Pricing Game: Indian trucking

Before joining a logistics company, I always thought this industry would be straightforward on pricing. This ideally should be an industry where anyone negotiating can easily estimate your costs and make your life a lot difficult for you. So, coming from a manufacturing background, I never understood the pricing game in logistics.

So, what are factors that affect the pricing? First are the costs. Broadly speaking, the fuel, toll and maintenance is generally recovered in almost all pricing. For a 32 Multi Axle truck of 28-ton gross weight this comes around 18+5+3, i.e 26 Rupees/kilometer. And a fuel surcharge is factored in to the contract to move the price along with fuel cost. Generally, driver costs (approx. 4/km) and some overheads like sales and operations (3/km) team are also factored in. Add the return on capital of around 15% for around 1 lac kms, it comes another Rs 3/km. Add some margins, around 1-2 Rupees/kilometer, you come to Rupees 38/km. So, if you are negotiating with a logistics provider, you just negotiate the best possible around this number, it should have been so simple.

Well, it is not that simple. Let us consider a typical lane, say Delhi-Kolkata which is approx. 1500kms, you offer 38*1500, i.e 57k, you will not get any transporter from Delhi to Kolkata. On the other hand, offer the same rate in reverse, you will have all transporters in a queue in front of your Kolkata warehouse. In practice, a Delhi Kolkata trip happens much above the marginal cost (roughly 80-90k against 57k) and the return trip happens much lower than the marginal cost (45-50k against 57k). Why is this so? The economics of supply and demand. Kolkata is a consumer state and has a trade deficit with Delhi. So, you need more trucks from Delhi to Kolkata and less trucks from Kolkata to Delhi. So why would reverse movement happen at lower than marginal costs? Again, two factors here- firstly round-trip yields. So, if a vehicle goes to Kolkata and comes back, he will get 80k+45k, i.e. 125k which is higher than the costs of 57*2, i.e. 114k. Secondly the trucks are limited, so you need to bring in back to Delhi to do next profitable trip. So, return trip for any transporter will be at a rate so that his full round trip will exceed in round trip marginal cost.

In the above example, the Delhi client and Kolkata client had their prices written all over them, thanks to their location, but there is another factor to this- time. Just like airline tickets, any client asking for extra vehicles at last moment have their warehouses full and would be willing to pay more at spot market. So, if we have spare vehicles after serving our mandatory contracts, we will see the spot rates, and if they are 10-15% higher, then we would serve the spot market rather than our regular clients. Again, we know last moment flyers generally pay well, so if some regular client does not mind, we even sometimes postpone their demand. Same thing happens here, if the spot prices are great, we may even pay the penalty and shift the demand.

The third differentiator in pricing is season, and in Indian road transportation, this is a larger than expected factor. Auto manufacturing is generally at its lowest in December as people don’t want their cars to be one-year older models. This generally results in an accumulation of supply in auto manufacturing hubs. Most of Kolkata manufacturing is closed for 10 days during Durga Puja, but consumption/shopping would be at its peak. So, inflow would be at its maximum and outflow would be at its lowest. And rate differential goes as much as 100-110k for Delhi Kolkata trip vs 30-35k in reverse in market.

Are there further differentiators? Yes, second-degree differentiation does happen. Clients who give us more kilometers pay on average less compared to one time, or clients with lower trips. Another very powerful tool in logistics is marketplace knowledge. Many companies with platform models are aware of the demand patterns across the country. This has been a very important tool for sales teams. For example, we knew client A needs daily 3-4 trucks to Bawal, Delhi and while we assured them for placement on time, we also have used this as a pricing lever and negotiated a contract of 52k (this was the highest Delhi Lane contract from Kolkata). The only factor that kept the prices in check was the fact that the market had comparatively lower entry barrier (financing is easily available on trucks) and smaller players had almost no overheads.

To conclude, the pricing in this sector is highly dynamic, seasonal and marginal costs only play a role to ensure the round trip costing is viable for the transporter. Also the supply and demand across the lanes ensure the pricing is different in different directions.