Freight Pricing

Freight Pricing

A transportation price (or a freight rate) was often determined by the fixed rate published by rate bureaus. Deregulations, however, facilitated more competition among carriers and provided greater flexibility in changing transportation price structures. Ever since, transportation pricing has become more dynamic and complicated.

The transportation price depends on a shipping distance, a dimensional shipping weight/volume, the form of cargo, the mode of transportation, accessorial charges, and the quality of services in terms of speed, accessibility, reliability, frequency (intervals between departures), rhythm (ratio of maximum intervals between departures) and punctuality. Among these, the most dominant pricing factors are: a distance, a weight, and a class that categorizes the type of cargo. Generally, there are three ways to determine the transportation price. These are published tariffs, negotiated contracts, and open-market arrangements.

Characteristics responsible for pricing are

• Density, as measured by shipping weight per cubic foot and the value per kg in comparison with other articles
• Stowability, which includes excessive weight or length
• Extent of handling (including loading and unloading), which includes special care and attention necessary to handle the goods
• Liability, as measured by value per pound, susceptibility to theft, liability to damage, perishability, propensity to damage other freight with which it is shipped and propensity to spontaneous combustion or explosion
• Freight characteristics, which encompass trade condition, competition with other commodities transported, quantity offered as a single consignment, and value of service required.

A transportation price can be ultimately determined by either one of two contrasting pricing principles

• cost of service pricing (cost-based pricing)
• value of service pricing (differentiated pricing)

In cost of service pricing, freight rates should cover the total summation of the variable cost (e.g., fuel cost, operating cost) of a particular shipment, a proportionate, fair share of the fixed costs (e.g., equipment cost), and a “reasonable” profit margin. On the other hand, in value of service pricing, freight rates are set based on what the tariff will bear and thus can be settled at any level above the variable cost or the floor price.

Revenue/Yield Management

Revenue management (also known as yield management) is an approach that aims to maximize revenue streams or profits given fixed but perishable resources (e.g., airline seats) through a thorough understanding of market dynamics.

This approach has become popular among the commercial airliners ever since American Airlines successfully used it in 1985 to fill a sufficient number of seats without selling every seat at a discounted price. This approach helped American Airlines defray at least its fixed operating expenses. Once fixed operating expenses were covered, they could sell fewer remaining seats at higher prices and thus could maximize their revenues and profits.

Revenue management can take three different approaches: allocation of capacity by different classes (e.g., first class, business class, and economy class in airlines); price bidding based on the estimated opportunity cost; and direct price adjustment for an individual sale, where the price increases after every sale because there is one less unit to sell. Revenue management is also affected by a multitude of factors, such as demand volatility, seasonality, price sensitivity, uncertainty, marginal variable costs, and market segmentation.

Revenue management is particularly useful for determining how to do the following

• Discount rates with discretion to build market share
• Uncover hidden demand, which allows opportunistic pricing
• Understand customer tradeoffs between price and other service attributes
• Increase revenue without sales promotions or improving service quality
• Identify lost revenue opportunity
• Focus on profit growth