Trucks at Work

Pricing and costs

It's not the load that breaks you down - it's the way you carry it.” -Lou Holtz, former college football coach

Everybody is struggling to come to grips with rising commodity costs and their impact on pricing. Truckers know this especially well as diesel fuel prices spikes earlier this summer pushes the cost per gallon well over $5 in many parts of the U.S. Add that to rising sticker prices for new Class 8 tractors - in some cases well over $10,000 more - due to higher steel costs and emission reduction mandates and it‘s no wonder many fleets (small and large) are throwing in the towel.

It‘s not any easier in other sectors of the transportation. The Associated General Contractors of America (AGC) reported that states are struggling with rising prices for construction materials required to build and maintain the roadways truckers use. Asphalt costs have more than doubled since the beginning of 2008, with increases of as much as 40% announced in many regions since July 1. On-highway diesel fuel costs, as we all know, jumped 68% in the past 12 months, with reinforcing steel (rebar) roughly doubled in price since the beginning of 2008. Then there‘s the price of construction plastics, such as polyvinyl chloride (PVC) pipe and plastic fencing and moisture barriers, which have risen 10% to 25% percent since early 2008.

The problem could get worse in 2009 when the U.S. Department of Transportation (DOT) may be forced to cut highway funds to states by a minimum of 34% because revenue into the federal Highway Trust Fund is falling - in no small part because people are driving less, thus reducing the flow of fuel taxes into the fund.

(Frankly, the hand wringing over this is stupid, because government at BOTH the federal and state level in this country wanted people to drive less to reduce oil consumption and tailpipe emissions. Now that it‘s actually happening - Americans drove 12 billion FEWER miles in June this year compared to 2007 - everyone is whining about the reduction in fuel tax revenue. Get real.)

For truckers, though, the question is how to cover cost increases while still making a profit. Obviously, rates need to rise - but by how much? That‘s the tricky part, and for a little insight into how to manage price increases from a broader business perspective, I thought I‘d let Professor Jerry Osteryoung from the college of business at Florida State University share his thoughts on the subject. For more trucking-specific ways to manage rates - especially from the small fleet perspective - you should really touch base with Contributing Editor Tim Brady, a past master at this. OK, back to Professor Osteryoung - the floor is yours, sir:

“In this economy, most businesses are caught between rapidly increasing prices of commodities and raising prices for their goods and services.

For one firm that we are assisting, the cost of steel increases almost every month. It has already gone up by 10% for them in the first six months of the year. Competition has also increased, so the firm feels that it cannot raise prices despite the fact that it is being squeezed by both steel and fuel price increases. Clearly, the owner is very concerned about maintaining their positive profits.

So many firms in today‘s economy are experiencing a similar squeeze. Forced to raise their prices in response, firms are now worried about losing sales and profits. However, there is so much a business owner can do to mitigate the damage caused by price increases.

If you are competing with other firms, it is important to remember that they have to buy the same products you do and are experiencing the same price increases. If many firms in an industry begin raising prices, consumers will be able to understand and tolerate the increases that you implement.

Most consumers understand that in order to stay in business, a firm needs to make a profit and cover its costs. Most will tolerate a 5% increase in price, especially if you clearly explain why you are doing this. Most understand as they are seeing costs increase all over, particularly in food and fuel. Increasing price because of the higher costs of fuel and other commodities is clearly understandable.

For example, we are working with one service industry firm that increased its prices mid-year by six percent. Following their price increase, they saw no decrease in sales. In fact, some customers wondered why they waited so long to raise prices.

Firms should also consider unbundling as many products or services as they can. Doing so will allow you to mask the price increase. For example, one service company previously included transportation in its pricing. They removed it from the bundle and began billing transportation costs separately. While some customers were unhappy, the majority understood what the firm was doing - especially following the nice letter that was sent out to announce the price increase.

What is important to remember here is that receiving complaints from a limited number of customers does not necessarily mean that the price increase wasn‘t tolerated. Rather, certain customers are just always going to complain about price increases. Paying too much attention to the vocal minority could be very dangerous to the financial health of a business.

Clearly every business needs to be profitable over the long run. Raising prices to cover cost increases is simply good business and economics. If you are, however, in an environment that prohibits you from increasing your prices, you may need to think about the products or services that you are providing. It may be that you are in a much too competitive environment, in which case you will need to find better ways to differentiate your products and services from others in the market. You may also find that certain products or services are no longer viable for your business.

With costs rising all over, each and every business must make sure that they are covering all of their costs in order to stay in business.”

As usual, you can reach Professor Osteryoung by e-mail at [email protected] or by phone at 850-644-3372.