Transport Management & Theory Practices (10)
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Transport Management & Theory Practices (10) Transport Management & Theory Practices (10) Presentation Transcript

  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Management of Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 10 Costing and Pricing Issues © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Chapter 10 Topics • Market Considerations • Cost-of-Service Pricing • Value-of-Service Pricing • Rate Making in Practice • Special Rates • Pricing in Transportation Management © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Market Considerations • In post-deregulation period, transport prices largely determined by market-based forces • Market structure models – Evolve from conventional economic price theory • Attempts to explain the pricing behavior of a collection of firms faced with particular market characteristics (number of competitors, degree of product differentiation, barriers to entry, etc.) • Does not do well in predicting pricing behavior of individual firms
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Market Considerations, cont’d • Market structure models, cont’d – Principal market structures • Pure competition – Many sellers with same products • Monopoly – One seller • Oligopoly – A few large sellers with substitutable products • Monopolistic competition – Many small sellers, some product differentiation
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Market Considerations, cont’d • Market structure models, cont’d – Few markets are either perfectly competitive or totally monopolistic – All modes encounter some form of oligopolistic competition • In pricing and output decisions, sellers consider potential reactions of competitors (mutual interdependence)
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Market Considerations, cont’d • Theory of contestable markets – Instead of many sellers, substitutes “threat of entry” from new competitors – Necessary conditions: • No barriers to entry • No economies of scale • Consumers able and willing to switch • Carriers are not able to respond to new entrants’ prices – In some time periods, theory applies well to airline industry, other times it does not
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 Market Considerations, cont’d • Relevant market areas – No single market structure model correctly describes competitive environment of transport or even a single mode in transport – Classification of competitive environment should be: • Mode-specific • Route-specific • Commodity-specific • Shipment size-specific
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Cost-of-Service Pricing • An approach to setting prices on the basis of the cost of providing the service • Principal assumptions – Service is homogeneous – One group of customers – Customers must cover all costs – Seller sets prices to maximize profits
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 Cost-of-Service Pricing, cont’d • Two variations of cost-of-service pricing – Average cost approach – Marginal cost approach – Cost of service as price floor • Impact of common costs – The cost-price circular argument • Problem of decreasing cost industries – Subsidies and tax policy
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Figure 10-1
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Figure 10-2
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Value-of-Service Pricing • Alternative definitions and terminology – Similarity is that all consider demand characteristics (as well as costs) in 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
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Figure 10-3
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Value-of-Service Pricing, cont’d • Third-degree price discrimination – Def: Seller sets separate prices for separate groups of buyers of essentially same service – Three necessary conditions • Must be able to segment buyers into sub-markets defined by price elasticity • Seller must be able to prevent transfer of sales between sub-markets • Seller must possess some degree of monopoly power
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Value-of-Service Pricing, cont’d • Differential pricing – Similar definition as 3rd degree price discrimination – Same 3 conditions apply – Means of segmenting buyers • By commodity • By time • By place • By individual person – Legal limitations
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Figure 10-5
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Value-of-Service Pricing, cont’d • Sets a ceiling on prices – Can also be price floor in certain circumstances • Useful if high % of costs are fixed or common • Enables carrying of traffic that might be lost if average cost-based prices are charged – Some prices < ave. costs can be profitable • Keys to successful value-of-service pricing – Knowing how costs behave – Good estimates of price elasticity
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Figure 10-6
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Rate Making in Practice • Some initial terminology – Rates and tariffs • Individual tariffs – Rate bureaus and bureau tariffs • General rates – Class , exception, and commodity rates • Each designed to simplify the potential complexity of trillions of possible rates
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 Rate Making in Practice, cont’d • Class rate system – Provides a rate for any commodity between any two points – Three simplification steps • Geographic: rate basis points and numbers • Commodity: commodity classification, class ratings • Rate structure: national scale of rates, cwt-based
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 Figure 10-8
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Table 10-1
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Table 10-2
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Table 10-3
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Rate Making in Practice, cont’d • Commodity classification factors – Product characteristics that impact carrier costs • Product density – Higher densities mean lower carrier costs per cwt • Stowability • Handling • Liability – Considers product value and susceptibility to damage – Individual carriers may establish commodity exceptions
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Table 10-4
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Rate Making in Practice, cont’d • Determining a class rate – Determine rate basis points for origin/dest. – Determine rate basis no. (rate basis no. tariff) – Determine commodity classification rating – Determine rate from class rate tariff – Multiply class rate by shipment weight in cwt
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Figure 10-9
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Table 10-5
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Rate Making in Practice, cont’d • Exception rates – Modification to national classification – Instituted by individual carrier – Used when transport characteristics for an item in a particular area differ from other areas • Ex: large volume movements • Ex: intense competitive conditions
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Rate Making in Practice, cont’d • Commodity rates – Constructed on variety of bases • Most common: specific rate on a specific commodity between specified points via specific route and direction – Not part of commodity classification system – If available, takes precedence over class and exception rates – Typically offered for regular, large volume moves
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Table 10-6
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 Rate Making in Practice, cont’d • General rate structures were principal basis of rates published by rate bureaus • Post-deregulation era – Diminished role of rate bureaus in rate matters – Increased number of individual carrier tariffs – Expanded use of shipper-carrier negotiations – Portions of general rate systems still used in LTL • Commodity classification useful simplification • Class rates serve as benchmark for new types of rates
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 Rate Making in Practice, cont’d • Post-deregulation era, cont’d – Some new rate type examples • Zip code based rates published as part of carrier specific class and commodity rate structures – Many carriers offer web-based zip-code tariffs as variations of class rate system • Mileage-based rates – Variation of commodity tariff system – Rates quoted per mile, regardless of weight
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 Special Rates • Rate forms that evolved due to special cost features or to induce certain shipment patterns • Character-of-shipment rates – LTL/TL rates – Multiple-car rates – Incentive rates – Unit-train rates – Per-car and per-truckload rates – Any-quantity rates – Density rates
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Special Rates, cont’d • Area, location, or route rates – Local rates – Joint rates – Proportional rates – Differential rates – Per-mile rates – Terminal-to-terminal rates – Blanket or group rates
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 Special Rates, cont’d • Time/service rate structures – Contract rates • Contract services common in rail, trucking, water, and some air transport • Rates and services negotiated between shipper, carrier – Rates not governed by published tariffs – Objectives of the negotiations » identify service and cost factors critical to each party » set rate inducements and penalties based on performance on those factors • Contracts allow for a great deal of tailoring of services to particular needs of the shipper and carrier
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 Special Rates, cont’d Time/service rate structures, cont’d – Contract rates, cont’d • Examples of optional features – Volume-based: reduced rates in exchange for volume commitment over specified period – Equipment-based: variations in rate depending upon type of car supplied (car-supply charge) – Transit-time based: variations in rates by transit-time – Variety of services-based: menu of logistics-related services – Deferred delivery • Lower rate for flexibility in delivery time • Common in air transport • Enables higher vehicle utilization
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Special Rates, cont’d • Other rate structures (each is designed for a particular cost or service purpose) – Corporate volume rates – Discounts – Loading allowances – Aggregate tender rates – FAK rates
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 Special Rates, cont’d • Other rate structures, cont’d – Released rates – Empty haul rates – Two-way or three-way rates – Spot-market rates – Menu pricing
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 Pricing in Transportation Management • Factors affecting pricing decisions – Role of the market (customers) • Relative power of customers vs. carrier • Price elasticity (sensitivity) • Availability of substitutes – Governmental controls • Surface Transportation Board: economic reg. • Justice Dept.: antitrust
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 Pricing in Transport Mgmt, cont’d • Factors affecting pricing decisions, cont’d – Involvement of other channel members • Carriers involved in interline movements – Revenue split issues – Price change interdependency – Influence of competitors’ pricing • Price leader influences
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 Pricing in Transport Mgmt, cont’d • Major pricing decisions (strategic) – Setting prices on new service • Often little info on price elasticity or actual costs • Too high a price might attract competitors or not enough traffic – Modification of prices over time • Response to market, service, or operating change • Timing of change can be important – Initiating/responding to price leader changes
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 Pricing in Transport Mgmt, cont’d • Establishing the pricing objective – General considerations • Should reflect corporate objectives • May vary during product/service life-cycle • May vary by market – Alternative objectives • Survival-based pricing – Increase cash flow through low prices that attract volume
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 Pricing in Transport Mgmt, cont’d Establishing the pricing objective, cont’d – Alternative objectives, cont’d • Unit volume pricing – Set prices to maximize utilization of existing capacity – Ex: pickup allowances (LTL), space available prices (air freight, multiple-car prices (rail) • Profit maximization – Attractive to carriers focused on returns on investment • Skimming – High price designed to attractive traffic focused on service quality, uniqueness and insensitive to price
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 Pricing in Transport Mgmt, cont’d Establishing the pricing objective, cont’d – Alternative objectives, cont’d • Penetration pricing – Often follows skimming • Sales-based pricing – Lower price to attract mass market and increased sales – Used in later stages of life cycle • Market share pricing – Lowering price to gain market share from competitors – Attractive in stagnant or declining industries • Social responsibility pricing
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 Pricing in Transport Mgmt, cont’d • Estimating demand – Important, but difficult, especially for new service – For price changes, price elasticity estimates are made • Similar market comparisons (cautions) – Role of surveys and market tests • Estimating costs – Determination of what costs to include – Cost variation at different levels of output
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 Pricing in Transport Mgmt, cont’d • Price levels and price adjustments – Given demand and cost estimates, actual price can now be set – Alternative methods of setting actual price • Demand-based • Cost-based • Profit-based • Competition-based
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 Pricing in Transport Mgmt, cont’d Price levels and price adjustments, cont’d – Discounts and allowances (price adjustment) • Def: reduction from published price in exchange for buyer doing something beneficial to supplier • Examples – Lower prices for larger shipments (TL vs. LTL) – Lower prices on low-demand seasons – Cash discounts for quicker payment of bills • Federal regulation of discounts – Discount must result from carrier cost savings due to action of shipper – Size of discount should not exceed cost savings
  • © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 Pricing in Transport Mgmt, cont’d • Most common mistakes in pricing – Over-reliance on costs – Slow reaction to market changes – Ignoring marketing mix – Prices not tailored to services and markets – Need to price according to strategic plan