Back in 1995, I was a new landfill sales manager trying, with two of my peers, to solve the problem of growing our business while increasing our margins. We talked through several standard ideas on how to do this before stumbling upon what we felt was a revolutionary method of disposal pricing.
It started with turning the concept of what a landfill is on its head. Traditionally, the landfilling of waste has been considered a service, somewhat intangible to the average person. We realized that in constructing landfills, we were actually manufacturing airspace. Compare it to coal mining. When you extract a ton of coal, you have a ton to sell. Determining the size of the coalfield reveals the amount of coal that you will be able to sell. Conversely, landfills create empty space and then fill it. Like Hotel California, material checks in, but it never leaves.
Thus, landfill operators attempt to maximize cubic yards of airspace through waste mixture, effective compaction and minimal cover. Airspace is their tangible product.
The landfill business has traditionally treated most waste streams as identical. A ton of feathers is the same as a ton of bricks. Weigh the material, put it into the landfill and compact it. Some wastes were priced based on the amount of handling involved, such as the digging required to immediately cover asbestos or the mixing of sludge into other wastes to ensure landfill stability.
"Yardage is for Suckers"
Do we charge by the ton or by the yard? Before the widespread use of truck scales, the industry was built around charging based upon the size of the load. This is volume-based pricing. Because it is based on the total volume of a truck or the volume of the material in a truck, pricing is subject to interpretation and estimation by the scale operator. Some companies have dealt with this by imposing minimums and vehicle capacity charges, which come with drawbacks:
Charging for a full truck when it is only half full creates ill will with your customers.
Scale personnel tend to underestimate volume to avoid dealing with angry customers.
Customers attempt to exceed the capacity of their vehicle by "mounding" waste.
Customers direct heavy, bulky loads to your site in an attempt to avoid paying tonnage rates.
In short, everyone loses when you charge by the yard.
Charging by the ton with minimum tonnages eliminates this problem. The customer weighs in and then weighs out. They get charged for what they had in their vehicle. To ensure that they are not bringing you the âfeathers,â you charge the minimum tonnage to ensure that you earn enough to cover your costs plus some profit.
This system works for almost every landfill including those that accept friable asbestos, drums and liquid wastes for solidification. The customer knows exactly what they brought and are charged for that. The scale staff is limited to charging the price and minimums set for that customer or the gate rates for customers without a set rate.
New Pricing Framework
So back to those three young men: We determined that our widget was a cubic yard of airspace somewhere in the expanse of the landfill. If we charged by the ton, then we needed to get as many tons into that space at the highest price per ton. Thus, we realized that we needed to build our pricing around the density of the material.
A ton of soil (2,800 pounds per cubic yard or #/yd) uses much less airspace than MSW (1,000 pounds per cubic yard). I can fit much more than MSW into my cubic yards of airspace. Sludge, when properly mixed with MSW, uses little or no additional airspace. Asbestos comes in two flavors: friable, which is extremely light and has higher handling costs, or non-friable, which still has handling costs, but is usually extremely dense. In summary, the type and quantity of waste you take in can dramatically affect the use of airspace.
We wanted to build our pricing around the actual costs associated with the material being disposed. This system allowed for more competitive pricing for more desirable materials, as well as reasonable pricing for bulkier materials. Thus, we laid out a framework for density-based pricing.
A few key pieces of data are required for this program to work. These pieces of information are crucial to understanding how you are making money, so if you don't have them get them.
Fixed costs per ton: This is the cost per ton to construct the landfill and any other per-ton costs that never vary due to volume. This includes construction costs, per-ton taxes and any royalties or host fees that are charged on a per-ton basis. This is usually calculated by determining the cost for buildings and other items that do not vary per ton, plus construction costs, plus prorated closure costs, and dividing that sum by the airspace remaining in the landfill. Remaining capacity calculation is a long and involved process, and I recommend working with a landfill operations specialist to put in place a program for regularly quantifying this.
Variable costs per ton: These costs increase and decrease based upon the volume being brought into the landfill. This includes equipment, labor and other consumable items, which must be spread across the tons coming into the landfill. This cost usually decreases based upon an increase in volume, with the exception of adding additional equipment and labor when the volume exceeds the capacity of the current levels of these items.
Compaction Ratio (aka Airspace Utilization): This is the measurement of tons per cubic yard. This is the total tons delivered to the facility since it opened, divided by the total cubic yards of airspace consumed during that same period. It is usually represented in decimal format.
1,600 pounds per cubic yard = .8 compaction
2,800 pounds per cubic yard = 1.4 compaction
These three items can calculate your average cost per ton, based upon your average volumes and compaction ratios.
A = Average cost per cubic yard
F = Fixed cost per ton
V = Variable cost per ton
C = Compaction Ratio
A = (F + V) / C
A = ($5.00 + $3.00) / (.8) = $10.00 per compacted cubic yard
The next step is calculating the cost of the material being disposed. Again, a ton of feathers uses up a lot more airspace than a ton of bricks. (I would use lead, as in the original riddle, but the environmental compliance people would be too hung up on what treatment methodology I used to stabilize the lead for disposal.) So I need to know the density of the feathers and bricks when I run over them with the compactor in the landfill. This would be generally measured in pounds. For purposes of this example I will estimate the compacted pounds per cubic yard as 500 for the feathers and 3,000 for the bricks.
Next, we must calculate the amount of material needed to cover the disposed materials. In the case of the feathers, it would be about 50 percent of the delivered waste; in the case of the bricks it would be about 10 percent. Adding in the cover is where it gets tricky.
So in the case of the feathers, my density is now half of what it was due to the large amount of cover necessary to keep the feathers from flying around and allowing vehicles to drive over them without falling into the void. Think of how the feathers compact when you lay your head on a pillow. While it is easy to lift your head out of that impression, a 40-ton truck in a scale situation might have a harder time.
Here is the equation for calculating the adjusted density of the waste material:
D = Density of compacted material
C = percentage of cover material
M = Adjusted density
M = D - (DÃC)
M = 500 - (500 Ã .5) = 250 pounds per cubic yard
We are now able to calculate our price per ton based upon density. This takes the equation we used to determine our average price and adjusts for the material being disposed.
T = Adjusted cost per ton
T = F + VCM
T= (2,000 Ã A) / M
T= (2,000 Ã 10) / 250 = $80.00/ton
Margin is the last part of this process. Aside from publicly operated facilities, which usually operate at cost, the majority of landfills strive to turn a profit. The operator calculates profit based upon desired return on investment and other factors. For purposes of this example we will use a gross margin of 50 percent.
To calculate the sell price, divide your cost by the cost percentage of your margin.
P = Profit Margin (aka Gross Margin)
S = Sell Price
S = T / (1 - P)
S = $80.00 / (1 - .5) = $160.00 per ton
So in this example, the price per ton would be $160.00 at a gross margin of 50 percent.
While this methodology maximizes profit per cubic yard of airspace, calculating this for each waste stream and corresponding profit margin takes some time. Building a spreadsheet is a good idea.
A premade spreadsheet that uses the above methodology to quickly develop a pricing matrix is included here. (Click to download the Excel spreadsheet now.)
Pricing on a per ton basis, even for liquids, allows for a consistent, measurable basis of evaluating the material being delivered to the landfill. Tonnage costing and pricing more accurately reflect the costs of disposing of the material.
Transitioning over to this system takes some employee training and customer follow-up to ensure sure both parties understand the value that this pricing structure represents. Once implemented, pricing should be evaluated on a semi-annual basis to account for fluctuations in the types of waste being received and the actual remaining life and costs of the landfill.
Glen Wilkinson has almost 20 years of waste industry experience in both the collection and post-collection sides of the business. He currently resides in the Seacoast of New Hampshire where he works, develops web applications and writes short stories for his blog, TouchingTheStove.com.