I was at a meeting at Northwestern University’s Sandhouse Gang a week or two ago. During a very interesting discussion about the Indiana Railroad and railroad pricing, this comment was made:
“Railroading is one of the most interesting businesses out there, because you have to understand everyone else’s business to understand pricing. In trucking, a box is just a box, they don’t care if it has diamonds or wood chips in it. But, in railroading, the value of the cargo affects pricing.”
I have always wondered why this is the case? One would think that the price/effort to haul 40 tons of diamonds from point A to point B would be the same as hauling 40 tons of woodchips from point A to point B. Moreover, as I would think railroads haul a lot more woodchips than diamonds, a pricing structure that rewards high-dollar commodity drayage and punishes low-value commodity drayage would hurt railroads more than it would help?
Why is railroading different than trucking in this regard? Is it because there is more competition in trucking? Is there a disadvantage and/or an advantage to treating pricing this way?
Certain aspects of trucking have value as a determinate for the pricing, particularly LTL shipments. I have been away from the trucking industry for awhile, but that is probably still a factor. Not sure if there are bill of lading notations regarding valuation or not.
BTW…what is Northwestern University Sandhouse Gang?
What do you hear about Indiana Railroad these days? I just reread the book on it last week…and am still amazed at their model.
The Sandhouse Gang is a group of mostly railroad professionals (many of whom retired) that meet at Northwestern University for lectures regarding railroading. Mark Hemphill gave a very good lecture not too long ago. The last lecture was one by Tom Hoback of the Indiana Railroad. I was amazed about how much I learned of coal and its effect on the INRD.
I think there is another lecture on May 5th at 3 CST. You should attend. I usually make it in company with Jeaton, who is always good company. I am pretty sure you would enjoy it.
If there is anything I can do to help facilitate your attendance let me know.
Transportation pricing is very complicated. Airlines, truck lines, barge lines, steamship lines and railroads charge different customers and commodities different prices for the same service. As an example, Southwest’s current prices for air service from Washington to Portland, Oregon on July 21st’s 6:35am flights are $250, $375 or $400. This is because Soutwest looks at their customer’s need for air service before they look at their costs when they make rates.
A good start for learning about this topic in regard to North American railroads is the Rates and Rate Associations entry in the Encyclopedia of North American Railroads by Bill Middleton, et. al. Karen’s will sell you a copy for $90. I think it is well worth the price.
I believe one reason for value based pricing is the risk of loss or damage to the shipment. There is much less risk of damaging a car load of rocks compared to say, TV’s, and the cost of replacement is much lower. Mark
Isn’t there a direct correlation between the value of the item shipped, and the speed and service the shipper needs to purchase with it? For example: consumer goods verses scrap metal.
The floor for railroad pricing is the cost of service. The ceiling is the price at which it won’t move at all, or move via another transportation provider. The goal of the pricing exercise is to get the price as close to the ceiling as possible. Value of commodity has a great deal to do with the value of the transportation service to the shipper. The more value the commodity has its point of delivery, the more willing the shipper is to pay a higher price for the transportation.