Based on my years in logistics I wish to follow up on my article about Volumetric Weight and Density. I would like to discuss Density-Based Pricing and Effective Yields. What does this mean? It involves pricing based on the dimensional size of a shipment and the corresponding yields. The dimensional size determines the volumetric weight, which is explained in my article Volumetric Weight and Density mentioned above. I will then expand on this topic to discuss the corresponding yields with a term I have coined as “Effective Yields”.
First, I need to explain why volumetric weight is so important. In the logistics and transportation industry almost all vehicles and vessels are constrained by their cubic size. Trucks can carry very heavy loads up to the maximum weight the axles can support. Ocean-going container ships can carry up to the maximum displacement weight depending on the size of the ship, and that weight is significantly high. And modern aircraft with more fuel-efficient and more powerful engines almost always have an excess of lift available. This means even though vessels are completely full those vessels are capable of carrying more weight. In the industry this is known as “cubing-out” rather than “weighing-out”.
Vessels have two constraints:
- The amount of weight a vessel can carry
- The amount of space (cubic meters) that a vessel has available
When a vessel hits its maximum weight it is known as “weighing-out”. When a vessel becomes completely full before hitting the maximum weight it is known as “cubing-out”. As mentioned above most vessels cube-out whether it is air, ocean or trucking so the way to increase revenue on a vessel is to increase the density of shipments being carried. Since carriers charge by the weight or the cubic size then maximizing density is beneficial for both the shipper and the carrier. So how can carriers encourage higher density shipments?
In the chart below you will see three boxes all of which have a volumetric weight of 10 kilograms (given, 60,000 cubic centimeters divided by a Dim Divisor of 6000 cc/kg), with one box weighing 10 kgs, the other 20 kgs and the next 30 kgs. It is well worth the carrier to offer “density discounts” to gain higher density shipments from their customers. With Density-Based Pricing it is beneficial to offer lower prices from $6.00/kg to $5.50/kg to $5.00/kg (shown in the top line) as the density increases. Even though the price per kilogram goes down, the revenue per cubic meter goes up dramatically, and the “Effective Yield” also rises dramatically shown in the bottom line. The Effective Yield rises from $6.00/kg to $11.00/kg and then to $15.00/kg!
I have included other metrics in the chart above such as kgs/m3 and Revenue/m3 for those of you who are math enthusiasts. You will notice that the density increases (kgs/m3) and the Revenue per cubic meter (Rev/m3) also increases resulting in higher Effective Yields as the weight of the same size box increases, even though the price per kilogram is lowered.
Density-Based Pricing is very powerful if understood by management. In my experience most companies do not understand this concept and do not pay attention to the power of Density- Based Pricing. I hope this article will help change that lack of understanding and allow this concept to flourish in the industry.
Three Tree Solutions 