Pricing in the less-than-truckload industry is evolving from annual RFPs and static tariffs to a more fluid approach, which includes dynamic pricing.
Historically, the industry has worked off base rates and in-house models to best account for trailer space occupied, time spent at pickup and delivery sites and handling costs on the docks. Risks like injury to drivers and costs stemming from potential cargo claims are also factored. Rates are generated based on assumptions and averages, often leaving both carriers incurring higher-than-expected costs and shippers disappointed when their freight gets repriced.
“This mismatch has for years caused LTL carriers to use various costing methods to somehow align cost with revenue,” according to Curtis Garrett, VP of pricing and carrier relations at Recon Logistics. “That alignment is held together by the ‘duct tape’ that is various tariff rules and upcharges.”
Pricing can be tough for shippers, which have to manage multiple carrier relationships in multiple regions. Carrier pricing fluctuates by lane and each carrier works off of their own schedules for base rates, discount rates and accesorials.
Dynamic pricing is a natural extension for an industry becoming more digitized. The amount of data captured on shipments throughout carrier networks in recent years has allowed a more nimble approach to setting rates, which can now be better tailored to shipment characteristics and a carrier’s capacity availability in real time.
Accurately pricing LTL freight now requires more than just ZIP codes, weights and freight classes.
“As carriers learn and quantify more about the freight they handle, they are putting to use the operational data captured from day-to-day activity,” Garrett said. “The impact to trailer space and loadability from capturing more dimensions and data on their own lane needs is based on live intel pulled from within their networks.”
Carriers can use dynamic pricing to adjust for lane imbalances and improve trailer utilization as most lanes don’t see the same amount of volume every day. The pricing model recalibrates to better price areas within a carrier’s network that are short on loads, allowing shippers and 3PLs to take advantage of soft spots or favorable pricing when a carrier is launching service in a new lane.
“Some carriers are starting to do dynamic pricing based on lane, others based on shipment dimensions, and more, based on shipment weight,” Garrett continued. “This will evolve into LTL pricing not being static and locked in for the dreaded annual rate increase. Instead, pricing will go up and down throughout the year based on market factors, carrier variables and shipper profiles.”
Many carriers already provide discounts for API connectivity. While the industry is still working off of contracts, dynamic pricing can augment current base rates, allowing shippers to sometimes see better-than-contracted rates while carriers continually adjust to cover costs.
A full transition to dynamic pricing may be tough for some large shippers to incorporate. National shippers like the certainty traditional contracts provide when planning transportation budgets. However, with both in place, a shipper can get a rate discount as spot dynamics improve without doing anything.
Garrett said some carriers are building out true dynamic platforms where they are trying to better match rates with operating costs. But some are using the influx of API quotes to pick off a piece of business or determine how far off they are priced.
“We are still in the early stages of dynamic LTL pricing — however it’s absolutely the direction that the industry needs to head,” Garrett said. “Many folks are working feverishly on driving this forward, experimenting and iterating.”
Click for more FreightWaves articles by Todd Maiden.
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