Transportation Pricing Basics

Here are some basic principles to keep in mind when considering your pricing strategies:

Prices must at least cover costs. If you don't at least cover costs, and this includes an amount for your time, you will incur a loss.

The best way to lower price is to lower costs. As price equals costs plus profit margin, it's obviously better to reduce the cost element than the profit element if, for any reason, you find that you must reduce your prices. Sometimes you have to reduce both.

Prices must reflect the environment in which they operate. Any price, whether yours or your competitors', necessarily reflects the dynamics of cost, demand, market changes, competition and product utility.

Prices must be within the range of what customers are prepared to pay. It's all very well having the best transportation service in the world but, if your price is more than customers are prepared to pay for it, so what? On the other hand, there is absolutely no reason to charge less than customers are prepared to pay.

The price you set should represent a fair return for your time, talent, risk and investment. Don't be shy about demanding a reward for what you offer. Your expertise and talent has objective worth.

Price = Cost + Profit Margin
If the basic price you will strike is simply your costs plus a profit margin, it follows that before you can set your prices you must know exactly what your costs are.

Operating Costs fall into three main areas:
Direct Costs- Direct costs are those things directly related to the creation of your product/service, such as trucks, raw materials, parts and supplies.
Overhead- Overheads are business costs not directly (or entirely) related to the movement of freight and include things such as taxes, rent, office supplies and equipment, business related travel, insurance, permits, repair of equipment, utilities and professional advice (accountant, lawyer).
Labor- Labor costs include all wages paid to employees. This also includes fringe benefits.

A company can break down the operating cost into its component costs. The component costs (drivers) of the operating cost can be identified and measured as a percent of total sales, in order to determine the percentage change in each cost category from year to year. In this way, a company can see which costs are increasing the fastest, whether year-to-year cost increases are due to fixed or variable costs, and whether the costs are within their control.

Here is an example of some of the operating costs that you must consider:

1. Driver/owner operator, P&D costs
2. Insurance cost
3. Fuel cost
4. Fleet maintenance cost
5. Equipment capital cost
6. Sales & Marketing cost
6. General operating cost

Some cost increases are at least partially addressed through surcharges and accessorial fees by most carriers. For instance, one cost that is outside of a company’s control, fuel price fluctuations, has been addressed through fuel surcharges. However, other costs beyond a company’s control, such as the recent fuel efficiency deterioration (caused by new environmental emissions regulations) are costs that cannot be addressed by surcharges or accessorial fees. Yet other costs are at least partially under a company’s control, such as driver costs, sales and marketing, insurance, fleet maintenance and equipment capital cost. However, these costs still tend to increase every year (especially labor cost).

Prices should be set at levels that will shift products and services and not only to beat competitors. At the end of the day, you set your prices as high as you can while still shifting your products and services. Don't think that keeping your price as low as your competitors is enough. It isn't. As a matter of fact, you may have competitive advantages that mean you can price higher than your competitors.