Anyone who has booked an airline ticket online has interacted with a model known as “dynamic pricing.” Put simply, it’s the process by which airlines adjust fares, often on a moment’s notice, to reflect real-time changes in supply-and-demand conditions.
The less-than-truckload industry, hardly a first mover in information technology, is slowly but inexorably moving in that direction as well. For LTL, the shift is a big deal.
For generations, LTL pricing has been a static phenomenon. It has taken two forms: One is direct base rate pricing typically between large shippers and their carriers. The other is what is called “blanket” pricing, in which carriers load pricing matrices into third-party logistics providers’ TMSs. Those prices are then offered to small-to-midsize businesses (SMBs) that engage with carriers through their 3PL provider partners. Both models reflect pricing schemes that don’t change frequently.
Each LTL carrier is “somewhere along the plane in getting” to dynamic pricing, said Scooter Sayers, who runs an LTL consulting firm and spent decades as a pricing executive at ABF Freight System Inc., the LTL unit of ArcBest Corp. (NASDAQ: ARCB).
Sayers’ old employer is probably the furthest along the road, he said. ABF uses what Sayers called a “profile-based” program in transactional relationships with its 3PL partners. This means that the carrier sets its prices based on the freight’s characteristics, such as weight, dimensions, the number of pieces and packaging.
It also means there is no need to rely on the age-old formula that determines rates based on one of 18 product classifications, according to Sayers. In use since the 1930s, the classification model has long been a source of disagreement and contention over what class should be assigned a specific product.
ABF typically sets a seven-day window for pricing changes, according to Sayers. At this point, LTL technology is not capable of adjusting rates any quicker than that, he added.
Dynamic pricing is an idea whose time has very much come, according to C. Thomas Barnes, chief revenue officer of transportation technology platform MyCarrier and a longtime LTL executive. The static pricing model keeps shippers in control, Barnes said. Shippers typically had negotiating leverage and rarely had to worry about pricing disruptions, because the rates effectively stayed the same for long periods. Carriers never had the ability to move pricing up and down based on the shipment’s profile and the carriers’ network needs.
With dynamic pricing, rates would be set based on the unique profile of each customer, and not based on an arcane classification model that would often give shippers the upper hand.
As a result, big shippers hate dynamic pricing because it forces them to cede control of the relationship, Barnes said.
“Most carriers are closer than ever” to attaining a dynamic pricing model, Barnes said.
The core element of dynamic pricing is that carriers should be fairly compensated for the cost of transporting a properly sized and weighted shipment that occupies a specific amount of freight aboard a trailer, based upon the service requirements of the pick-up and the address of the delivery location. Though some big shippers might resist the change from the status quo, the ability to give their carriers more granular shipment information will incent carriers to give them their best pricing packages because it will help the carriers cost out their operations more accurately and eliminate invoice surprises, Sayers said.
Not everyone is convinced that dynamic pricing is the potential boon that some think it is. “We see some challenges with dynamic pricing for both the shipper and the carrier,” said Todd Polen, vice president of pricing for Old Dominion Freight Line Inc. (NASDAQ: ODFL). “First, because of the rise of ‘appointment’ freight, dynamic pricing rarely works optimally as the consignee may dictate the delivery terms.” Appointment freight is defined as the shipper and receiver agreeing that goods should arrive at their destination at a specific date and time.
“Second, we don’t feel like [dynamic pricing] accomplishes the intended goal,” Polen said. “If a customer does not ship the day you want them to, it could cause conflict later about the agreement you had in place. Then it’s hard to determine who is at fault: the carrier or the shipper?”
A superior alternative, Polen said, is Old Dominion’s One Rate One Time pilot program. Polen said the program is the “future of LTL pricing because it captures upfront address verification and the necessary information to provide an accurate quote — weight, dimensions and destination.”
Lance Healy, vice president, LTL innovations for IT firm Optym, said that “only a few carriers have invested in true dynamic pricing,” with deep rating and billing connections enabled by application programming interface (API) technology “that enables them to move [their] pricing up and down on client-specific accounts, regardless of their base rates.”
“All the carriers want to get there, but it will take some time to get that project bubbled up to the top, Healy said.
“Many carriers offering ‘dynamic pricing’ today are merely lumping a lot of clients — typically SMBs and 3PLs — onto a single tariff and just moving that tariff up or down en masse, said Healy. “It’s a watered-down version but allows them to make some adjustments for network needs.”
“The whole promise of dynamic pricing is to use pricing as another tool to proactively influence what enters the network and from whom,” said Healy. “When better shipper behavior translates directly and immediately to pricing incentives, then change will occur.”
Dynamic pricing works for shippers in that it exposes the behaviors of a few bad shipper locations, and can address those concerns so the carrier can be properly compensated without affecting the rates of the entire contract, Healy said.
Dynamic pricing “will be an evolution, and those that prioritize its advancement will have more agility to address market changes and incentivize customer behavior changes,” he said.