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
