SCM 476 Final Study Guide
Lecture 6: Costing and Pricing
Deregulation
Prior to deregulation, the term “rate” represented the carriers charge. Rates were published in tariffs available to all shippers, the published rate for a given commodity movement was available to any shipper meeting conditions on the tariff
Changing this rate required regulatory approval
Rates were mostly based on carrier costs, they were rarely influenced by short term market conditions
After deregulation, transportation prices were largely determined and driven by market forces. The carrier cost was still a major force but was part of the dynamic between customer demand and carrier supply conditions
Motor and rail carriers still offer tariff rates, however, these rates are no longer subject to regulatory control
Much traffic moves under confidential contracts negotiated by the carrier and the shipper. These prices charged are much more reflective of current market conditions and each party’s market needs
Cost of service pricing: an approach to setting prices on the basis of the cost of providing the service
Average (fully allocated) cost approach
Marginal cost approach
Value of service pricing: pricing according to product value, charging higher prices on higher value products
Cost based reasons (liability) for such pricing
Value is indicator of ability to bear prices, but other demand factors may dictate price elasticity
Price Discrimination: seller sets separate prices for separate groups of buyers of essentially the same service
3 things for price discrimination to work:
Seller (carrier) has ability to segment the market into submarkets based on price elasticity
Different prices for each submarket
Prevent transfer of sales between these submarkets
Carrier has to have power to set the prices
Useful if a high percentage of costs are fixed or common (common between products, processes, activities, etc.)
Enables carrying of traffic that might be lost if average cost based prices are charged
Keys to successful value of service pricing:
Knowing how costs behave
Good estimates of price elasticity
Value of service as price floor and price ceiling:
Class rate system: provides a rate for any commodity between any two points
Three simplification steps:
Geographic: rate basis on points and numbers
Commodity: commodity classification, class ratings
Rate structure: national scale of rates
Example: how much does it cost to move 7,000 lbs of plastic sheets, exceeding 9 ft 6 in, from Columbiaville, MI to Clement, OH with an LTL carrier?
Based off reference points you are going from Flint to Dayton and you will have a rate basis number of 214:
LTL for plastics sub 1 (exceeding 9 ft 6 in) = 85 class rating:
With a route bases number of 214, we look at the 201-250 section, and since our shipment is more than 5,000 lbs but less than 10,000 lbs, we are in the weight group M5M (C = 100, M = 1,000, therefore L5C = less than 500 lbs, M5C = more than 500 lbs but less than 1,000 lbs,M1M = more than 1,000 lbs but less than 2,000lbs, etc.)
After finding all of this, we can find that the total cost = 582/100 = 5.82 cents/lb. 5.82 x 7,000lbs = 40,740 cents = $407.40
The higher the commodity class rating, the more expensive it is to ship. As the basis rate increases the price increases but not at as steep of a rate as the class rating
Deficit Pricing: if you are close to a weight border (Ex. If we bump the previous example up to 9,500 lbs) then it may be cheaper to add weight to the shipment in order to bump it up to the next weight group (see above M5M = 582 and M10M = 540).
M5M: 9,500 x 5.82 = 55290 cents = $552.9
M10M: 9,500 x 5.4 = 51300 cents = $513
Discounts and allowances (price adjustment): reduction from published price in exchange for the buyer doing something beneficial to the supplier
Lower prices for larger shipments (Truckload Vs. Less than truckload) lower prices on low-demand seasons cash discounts for quicker payment of bills
Pricing Decisions
Factors
