Hardee Transportation is a freight company that wants to rethink the pricing methods used in order to make a fair amount of profit for the work they do. The business selected Jim O’ Brien to consider this issue; he believes that value-of-service pricing methods may be more effective than traditional cost-of-service pricing. Despite this, Hardee is having a difficult time in determining where their costs are hidden. Jim knows what Hardee pays its drivers, knows the cost of equipment and fuel, and knows the overall costs of dispatch and dock operations. Therefore, he must consider the advantages and disadvantages of using cost-of-service versus value-of-service pricing for Hardee’s customers including the type of cost (average versus marginal) that would make the most sense for Hardee. In addition, Jim must develop a methodology for Hardee to price its existing and evolving services and consider the possibility that the strategies for each may differ depending upon the company’s involvement and needs.
Cost-of-service pricing determines what it will cost Hardee Transportation to deliver freight while value-of-service pricing determines what the customer is willing to pay for the provided service; the difference between the two will be the company’s profit. If Hardee Transportation were to use this method, there would be a fixed price for all customers. Currently, Hardee implements this method by charging customers according to the volume of their shipments; this is problematic for the company because customers are not charged for the work they must do outside of the physical shipment, which varies from customer to customer. Despite this, cost-of-service and value-of-service pricing have several advantages for the company. This system is predictable, allows the vendor to charger a higher cost by establishing a fixed price, and assists with budgeting the money that the company will need to actually provide the service (Synes, n.d.). This system also has several disadvantages. The fixed price for the service may be too high for customers and scare them away and if the market changes too dramatically the buyer may not be able to afford the fixed price even though they signed a contract; this would result in profit losses for Hardee. Ultimately, average cost would make more sense for Hardee because it accounts for the total cost of production at an activity level. To ensure maximal profit, they need to factor in the additional labor that they are providing to customers.
Hardee Transportation should develop a skimming pricing strategy, in which the prices are based on the product’s value. In doing so, Hardee should ensure that the price set for each customer reflects the amount of work they will need to put in; the business can get away with this because they are providing an adequate amount of personal service on top of their basic function as freight transporters. Since not all transportation companies provide these additional services, Hardee will maintain its customer base that would like maximal assistance while shipping their items (Meissner, 2010). It is essential for Jim and Hardee Transportation to access all financial information regarding the company to set an actual price. While knowing what Hardee pays its drivers, the cost of equipment and fuel, the overall costs of dispatch and dock operations, the average length of haul, and loaded mile metric will help contribute to understanding an effective price for their service, Hardee still has more research to conduct. They also need to consider the prices that their customers would be willing to pay for this service and how many freight cars they have available. Lastly, the business should charge a base rate according to volume of freight plus an extra charge for additional services provided.
In conclusion, Hardee should be able to get maximum profit for every freight car they own if they use the skimming and average cost pricing strategies. These methods will be effective whether Hardee applies it to its current or evolving services. The more that the company is able to distinguish itself from its competitors, the more money it will be able to charge, which will result in higher profit.
Meissner, J. (2010). BASIC PRICING STRATEGIES AND WHEN TO USE THEM. Meissner Research Group. Retrieved from http://www.meiss.com/blog/tag/neutral-pricing-strategy/
Synes, S. (n.d.). Advantages & Disadvantages of a Fixed-Price Contract. Chron. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-fixedprice-contract-21066.html