The number one question that we consistently get asked from both our shipper and carrier partners is “how did you price this lane?”. As much as we wish that pricing was a simple two-step process, there are numerous variables that help to determine full truckload rate calculations. In some instances, the type and amount of product affects the rate, however this is only when normal freight insurance is inadequate (typically for high-value cargo) or when the total weight is above 45,000 pounds (think construction or gym equipment). Now that we’ve reviewed what doesn’t affect pricing at a high level, let’s take a look at the most important factors we consider when determining rates.
1.) Mileage
Mileage 100% plays a role in determining total cost, however, you can’t really say that the longer the distance, the higher the price. Why is that? Although longer distances do incur higher charges because of the increased amount of fuel and driver time required, a larger city like Atlanta is less expensive to ship to vs. a less populous city like Glasgow, Montana (fun fact: this city is actually considered by geographers to be “the middle of nowhere USA”).
2.) State of the Freight Market
Using 2020 as an example, the freight market experienced a volatility never seen before due to the COVID-pandemic. This caused volumes to end the year at 42% above 2019 levels, leading to a significantly tight market and rate increases of 50%. This proves that prices are influenced by the state of the freight market and economic environment. If economic conditions remain favorable, rates are likely to be higher. However, if the economy slows, rates are likely to decrease.
3.) Seasonality
Seasonality is a major factor in helping us to forecast and plan for the entire year. As we all know, the transportation industry is heavily influenced by supply and demand (as explained above). Market conditions of course vary on a year-over-year basis, however, a consistent pattern is apparent each season. Logistics professionals commonly define four seasons in the freight industry:
- Quiet Season (January-March) – keep in mind that at this current time, the market is not experiencing a quiet season due to e-commerce returns and continued inventory restocking as online orders spiked significantly over the holiday season
- Produce Season (April-July)
- Peak Season (August-October)
- Holiday Season (November-December)
Because of these patterns, in a normal year, we would expect prices to be lower in the quiet season and then at their peak from April through December depending on the industry.
For more information on the impact of seasonality, download our guide here.
4.) Shipper of Choice Status
As driver retention, hours of service, and driver shortage continue to be some of the most prevalent issues facing the transportation industry, standing out as a shipper of choice ultimately helps to secure better rates and to develop carrier relationships that are the best fit for your supply chain. The more “driver friendly” your facility is, the more willing carriers are to deliver into/drop off at your facility (and will also likely charge less). Here’s a few quick points to keep in mind when we think of “shipper of choice” status:
- Use the “golden rule”. Treating drivers how you would want to be treated is easy.
- Have access to basic amenities. Add a driver lounge with restrooms, Wi-Fi, and vending machines.
- Provide options for parking. Overnight parking is a consistent pain point with drivers as they often have minimal options when they’re close to their HOS limit.
- Keep detention to a minimum. Time is money! The more time drivers are forced to spend loading/unloading, the less time they are able to spend on the road earning their living.
5.) Flexible Scheduling
Shippers with predictable load schedules, flexible appointment windows, FCFS availability, and 24/7 and/or weekend operations allows for drivers to maximize their time behind the wheel. For example, a carrier is more reluctant to offer a more reasonable rate if the delivery/pick-up occurs in the morning vs. late at night. It’s also much easier to secure capacity and plan an efficient route with the driver when a shipper avoids strict appointment times.
6.) Lead Time
The more time given to book and plan for an order, the lower the cost. When alerted as soon as possible about a shipment, more time can be allocated to shopping for the best rate vs. having to take the first price offered out of the need to book a carrier as quickly as possible. If you take a look at the chart below, you’ll see that the average rate drops for loads with lead times beyond five days, which is equivalent to a savings of $41 for each additional day of lead time between five and eleven days.
7.) Contract vs. Spot
Stemming off the topic of lead time, loads posted to the spot market tend to cost more. If you have lanes that run on a reoccurring basis, the most cost effective strategy is to work with your most trusted transportation partners to develop contract rates. Doing so allows brokers to have more buying power when negotiating pricing with their carrier base.
8.) Spot’s Proprietary Bid Tool
Numerous shippers send out bids to their logistics providers. In order to provide the most appropriate pricing when submitting bids, we created a proprietary tool that attributes an “opportunity score” to each lane. This score considers various characteristics, including mileage band and companywide headhaul/backhaul synergies over the past six months. This way we know know where we have an increased probability of being able to offer the best rate possible while providing high service levels.
How to Get the Best Pricing
As you can see, quite a few variables are considered when determining freight rates. To keep it simple, by providing your transportation partners with as much detail as possible and as early as possible, you will in turn recognize cost savings across your logistics operations.