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Learning objectives
• After studying this chapter, you should be
able to:

 Identify factors influencing transportation

costs and pricing
 Discuss pricing in transportation
management
 Discuss the rate making practices and types
of rate making
 Discuss the most common mistakes in pricing
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Introduction
• Definition of Transport cost: the expenses involved in moving
products or assets to a different place, which are often
passed on to consumers.
• Transportation economics and pricing are concerned with
factors and characteristics that drive cost.
• To develop effective logistics strategy, it is necessary to
understand such factors and characteristics.
• An overview of transportation economics and pricing builds
upon four topics:
1) the factors that drive transport costs,
2) the cost structures or classifications,
3) carrier pricing strategy, and
4) transportation rates and ratings
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 4.1 Factors influencing transportation costs and pricing

• Transportation costs are driven by seven factors.

1. Distance 5. Handling
2. Volume 6. Liability
3. Density 7. Market
4. Stowability

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• In general factors influencing transportation
costs / prices

Product Market
related related
factors factors.
A. PRODUCT RELATED FACTORS: The product related
factors include:
 Density
 Stow-ability
 Ease or difficulty of handling
 Liability
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 1. Density: Density is a combination of weight and volume.

• Transport charges are commonly quoted as

amount per hundredweight.
 The higher the product density, the greater the
amount of weight that can be hauled and the
lower the cost per hundredweight.

 The lower the product density, the lower the

amount of weight that can be hauled and the
higher the cost per hundredweight hauled.
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 2. Stowability:
• It refers to how product case/box / container/ holder
dimensions fit into transportation equipment.

• It is the degree to which a product can fill the available

space in a transport vehicle.

• Odd package sizes and shapes, as well as product

characteristics such as excessive weight, length, and height
result in higher stowage costs for the carrier and a
corresponding higher classification rating because it may
not fit well in transportation equipment; this results in
wasted cubic capacity.
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3. Ease or difficulty of handling:
 Difficult to handle items are more costly to transport
than items easy to handle.
 Because special handling equipment may be required
to load and unload items those are difficult to handle.
4. Liability:
 It considers the value of the product.
 Products that do have high value-weight ratios and
easily damaged and subject to higher rates of theft or
likely to damage other freight increase the potential
liability cost and are placed into a higher classification
rating and cost more to transport.
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 B. Market related factors.

1. Distance (Location of markets), 2. Market factors (Balance or

imbalance of freight traffic into
 Determines the distance and out of market):
goods must be transported.
 Factors such as lane/path
volume and balance,
 It has a major influence
influence transportation
on transportation costs
cost.
since it directly
contributes to variable  Since transportation vehicles
costs, such as labor, fuel, and drivers must return to
total journey time, their origin, either they must
maintenance costs etc. find a load to bring back or
the vehicle is returned empty.
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 Cost Structure:
• There are three perspectives from which freight
transport costs can be considered differently.
1. From the freight transport operators‟ perspective,
It refer to the expenditure they incur in providing
the services.
2. From the freight owners‟ perspective, It refer
mainly to the charges they pay to freight transport
operators.
3. From the national perspective, It include costs
associated with social, environmental and
economic aspects,
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CONT’D…
• In general, transportation costs are classified into a number
of categories.
• The most are:
A. Variable Cost: They changes in a direct manner in relation to
some level of activity. Variable costs can only be avoided by
not operating the vehicle.
B. Fixed Cost: are expenses that do not change in the short run
and must be serviced even when a company is not operating,
C. Joint Cost: are expenses unavoidably created by the
decision to provide a particular service.
D. Common Cost: This category includes carrier costs that are
incurred on behalf of all or selected shippers, such as terminal
or management expenses, are characterized as overhead
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 4.2. Pricing in Transportation Management

• When setting rates to charge shippers, carriers typically

follow one or a combination of two pricing strategies.

1. Cost-of-Service: is a build up approach where the carrier

establishes a rate based on the cost of providing the
service plus a profit margin.

• The cost-of-service approach, which represents the base or

minimum for transportation charges, is most commonly
used as a pricing approach for low-value goods or in highly
competitive situations.

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Cont’d…
2. Value-of-Service: it is pricing according to the value of the
product.
• For example, high-valued products are assessed high prices
for their movement, and low-valued commodities are
assessed low prices.
• Another name given to value-of-service pricing is differential
pricing.
• Differential pricing can be done based on several methods of
segregating the buyers into distinct groups by;
 commodity (such as coal versus computers),
 time (seasonal discounts or premium rates),
 place, or
 individual person.
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Cont’d…
3. Combination Pricing: it establishes the
transport price at an intermediate level between
the cost-of-service (minimum) and the value-of-
service (maximum).

• Although it is possible to employ a single

strategy, the combination approach considers
trade-offs between cost of service incurred by
the carrier and value of service to the
shipper.
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 4.3 Rate Making Practices
• The overall carrier pricing function
revolves around costing, rates, and tariffs.

• We can classify the rate making in to two

main categories these are:
i. General Rate Making and
ii. Special Rate Making

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 4.3.1 General Rate Making:
• It would be simple if all transportation services were sold on the basis
of ton-miles; that is, we would have to pay x dollars to move one ton
one mile.
• But, in fact, transportation services are not sold in ton-miles; they are
sold for moving a specific commodity in a specific shipment size
between two specific points.
• This is theoretically because:
 The number of different possible routes would be the variation of
these points.
 It is necessary to consider the thousands of different commodities and
products that might be shipped over any of these routes.
 There are also the different modes to consider and different
companies within each mode.
 It also might be necessary to consider the specific supply–demand
situation for each commodity over each route.
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Cont’d…
• The rates under the general rate making are;
1. Class rate,
2. Exception rate, and
3. Commodity rate structures.
 In transportation terminology, the price per
hundredweight to move a specific product
between two locations is referred to as the
rate.
 The rate is listed on pricing sheets or on
computer files known as tariffs.
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1. Class rate:
The transportation industry has taken three major steps toward
simplification of freight rates. These are:
1st step is consolidating the shipping points into groups by
dividing the nation into geographic squares.

2nd step deals with the thousands and thousands of different

items that might be shipped between any two base points.

3rd step simply groups together products with similar

transportation characteristics so that one rating can be applied to
the whole group.

 Generally, class rate is rating / charging the shipment based on

their particular class.
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2. Exception Rates:
• An exception rate is a modification (change in
rating, minimum weight, density group and so
on) to the national classification instituted by an
individual carrier.
• Exception ratings are published when the
transportation characteristics of an item in a
particular area differ from those of the same
article in other areas.
• Just as the name implies, when an exception rate
is published, the classification that normally
applies to the product is changed.
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 3. Commodity Rates:
• Can be constructed on a variety of bases, but the most
common is a specific rate published on a specific
commodity or group of related commodities between
specific points and generally via specific routes in
specific directions.
• This type of rate is offered for those commodities that
are moved regularly in large quantities.
• However, it completely undermines the attempts to
simplify transportation pricing through the class-rate
structure.
• Commodity rates are usually published on a point-to-
point basis and apply only on specified products.
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 4.3.2 Special Rate Making
• A countless of special rate forms have evolved
over the years either as a result of special cost
factors or to induce certain shipment patterns.
• Special rate making can be further grouped
or based on:
1. Character of shipment rates and
2. Area, location and route rates

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 4.3.2.1 Character of shipment rates
• One set of special rates is relates to the size or character of the
shipment. Many rate forms have been developed under this
category. These includes:
 Less-than-truckload / truckload (LTL/TL) Rates:
 Incentive Rates: it generally apply to a rate designed to encourage
the shipper to load existing movements and equipment more fully.
 Per-Car and Per-Truckload Rates: are single-charge rates for
specific origin–destination moves regardless of shipment
commodity or weight
 Any-Quantity Rates: it provide no discount or rate break for larger
movements.
 Density Rates: Some rates are published according to density and
shipment weight, rather than by commodity or weight alone.

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 4.3.2.2 Area, location or route rates
• There are a number of rates relate to area, location,
or route.
a) Local Rates: Local rates apply to any rate between
two points served by the same carrier.
b) Joint Rates: Joint rates are single rates published
from a point on one carrier’s route to another
carrier’s destination.
c) Differential Rates: The term differential rates
generally apply to a rate published by a carrier that
faces a service time disadvantage compared to a
faster carrier or mode.

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Cont’d…
d. Per-Mile Rates: Some rail, motor, and air carriers
provide rates that are based purely upon the mileage
involved.
e. Terminal-to-Terminal Rates: Terminal-to-terminal
rates, often referred to as ramp -to-ramp rates, apply
between terminal points on the carrier’s lines.
f. Blanket or Group Rates: These rates apply to or
from whole regions, rather than points.
g. Combination rates: rates in that two or more rates
may be combined when no published single-line or
joint rate exists between two locations
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4.4 Most Common Mistakes in Pricing:
• Carriers are prone to certain mistakes in setting and
managing prices on a strategic level. These are;
The first common mistake is to make pricing too reliant or
dependent on costs.
The second common mistake is that prices are not revised
frequently enough to capitalize on market changes.
Setting the price independently of the marketing mix is a
third common mistake.
Finally, price is sometimes not varied enough for different
service offerings and market segments. A “one price for
all” mentality does not work in the transportation industry.

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 a pter !
f t h e ch
End o

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