Hauler, Know Thyself

Ted W. Fenn

In Today's Rapidly Changing Economy, Accurate Commercial pricing is more important than ever. To be successful, a commercial collection company needs to understand the various components of its pricing model and what may impact those components.

This article describes pricing for front-loader trucks used to collect a mixture of municipal solid waste (MSW) in various container sizes. It will show how a hypothetical commercial collection company arrives at standard monthly charges for its service, depending on the size and number of containers, and frequency of service.

Know Your Operation

Before a company can begin to price commercial collection service, it needs to measure its past performance, which comes from the company's route sheets. Measurements can be tracked over any timeframe, but the best measure is the last three months. That should account for fluctuations due to weather, changing traffic patterns and other factors.

The first measurement is minutes per stop. The driver's total hours multiplied by 60 and then divided by the number of stops serviced will yield the average minutes per stop. A stop may include servicing two or more containers.

The next measurement is pounds per container yard. This is measured by dividing the number of tons disposed by 2,000 (the number of pounds in a ton) and then dividing by the container yards picked up.

Consider the following example: A driver might work a 10-hour day, servicing 104 containers at 100 stops (four of the stops had two containers each) and make two disposal trips, one carrying 17 tons and another carrying 18 tons. For this example, his volume picked up might have been 679 container yards. Using the calculations above, the minutes would average 6 minutes per stop and 103 pounds per container yard.

Know Your Costs

There are direct and indirect costs for commercial collection, such as the costs of owning and operating vehicles, purchasing and maintaining containers, disposing of waste, supervising, billing and accounting. To accurately price its commercial service, a hauler needs to have good financial records.

There are many different ways to present expenses on financial statements. But to develop a good price model, a commercial collection company only needs to segregate its costs into three categories: disposal costs, container expenses and total truck costs.

Disposal costs are the total amounts charged by whatever disposal sites the company uses to dispose of commercial MSW. Typically, a disposal site will bill a hauler for the number of tons the firm disposes of at the site.

Container costs include the depreciation of the containers purchased and all of the expenses related to maintenance and delivery. Maintenance and delivery expenses cover parts, paint, welding supplies, labor and the operating costs of container delivery vehicles.

Total truck costs include operating expenses, truck depreciation, supervision, billing, accounting, administration, insurance, driver labor and mechanic labor. Although many of these costs are not directly related to the commercial collection service, they are a part of providing the total service and need to be recovered as part of the price charged to the customers.

Know Your Return

How much do you want to make? The most consistent result is attained when a company decides what percentage return it wants to achieve from its investment. Multiply that capital investment by the percentage, then divide by 12 to determine the amount of monthly profit needed.

If a company wants to achieve a 15 percent return on its investment, and it has invested $500,000 in trucks and $720,000 in containers, then it needs $6,250 in monthly profit from the service part of the price model and an additional $9,000 in monthly profit from the container portion of the model to do so.

However, a company calculating the profit needed to achieve its return should use the replacement costs for its assets. Its pricing model will more accurately reflect the price needed to keep, maintain and replace equipment.

Know Your Pricing Model

There are three parts to a pricing model: containers, service and disposal. The container factor is a calculation based on the container replacement cost, and a percentage derived from knowing your container costs and your return.

The container cost comes from dividing a firm's historical container cost (annualized if they represent a period less than one year) by the investment in containers. If the annual container cost is $45,000, and the investment in containers is $720,000, then the annual container factor is 6 percent. When that is added to the annual return of 15 percent, the total annual container factor is 21 percent, or a monthly container factor of 1.75 percent. Therefore, a customer who has a 6-yard container with a $600 replacement cost should be billed at least $10.50 per month for the container alone.

The truck portion of the pricing model is based on several calculations. First, the replacement cost is multiplied by the desired return rate. That number is then divided by 12 to get the monthly amount needed to generate the desired return. Next, the monthly truck costs are added, and that sum is divided by the driver hours per month in order to calculate the truck costs per driver hour. After that, the truck costs per driver hour are divided by 60 to find the costs per minute, and that number is multiplied by the minutes per stop to determine the revenue needed for each service stop. Finally, the revenue needed for each stop is multiplied by 4.33 (average weeks in a month) and then by the number of times each week the site is serviced.

Using this formula, a commercial collection company with an average minutes per stop of 6 minutes, 650 driver hours per month, total truck costs of $97,500 per month, a replacement cost of $600,000 for the trucks and a desired return rate of 15 percent would need to bill $69.95 per month for a stop that is serviced once per week.

Disposal cost is a calculation of the average pounds per container yard multiplied first by the size of the container and then by the frequency of service. That number is then multiplied by 4.33 (for weeks per month) and then the applicable disposal site rate before being divided by 2,000 (the number of pounds in a ton). If our hypothetical commercial collection company is in a market where the average disposal rate is $40 per ton, it would need to bill $53.52 for a 6-yard container serviced once per week.

By bringing the various components of the pricing model together and calculating the price for different frequencies, a hauler can produce a price sheet for different container sizes and frequencies. Using the above financials, monthly billing rates for a 6-yard container are outlined in Figure 1.

Know Your Customer

Every commercial customer is unique in terms of space available, types of waste streams, special schedules, security and other factors. One price does not fit all customers, so the pricing model can be adapted for individual customers.

Customers that have space for additional containers can improve by adding containers instead of increasing the frequency of their service. Many companies count additional containers at the same stop as “half-stops” since the driver doesn't have to drive to a different location. A location with two containers would be counted as 1.5 stops for the purpose of pricing.

Using the above price sheet for a 6-yard container, a customer would be billed $257.43 per month for a 6-yard container serviced twice per week. However, if the service frequency remained once per week and the customer got a second 6-yard container, then the customer's price would be $232.97 per month (see Figure 2 below).

Similarly, adjustments can be made for enclosures, locked containers, containers on casters that have to be rolled out, or other customer requirements that increase the time needed to service an account.

Another consideration is the weight of certain waste streams. Restaurant waste tends to be heavier than other kinds. Therefore, the disposal component of the price should be increased to account for the increased weight.

Know Your Results

A price model is only as good as the last time it was reviewed. A commercial collection company should review and adjust its price model at least every quarter, possibly more often if the market has changed due to disposal increases, fuel costs, contract bids, or even if the company purchases new equipment.

Ted W. Fenn is an independent financial consultant who primarily serves customers in the solid waste industry. He can be reached at [email protected].

COMMERCIAL ACCOUNT TERMS

Minutes per stop - total driver hours multiplied by 60 minutes, divided by the number of stops serviced.

Pounds per container yard - number of tons disposed divided by 2,000 pounds, divided by the total of container yards picked up.

Monthly desired return - asset replacement costs multiplied by the rate of return desired divided by 12 months.

Annual container factor - historical annual container expenses divided by the investment in containers plus the desired rate of return.

Container component of the monthly standard charge - replacement cost of the container multiplied by the annual container factor divided by 12 months.

Truck component of the monthly standard charge - monthly truck costs plus the replacement cost multiplied by the desired rate of return divided by 12 months, divided by the monthly driver hours, divided by 60 minutes, multiplied by minutes per stop, multiplied by the frequency of weekly service, multiplied by 4.33 weeks.

Disposal component of the monthly standard charge - average pounds per container multiplied by the container size (in yards), multiplied by the frequency of weekly service, multiplied by 4.33 weeks, multiplied by the disposal rate, divided by 2,000 pounds.
— TWF