The Art of COMMERCIAL PRICING

JEFF ADLER

PROVIDING COMMERCIAL collection is perhaps the most complex service a waste hauling company can provide. It involves serving a wide variety of customers, which can make quoting a price for that service especially challenging.

For this article, commercial collection refers to when a hauler uses front loader trucks, collects a variety of municipal solid waste (MSW) in varying container sizes from many customers on a route day, and then disposes of the waste at an approved disposal site. In exchange for having their waste carted away, customers pay a fixed monthly charge for the service.

Now, here's how to make money doing it.

Identify the Costs

There are direct costs to commercial collection, such as costs to own and operate a vehicle, the cost of purchasing and maintaining a container, labor, and disposal. There also are indirect costs including supervision, billing, accounting and other administrative tasks. Depending on the area of the country, disposal costs can range from $20 per ton to more than $100 per ton.

Vehicle, container and labor costs are fairly easy to identify. When all the costs are added up, they typically total about $13,000 a month, or $650 per day, to operate one truck. If a hauler services 80 customers in one day, then the company will need to charge an average of $8.12 per pickup to each customer. For a customer that receives once-a-week service, that averages about $35.18 per month. Twice a week service would average $70.36 per month. Remember, however, this is only for the vehicle and labor costs of service.

Disposal costs will vary for each customer. A good rule of thumb is that the average will be 95 pounds of MSW per container yard. Assuming a disposal cost of $40 per ton, it will cost $1.90 for each container yard that a hauler picks up. For a once-a-week customer with a 4-yard container, that is $33 per month in disposal costs.

Indirect costs are more difficult to determine, and there also is no clear method to allocate them to the costs of servicing customers. However, indirect costs clearly add to the cost of doing business and should be collected from customers to make a profit. A good estimate is to add 15 percent of the direct costs to provide service. Because a hauler also wants to be profitable, add another 15 percent to the price.

Taken all together, a hauler would need to charge the following to an “average” customer receiving once-a-week service for a 4-yard container:

Total customer price: $88.64 per month.

Of course, everyone knows there is no such thing as an “average” customer. There are other key issues to take into account when quoting a price for service, or when adjusting prices after certain problem customers are identified.

Disposal Variances

In the initial calculation, the disposal cost was almost 40 percent of the price charged for the service. This was based on the customer filling this container with “average” MSW that weighed 95 pounds per container yard. Many factors can affect that weight and the related disposal cost to a hauler.

Some customers to be wary of include restaurants, bars, and auto repair or glass shops. These customers tend to have very heavy waste — possibly as heavy as 130 pounds per container yard. A 4-yard container serviced once a week would have disposal costs of $45.21 per month — not the $33 mentioned above. Haulers should check with their drivers to see if they notice a heavy sigh of the hydraulics when lifting containers. To be profitable, this heavier customer would have to be charged more.

Another type of customer whose bill will not have an “average” cost has an oversized container to ensure there are no trash overflows. As a result, he may not fill the bin regularly and may average only 70 pounds per container yard. A customer like this will create an additional profit of $8.66 per month, based on the example above, because of the disposal savings.

It also is important to keep the potential effects of recycling programs in mind. If there is a good recycling program in a hauler's service area, the makeup of MSW collected could be significantly affected. For example, the bar that threw away a lot of heavy glass may now be a more attractive customer because all the glass is being diverted to the recycling stream and the remaining MSW is not as heavy.

Unusual Situations

Some customers will have special requirements, as well. This should not be a problem as long as the customer pays for the extra service and contributes to profitability. An example of such a requirement includes timed stops in which the account must be serviced at a specific time of day and requires the driver to significantly disrupt the flow of his route. Another example is if the customer requires a signature from one of its representatives on the service ticket before for the hauler gets paid. Be sure to add the extra time it takes to find the person to sign for the service. Other time-consuming situations include having to enter a narrow alley or perform special maneuvering to dump the container because of overhead restrictions, or opening and closing a gate. Also, if a customer is out of the way and it takes extra time to reach the location, make sure the price takes that into account.

When to Break the Rules

Sometimes a hauler cannot charge a customer the full cost of providing service, but it may still be a good business decision to service that account. For example, a new shopping mall may be opening in an area where a hauler currently does not service a lot of customers. Although it may take the hauler extra time to get to that first customer initially, it might be wise not to charge for the extra travel time because servicing that account may lead to more customers as the mall completes construction. As customer density improves, the cost of providing service will be reduced to the point that the first customer becomes profitable.

Evaluating Current Prices

Most solid waste billing/routing programs provide haulers with tools to evaluate the pricing of their services. Regardless of which program a hauler uses, they generally provide the same basic reports that allow a hauler to zero-in on problem routes and problem customers. Following are the more useful reports:

If a hauler has examined all the “bad” routes and corrected problems, keep going. Review the average routes for unusual situations. Then, review the good routes because even good routes have some bad individual customers. Make this a constant improvement process that includes drivers and dispatchers. Employees who have constant customer contact are a hauling firm's best source of information.

Using Scales

Scales can help to price accounts. Improvements in the technology have made it possible to weigh every container a hauler empties and record the weight by customer. This valuable information can help to identify customers with excessive disposal costs. This also adds credibility to a price increase because a hauling company can show the customer what he is throwing away.

Many companies will use scales only on one truck in their fleet and rotate that truck through the various routes to gather customer information. A solid waste service firm doesn't have to “do it all” to still gather meaningful information to manage its business better.

Consider the Customer

Every commercial customer is unique in terms of its location, type of waste disposed of and level of service. Yet even with the differences, a model of the cost of providing service for an average customer should be developed to ensure all costs are covered by the price the customer is paying. From this point, adjustments can be made to verify that each customer is paying an appropriate amount for the service he is receiving.

New technologies such as integrated billing/routing software and truck scales can be used to identify potentially unprofitable customers so appropriate adjustments can be made. Remember that commercial pricing is a constant assessment and re-evaluation process. When performed correctly, it can greatly improve profitability.

Jeff Adler is a senior financial consultant for The J&B Group, Farmingdale, N.J. E-mail: [email protected].

ALLOCATING VEHICLE & LABOR COSTS

There are two ways to allocate vehicle and labor costs — by container yards or by lifts. In the adjacent story, the costs have been allocated by lift (80 customers per day). The assumption is that it takes the same amount of time to service a 2-yard container as it does to service an 8-yard container. This is a straightforward method to allocate the costs of doing business.

However, costs also can be allocated by container yard. This is calculated by taking the total daily cost and dividing it by the number of container yards collected on the route that day to determine the cost per container yard for the vehicle and labor portion of total costs.

Some efforts have been made to try and separate the route day into several categories such as: travel time, on-route time, landfill time, approach time, service time, etc. These differentiations typically create confusion and do not help to create a better pricing model. — JA