The Science of Pricing By Joel McGinley

Effective pricing requires strategic thinking and to do that you must have a clear understanding of the many market factors that need to be taken into account when you are determining a price for your services. These factors include supply and demand first and foremost, seasonality, the type of freight you're shipping, the volume of freight a shipper wants transported, your competition and your internal cost structure. So lets talk about Supply and Demand.

It's basic economics -- supply and demand affects pricing. As demand goes up (and I am really talking about relative demand -- how many loads are available for the amount of available trucks) price follows. Conversely, when demand falls off, prices go down as well.

However, there is a natural lag between demand and price and it's usually about three to four weeks on the truck side depending on the severity of the increase in demand. In other words, when demand increases, it usually takes three to four weeks before trucks start hammering you for higher prices. Unfortunately however, it takes the typical shipper about three months to react to the change. Therefore, when volatility in the marketplace causes demand to shoot up, you are probably going to have to pay higher prices within three weeks, but most likely you won't be able to pass those increases on to your shippers for another eight to ten weeks. When this is the case, you'll experience margin compression, something I expect that all of you experience between April and June when the 18%-20% margins you've been enjoying typically drop to somewhere between 12% and 15%.

Tip: The need for strategic thinking applies to both spot and contract rates. Often, spots rates will drive contract rates depending on what the market is doing at the time that you agree to a contract rate. If you agree to a long-term contract rates, you're going to have to experience periods of margin compression as well as periods of margin expansion to get your overall margin where you want it.

Having good intelligence can help you minimize the lag between demand and price. Good data will let you know you when prices are starting to move up so you can begin selling the concept of a price increase to shippers sooner.