Delivering Price Increases
A mid-tier Transport Service company with annual revenue of $200M and a 4% year-over-year growth rate was questioning their pricing structure. Its pricing was always based on distance travelled and weight regardless of material or market. Traditionally, when passing prices increases, the company relied on a “peanut butter” spread method. Each Courier Lane received the same percent price increase regardless of capacity utilization. Interestingly, Back Haul capacity utilization was running at half of Head Haul (Figure 1).
The RML Approach
Our approach focused on three main areas:
Build the Strategy
Where should we take the price increase? How much should it be?
Set List Price
How do we manage the effective price through List and Discounts?
Execute, Monitor, Report, Adjust
What training is needed to create a sustainable change?
1. Build the Strategy
The team approached the project on two fronts:
- A demand share tool was utilized to determine how each lane reacted to price increases (Figure 3). It discovered that each lane demand sensitivity varied greatly, thereby invalidating the “peanut butter” spread pricing method. With each lane modelled, we created a segmented lane pricing strategy.
- The sensitivity analysis found that the probability of sale for Head Haul and Back Haul trips was highly dependant on price per pound (Figure 4). We sought to optimize Back Haul capacity by increasing competitiveness of rates in certain markets.
2. Set List Price
In conjunction with the new pricing strategy, the team developed new customer-relevant offerings. Figure 6 displays the new value-added offerings to clients on a for-charge basis.
3. Execute, Monitor, Report & Adjust
Revenue Management Labs went on to do training with the internal sales team on:
- demand sensitivity tool
- willingness to pay tool
- demand share tool
- effectively communicating list price changes and the value-added offerings
The client built these tools into their sales process to ensure compliance.