From ‘Why’ to ‘How’: Building Blocks for Profitability 

You’ve accepted that high-level average costing is a risk; now, how do you fix it? The goal is building cost model for parcel and road freight carriers that are granular, reliable, and automated. This is the necessary building block to modernize your pricing strategy.

Here is the three-part framework for creating a “Costing for Pricing” model that delivers a competitive edge:

Step 1: Embrace Activity-Based Costing (ABC) for Granularity

The foundation of a modern model is Activity-Based Costing (ABC). Instead of averaging all costs across all shipments, ABC isolates costs to specific, measurable activities and their respective cost drivers.

Activity Old Metric (Low Granularity) ABC Metric (High Granularity) Why it Matters
Delivery Cost per Shipment Cost per Stop/Pick-up Density A route with 200 stops is cheaper per package than a route with 100.
Linehaul Cost per Kg (National) Cost per Kg/Km driven
or Cost per Kg (State/Lane Level)		 Accounts for distance, fuel, and specific network constraints.

This approach allows you to identify the specific operational differences that impact profit, revealing your true cost position.

Step 2: Leverage Capacity Utilization Data – The Game Changer

A crucial element that many carriers overlook is capacity utilization. If your cost model assumes that every linehaul is half-empty, you are artificially exaggerating your costs and making it difficult to fill the remaining capacity.

Rule of Thumb: Costs should be calculated based on full capacity to accurately reflect the true cost of an incremental unit, allowing you to price more aggressively to fill empty space.

C-Level Benefit: Leveraging this data ensures your prices are competitive when you have available capacity, allowing you to make smarter tactical decisions to maximize asset usage and overall profit.

Step 3: Automate and Build a Roadmap for Improvement

An accurate cost model is useless if it takes a week of Excel computation to answer an RFQ. Your final cost model must be automated and readily available for decision-making.

Action Plan for the C-Suite:

  • Diagnostic (6-8 Weeks): Begin with a comprehensive diagnosis against best practices to assess your data and operational process gaps. This delivers a populated, accurate costing model and initial recommendations.
  • Build the Roadmap: Not all data will be perfect immediately. Work with proxies and rules-of-thumb initially, but immediately build a multi-year roadmap to firm up data quality and automate data feeds.
  • Refresh and Challenge: Your cost model is not a one-time project. It must be refreshed multiple times per year, and the underlying assumptions challenged annually to ensure accuracy and reliability.

Conclusion of Post 2: The connection between Costing and Pricing is inseparable in a tight-margin business. By adopting an ABC-based, capacity-aware, and automated cost model, you gain the granular insights necessary to not only survive, but thrive—winning more profitable business, defending your turf against competition, and driving better EBITDA results.

Learn more on our latest pricing insights:

Read The Hidden Cost of Average for Parcel and Road Freight Carriers

Read Pricing mistakes that make carriers lose margins Part 1

Read From cost cutting to value creation : How pricing systems protect carriers’ margins