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October 15 2018

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32 The Journal of Commerce | October 15 2018 Inland Distribution Special Report Satish Jindel Adopt demand-based pricing HAVE YOU RENTED a car or purchased airline tickets online lately? Then you're familiar with demand-based pricing, which matches rates with varying levels of activity among customers. In a market where it is not practical to add capacity on short notice, demand-based pricing allows suppliers to adjust prices based on predictable changes in demand. While the approach may be new to trucking, it has been used by the hospitality industry (such as airlines, hotels, and rental car companies) for decades. When you buy a seat on an airplane, do you pay the same rate if you book two months or two days ahead of time? Of course not. Demand-based pricing helps customers obtain lower pricing when demand is low and even pay low prices during peak travel periods by booking the capacity in advance, which provides predictability of demand to the suppliers — predictability carriers would love to have. In the parcel industry, peak-pe- riod pricing was implemented by UPS during certain weeks between Thanksgiving and Christmas in 2017. The peak pricing was applica- ble to volumes that exceeded the normal shipping volume of customers. It allowed shippers to avoid peak surcharges by shipping during the middle of that period, A er a year of double-digit price hikes across the trucking landscape, shippers are wondering when the days of predictable low single-digit rate increases will return. They shouldn't have high hopes. Prices may increase at slower rate in 2019, but they're not about to drop. Current market conditions have created a "new normal," and the external factors impacting capacity — including di iculty hiring truck drivers — are not expected to change. It's possible the situation, particularly the driver shortage, could get worse. Trucking operators have pricing leverage they haven't seen since deregulation in 1980. Even more noteworthy, this is occurring across the truckload, less-than-truckload (LTL), and parcel sectors, which limits shippers' ability to control costs by shi ing freight between those segments. In this environment, shippers and carriers need outside-the- box thinking. They need to look at solutions used by other industries to balance supply and demand that varies at di erent periods in a business cycle. They need to kick "bad habits" handed down from the days before deregulation and change behaviors they've ignored and enabled for years. Carriers could do much to make the pricing process more e icient, reducing costs for them and pricing for shippers. Shippers can take steps to simplify processes, too. There hasn't been a better time in four decades for carriers and shippers to rip up their old playbooks, especially when it comes to how they price freight, and work together to find better ways to ship. Here's where they should start. rather than at the busiest times. Although there are opportunities to further refi ne the period for which peak surcharges are applied, UPS had enough success with such pricing that it has announced its continuation during the peak period of 2018. Highest demand times LTL carriers experience spikes in demand at the end of month and at the end of quarter. For years, faced with excess capacity, the LTL carriers have been limited in deploying cre- ative pricing approaches to manage such short-term spikes in demand for capacity. However, the recent tightening of LTL capacity is creating opportunity for the carriers to raise rates to improve their margins. In doing so, some carriers are taking two general rate increases a year and raising rates for shipping at all times of the year. Such an across-the-board rate increase disregards the di erences in shipping pattern for various custom- ers. While manufacturing and in- dustrial shippers like to get products out at end of month and/or quarter to book revenue, the retail shippers moving products from distribution centers to retail stores do not have the same need. The LTL industry should consider implementing a pricing model that allows shippers to provide advance notice for capacity and lock prices and then use that capacity without paying "The LTL industry still relies on an antiquated pricing model developed for the calculator age."

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