I interviewed Hank Mullen who discussed Density Pricing.
It’s good to speak with you again, Hank. We’ve done interviews in the past, and they’re always very interesting, so I’m looking forward today to hear a new topic called on density pricing. Before we start, can you provide a brief background of yourself?
I’m 44 years in the industry; started in 1969 as a driver for UPS. Worked there for seven years and ended up a district manager in Sales. And then, of course, Consolidated Freightways, The Roadways, The Ground Transport and the international freight.
The first maybe 20-something years, I was actively involved in the industry with the carriers. Then in 1987 I started a company called ABM Transportation Services, and we did transportation consulting. My background is not only manual labor, but the management, midlevel management, less-than-truckload national, less-than-truckload regional ground transport, and, of course, international freight forwarding. I can say that I grew up in the industry, which is rarer nowadays. It’s rare to talk to somebody who was actively involved in the industry in 1980, when the Motor Carrier Act came and deregulated the industry.
I had my 10, 12 years of regulated industry, and then the remainder wasn’t regulated. Then, of course, in 2007 the Surface Transportation Board eliminated all the antitrust ruling the carriers had. That’s why density pricing theory just opened up the field for everybody to put their pricing not on National Motor Freight Classification classes. But essentially how much space it could take up, which, if you’ve done international, those people say, “We’ve been doing it two, three hundred years.” It’s kind of funny, especially since the Interstate Commerce Commission, in 1897, said pricing should be based on space that you use. And, of course, it didn’t; carriers just got in there and took over freight classification.
National Motor Freight Traffic Association, which owns the National Motor Freight Classification is actually managed by carriers; very few people know that. And then your Southern Motor Rate Conference, that’s actually maintained by the carriers also. That 2007 antitrust decision is huge, but it’s taken everybody about seven years to figure out how to do it. Of course, UPS freight started it March of last year, and in the past month or two have just come out full bone and said, “Hey, give us the length, the width, and height. Give us the weight and we’ll give you a price. No more classification,” which is actually incredibly huge. That’s kind of a lot there, isn’t it?
What is density pricing?
Density pricing—and this is interesting because you bring up something very few people know—there’s a difference between volume pricing and density pricing. Density pricing is length times width times height, then your weight; you get your pounds per cubic foot. If you look at the National Motor Freight Classification density chart, there are 18 freight classifications, and it goes from less than one pound per cubic foot, which is class 500—very, very, very expensive—down to class 50, which, essentially, is 35 to 40 pounds per cubic foot.
You can see the big difference. And if you look at a 12-by-12-by-12 package, it actually works out that density is 9 pounds per cubic foot, which would be class 100. The package carriers, specifically UPS and FedEx, have had that 12-by-12-by-12; that’s the standard-size package. If you take it just one step further, both FedEx and UPS say now on the packages, if it’s 3 cubic feet or less, you just pay gas and weight. Not anymore. January 1 of 2015, you’re going to pay whatever the density pounds per cubic foot comes out to; that’s huge. I figure UPS said this: “If the package people are going to do it, why don’t we?” It’s like that program American Pickers; they have to bundle it. If you go to DC Velocity, and if you go to my Web page, you can click on an article—I was interviewed—it explains a lot of this. It just kind of tells you it’s about time we joined the rest of the world and did something that makes sense.
The scarcest commodity a carrier has is space, and that’s exactly what UPS and FedEx said: “We’re sick of these great, big, huge cartons. We’re getting four, five pounds’ worth of revenue. We’re not going to do that anymore.” Of course, I think that’s tremendous. That’s the reason that I do those things.
Is there any more you can say about the why? Why do we have density pricing?
Essentially, like I said, the package people realized that the space on their vehicles was critical. If you had a 10-pound package, that was great in a 12-by-12-by-12-inch carton, but if you had a 12-by-12-by-12-inch carton and you had 2 pounds, oohh. One gets by with 2 pounds’ worth of revenue, and the other gets by with 10. If you realize, a lot of the packages nowadays are going residential; that’s kind of tough to take that type of a hit.
If people are familiar with it, there’s a thing called an oversize package, over 84 inches and less than 130, but you’re going to be billed 30 pounds. If it’s 85 inches in size and you have 12 pounds in there? No, you’re going to pay for 30; that’s been around 15, 20 years. They just took it down to the smaller-weight packages now, the stuff you’ve got—a lot of it, of course, is residential Internet. The other thing is, if you watch and listen to a lot of the industry, four or five years ago, Wal-Mart came out and told all the vendors, “Make all the packages five percent less in size.” With 60,000 vendors, you can imagine how much space it took up, but it also meant a lot less cardboard. A big green issue.
And then if you go back one or two years and you start reading about a company called Staples, they got a system in there that each carton that comes down is custom-built to fit the size of commodity inside. Just huge. It’s something that’s been around. People have finally begin to see this is a really good idea; the greening, less cardboard, less space, less cost; make it smaller and you pay less. That’s pretty simple pricing, isn’t it?
How is it done?
Whatever you have for carton size, just make sure there’s not a lot of empty space in there. That’s it; just make the shipment smaller. Instead of a 12-by-12-by-12 carton, maybe you have a 12-by-12-by-10, and that two inches is huge; it’s just absolutely huge. Think about 16 million packages a day going through a UPS system, and you take 10 percent of the space that they’re taking up out of the system. Boy, that’s a lot; that’s tremendous.
Same with the LTL carriers; there’s just so much you can put in a 53-foot trailer. If you could make it 10 percent less, maybe I get four more shipments on that trailer. If you’re doing 30,000 shipments a day and you can take that down by 10 percent, wow; that’s 3000 shipments that fit in to a smaller space. Once again, huge savings.
Thanks, Hank, for sharing today on the topic of density pricing.
About Hank Mullen
Principal, at Third Law Sourcing.