Tough Pricing Environment

Price Maintenance/Improvement

For the past few years, companies in most U.S. industries have had difficulty increasing their prices, due to increased global competition and slack demand. This lack of pricing power definitely extends to the transportation industry. Pricing power remains limited in transportation, given strong competition and reduced demand for transportation services, although spare capacity is being eroded. Although many trucking companies have gone out of business in the past few years, overcapacity in all segments of the industry still exists.

You must always integrate pricing decisions with strategic marketing decisions. For instance, decentralizing most pricing decisions may be the best way to determine what customers are willing to pay, as pricing will vary between geographic areas and market segments. However, the more decentralized your pricing process (that is, the more pricing authority you push out to the field, be it to regional managers, district managers or salespeople) the higher level of pricing skill you need to build in those people. Additionally, you need a higher level of incentives tied to pricing in their compensation plans. A lot of companies push pricing authority out to the field, but fail to create the conditions for success. The salesperson plays a critical profit-generation role either in negotiating individually, or in providing the information upon which headquarters-level executives make pricing decisions. If you decide to decentralize pricing decisions, you also need to monitor performance more closely, in order that your profit margin is maintained.

Price rigidity (stickiness) is defined as when prices do not adequately change in response to underlying cost and demand shocks. The more monopolistic the market, the stickier pricing becomes. Even in markets with a host of competitors (like LTL trucking), rivals often take into account the prices charged by other companies when they set their own prices. Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. Your own price elasticity of demand measures how much business will be lost to another company within the same mode, with a given price increase. Quantitatively, an estimated price elasticity measures the percentage change in quantity demanded (or supplied) resulting from a 1 percent change in the price, other factors constant. Within each mode, each company will have its “own” price elasticity of demand.

Historically, the average “own” price elasticity of demand for North American trucking companies is relatively inelastic (-.5). This means that a price increase of 10% will result in a decrease of 5% in quantity demanded, for the services of the average North American trucking company. However, in today’s recessionary economy, this average price elasticity has increased, due to overcapacity. The average may now be closer to -.7, -.08 (or higher), meaning that a price increase of 10% will result in a decrease of 7%, 8% (or more) in quantity demanded for the services of a company increasing their rates.

This recession has created a “Catch 22” situation for most trucking companies. Is it worth the calculated risk of losing some of your business to maintain the average profit margin on all of your business? After all, a one percent improvement in price yields bigger gains in operating profit than a similar improvement in variable costs, fixed costs, or volumes.

Price maintenance/improvement shouldn’t be approached as a project that you can complete in six months and then move on to the next thing. It is a constant process. With changing market conditions, you need to change the way that you think about price versus volume, versus market share. In addition, companies should concentrate on whether their customers pay on time as much as they do on their pricing.

Ultimately, prices must be within the range of what customers are prepared to pay. On the other hand, there is no reason to charge less than customers are willing to pay for your service. You don’t want to give away a price advantage your company possesses that is based upon superior service, in exchange for a temporary volume increase. It’s easy, when you start delving into the analysis and research about optimum pricing levels, to forget that the goal is to set the prices as high as you can, while still getting the customer to utilize your company’s services.