beneficial for the supplier. (Ex. Quantity and cash discounts)

Economies of density

Achievable by increasing traffic within the limits of a fixed network.

Differential pricing

Can be done based on several methods of segregating the buyers into distinct groups. (Ex. By time, place, commodity, person)

Modifying prices over time

Changes to market, service, or operations.

Vehicle costs

Costs of owning and operating trucks, ships, boats, barges, planes

If vehicles wear out due to age more rapidly due to age than due to use then...?

Depreciation costs are a FIXED cost of ownership

If vehicle lives can be measured in miles, or take offs and landings then...?

Depreciation costs are a VARIABLE cost of ownership

Vehicle depreciation

Depreciation is the reduction in value of transport vehicle which results from age and use

Fixed and variable costs

Different modes of transportation will present different levels of each of these costs.

Pipelines

Do not use vehicles; owned by companies

Cost of operation

Time of the driver or crew and Cost of fuel