Listen to the new podcast on Costing for Parcel Pricing featuring our partner, André Pharand, strategic Advisor for the Parcel industry and Nicolas Nemorin Director of Customer Success at Open Pricer. In this insightful discussion, delve into the critical topic of Costing for Pricing in the parcel and postal industry.
The Importance of Precise Cost Calculation for Parcel Pricing
In the current highly competitive parcel market, postal operators are facing significant challenges. Some have been losing market share and profitability over time, making it more crucial than ever to focus on profitable growth. Today’s context is characterized by increased competition, overcapacity, and rising costs. Henceforth, having a clear view of profitability by product, client, or lane is essential for running a successful business.
However, many postal and parcel operators approach Nicolas and André for pricing help without having the necessary costing information. This lack of visibility into costs across the value chain—from collection to sortation, transportation, and delivery—hinders their ability to pursue additional pricing and profitability analysis.
Key Topics Discussed
In this podcast episode, André and Nicolas explore several key areas:
- The Connection Between Costing and Pricing: Understanding how accurate costing information is fundamental to effective pricing strategies.
- Improving Cost Models: What needs to be improved in current costing practices to achieve more accurate and actionable insights.
- Benefits of Accurate Cost Models: How more precise cost models can bring new light to cost structures, enabling better decision-making for Post & Parcel carriers.
- Practical Advice: Actionable steps that postal and parcel operators can take to achieve profitable growth.
Why This Matters
The increased competition bears with consequence postal players’ increased need to leverage every advantage to maintain and grow their profitability. For this reason, accurate costing is a cornerstone of effective pricing strategies, enabling operators to make informed decisions that drive growth and sustainability.
Listen to the Episode
Don’t miss this insightful discussion. You can listen to the episode on various platforms:
The following article is based on this episode 349 of the Postal Hub podcast: Costing for Pricing with of André Pharand Strategic Advisor in the Parcel industry and Nicolas Némorin Director of Customer Success at Open Pricer.
You’ve got a new offering from Open Pricer. Tell us a bit about what it is and why you’re launching it.
André Pharand, Strategic Advisor in the Parcel industry: So you might be wondering why we’re talking about costing when Open Pricer is the market leader in price management optimization platforms dedicated to logistics. Well, there are two reasons.
The first one is that what we found, or what Open Pricer has found over the past 20 years, is that businesses that have always wanted to get into launching some pricing initiatives have found that they don’t necessarily always have costing or sufficient costing information to be able to initiate some pricing initiatives. So what that means is that while postal and parcel operators do have costing information, it sometimes isn’t granular enough or it doesn’t cover the entire full process from sortation, transportation, all the way through to delivery. And so what it means is that they’re stuck and they’d like to pursue better pricing, but they can’t.
The second reason is more from a structural standpoint. What we’re seeing in the market is that the parcel market has become extremely competitive in the postal parcel segment. Now more than ever, they need to focus on profitable growth. The market today is faced with increased competition and overcapacity. Which means that every penny counts and a merchant will move from one supplier to the other, just for a matter of a few pennies. And I’ll bring three examples of this to life.
The first one is -I’m sure some of you folks that are listening to this are facing some- price wars, and that’s a good manifestation of that increased competition. So getting better pricing, better costing information can help you address these pricing wars where in some lanes and for some specific products, you may be able to be even more competitive and you’re not leaving money on the table.
The second one is we’re seeing that volumes are going up, but margins are declining. And a good example of this is actually Omniva that just published their recent results this morning. And one of the key highlights is that, you need to pedal more to make the same amount of money. Basically UPS, same thing. And then lastly, you’re just losing money. So two examples of this would be Australia Post. Now they’ve improved their deficits, but they’re still losing about 80 million a year. And then Canada Post as well. So this is really a perfect opportunity to help address costing and pricing to help increase profitability overall.
Let’s talk about the connection between costing and pricing. What is it? Why is it important?
Nicolas Némorin, Director of Customer Success at Open Pricer: Well, of course, costing is very important for any business that you have. You need costing to make sound business decisions. The literature about pricing tells you that you can follow different strategies. You can use value-based pricing. You could use competitive based pricing, but, what’s important in all of these strategies is that you need to validate your profitability that you will get out of those prices. That’s a very important sanity check for carriers to make. It’s particularly important in transport because it’s a tight margin business, as André was explaining. Every penny counts.
And that’s right because when you move hundreds of thousands of parcels every day, if you miss your cost or your price point by only one cent. By the end of the year, you might have lost millions and that really impacts your bottom line. So I don’t think any carrier should consider making a quote to a large potential new customer without checking the profitability of that new deal. It wouldn’t be sustainable not to check profitability. So definitely, yes, pricing and costing are related and you do need to know your costs to be better at pricing.
Carrier’s finance teams probably already got a good visibility of the financial performance. So can you explain what should be improved and how it’s going to benefit pricing?
André: You mentioned this is really relevant for finance, but I want to really make this clear that when you’re talking about costs and even profitability, it’s everybody’s business. It’s not just finance, but you’ll have folks in marketing, folks in operations, even customer service, the channels, everything. All these costs really matter and getting to allocating the right costs from when you’re talking about fixed costs or even direct costs is very important. It’s important because if you’re working with averages and say, if you’re working with an old accounting system, you may be able to get averages, cost per shipment, cost per kilo and things of that nature.
But in today’s world that’s not enough. So you need to really focus on getting more granularity because you may not even know if you’re losing money on each transaction or leaving money on the table. So we are offering to get better granularity. I’ll give you an example:
If you’re averaging 200 parcels per shift or per sorting and on some lanes you’re only doing 100. You’re overestimating some of your costs and that really can have an impact on how you perceive profitability. So you may not even know this, you may not be aware. So the point is that average costs are simply not granular enough to account for those differences in operating costs. And it’s crucial, especially for the C-suite to really understand the power of de averaging these costs for lack of a better word. And can help avoid unknown or underestimating these costs and leave profits on the table.
Could you share some examples of what can be achieved with more accurate Cost Models?
Nicolas: Sure. I have two examples that come to my mind. The first example is from a national post organization. They are from an emerging market and they face quite intense competition. Actually, they’ve been losing market share for a few years now. They used to work with average costs per parcels when they were doing their margin calculations. In that example, they worked with an average cost of around 10, not mentioning any currency. I don’t think it’s relevant for the story. But when they compared their unit cost to the price point of some of their competitors who were selling at 8, for instance, and those competitors were gaining market share, the execs at that company were a bit confused. They thought they were really in serious trouble and they didn’t quite know what to do.
So they approached us and we’ve worked with them to de-average their perception of costs. And what we found out is that by introducing the right pricing or costing drivers on each activity that actually their cost per unit was varying between 4 and 50, even if the average was 10. So the takeaway from this example is that there are some parcels that they could sell below their competitors price point and would still generate a profit. So what they decided to do is to focus their commercial efforts on these customers who are incurring lower than average costs. And that’s why André was saying that it’s very important to de-average your perception of costs.
I can also think of a second example. It’s a customer that we’ve been working since the beginning of this year. It’s an express carrier, also from an emerging market. They used to work with average costs, but they actually operate in quite large countries.
So again, we’ve worked with them to de-average their perception of costs, and especially on linehaul and PUD costs. We went from the national average costs to a state level cost at least, and they realized that in their List Prices, some zones were actually not profitable. And of course, they had some customers who found these elements in their prices and decided to cherry pick them. So those customers were cherry picking the non-profitable lanes because they were too affordable and actually below average costs.
Can you summarize some of the benefits that this brings for postal and parcel carriers?
Nicolas: If you have a better view on your cost, the impact for you can be absolutely massive. There are two main benefits that we can think of. The first benefit is about enabling you to make better decisions on your existing customer base. The reality is as a carrier, if you have a better view on your cost and you have a de-averaged view of your unit costs, it can completely reshape your understanding of customer profitability, because you will find out that you have some customers with hidden profitability. So perfect. Those customers are actually more profitable than what you thought, but you will also find customers with hidden costs and those customers might not be profitable, unlike what you thought. That piece of information can be used as an input for a rate increase campaign. If you have that information right in time, because you can increase the targets for the rate increase of those customers who are unprofitable.
The second big benefit is that it will enable you to price better because you will be able to reshape your base prices and your discount policy. Because if you take the example that I just gave you about that express carrier, you can ensure that all zones and all weight bands are profitable. The second benefit when it comes to better pricing is that with better view on your costs and a better understanding on how different parameters will influence your cost dynamics as a carrier, you will be able to calculate your walk-away price more accurately and this will help you win some price-sensitive deals that before perhaps you might have decided not to pursue those opportunities. So yes, those would be the two main benefits of de-averaging costs for pricing purposes.
Spending some time and effort in improving Cost Models sounds like a no brainer. So what’s holding carriers back, do you think?
André: A number of different things. If you know the postal parcel world, they could have different priorities. I mean, a couple of years ago, achieving greater capacity was the top priority. So that took precedence. It could be that your systems were implemented decades ago and they were good enough then, but it’s time to upgrade and get that better level of accuracy. The change in product mix. Parcels are extremely competitive compared to mail and that also is really pushing the pressure a bit more I guess.
And greater visibility of pricing across shipping tools and platforms, right? As we mentioned earlier, cherry picking means that the pricing is available across a number of different platforms with their appropriate level of discounts. So, it’s time to get more serious about this. And sometimes you just don’t know what your competitors are doing. So, some posts and parcel companies can do real-time quotes during a visit with their customers and others. It’s a task force where they’re in Excel mode and they need a whole team to respond to an RFP. And, you know, if that’s what you’ve been doing and you’re not exposed to everything else, then that’s kind of what your best in class looks like. So I think there’s some of that too.
But I would say, you know, it’s just the bottom line. There is no doubt that more accurate Cost Models can, you know, be highly beneficial as Nicolas mentioned. And I’ll just add one last thing is that Open Pricer a couple of months ago, published a research article that demonstrates the power of improving that accuracy of costs. And specifically applying a 1% more accurate cost on new business can actually lead to better win rates, capturing an additional 2% in margin. So based on some mathematical simulations that will go into bottom line, it helps you when you have better accurate Cost Models, you’re able to respond to these opportunities you would not normally pursue. You might price more aggressively in some areas and not discount elsewhere. You might respond to opportunities with higher margins and, you know, ultimately it increases your win ability.
Is it difficult to improve your Cost Models, especially if as a carrier, you feel data quality is a weak spot in your organization?
André: It’s not that difficult. You can work around some of the constraints you may have from an operational perspective or from a data perspective. In our approach here, what we do is to leverage an activity-based costing light, which means that it helps you get better accuracy on those costs. It’s based on some observations. It’s based on additional data points that are not necessarily in your costing systems that can help you get that better visibility and better accuracy of costs. And what’s key really is that you should work on building the roadmaps to firm up that data over time, but for the sake of getting to enabling some better pricing and to get immediate visibility through the offering that we’re proposing, there are ways to overcome some of these gaps in, in costing information through the systems that exist today.
Is there any practical advice that you could share with listeners when it comes to getting some best practice in place?
Nicolas: I can name three of them. The first one would definitely be to work to automate your Cost Model because when you prepare a response for an RFQ, it shouldn’t be a one-week exercise for your teams to figure out what your costs are and which price level you can propose to that RFQ. So your costing information and profitability information should be readily available because you need it for urgent decision making.
The second advice I could give is to try and keep it as accurate and reliable as possible. Meaning that it’s not build it and forget the Cost Model activity. You have to refresh your cost data multiple times a year because you might have seasonality in your cost as well. And you also would like to challenge your Cost Models every year because things change quite rapidly. So it needs to be accurate and reliable again, because you will use it to make some important decisions.
The third piece of advice that would be a best practice -that we actually have seen the most advanced carriers implement- is to leverage capacity utilization data, if they are available, of course. Because those can be a total game changer. If you don’t consider the costs at full capacity, it’s likely that you will overestimate your costs. Then, it will make it more difficult for you to fill in the empty capacity simply because you will allocate more costs to the lanes that are not 100% full.
Just giving you one very simple example to illustrate: Let’s take the case of two line hauls. Let’s say that those line hauls would cost 1,000 €/day to operate each. If one of them is full with 1,000 units and the other one is only half full with 500 units, if you don’t take into account the capacity utilization rates, you will conclude that one costs you 1 €/piece, but the other one will cost you twice as much, which is 2 €/piece. So not taking that information into account will lead you to conclude that actually they don’t cost the same, but in reality they do cost the same. So yes, leveraging that information can really be a game changer if you have that information available.
How to get in contact with Open Pricer to find out more?
André: Just to summarize, we’re introducing a new costing offering that will help postal and parcel operators initiate the journey towards profitable growth. As mentioned, within a period of six weeks, depending on data availability, you will get a populated, more accurate costing model. Greater insights on actual costs and greater cost precision. Recommendations on costing and pricing opportunities, and the necessary building blocks to modernize that pricing. And lastly, some benchmarks and best practices regarding some of those costs that we’re talking about. So all of this is essentially the outputs of this offering. We’d be delighted to partner with postal and parcel carriers, and you can contact us or send us an email at sales@openpricer.com