By Shawn Dearman, Regional Vice President, Business Development
Do they use dartboards? Pick numbers out of the air based on a potential customer’s size? Call upon mainframe computers to compile terabytes of data in top-secret formulae? Just what is this “dark art” behind how carriers set freight rates?
Having worked closely with literally thousands of carriers over the years, we here at DTA can tell you the method is far less mysterious than you might imagine. Not surprisingly, most modern-day carriers use the same formula your organization likely does in establishing its own pricing. In other words, it’s usually the “cost-plus” pricing model — that is, the costs of doing business plus a desired profit margin.
It really is that simple. At the same time, this pricing model can become tremendously complex and has an impact on your freight service. Just like your organization, carriers have seen the “cost” side of their equation increase while the “margin” side has continued to shrink. No carrier or other business likes to increase its rates or prices too often, so a carrier may take steps to either reduce costs (and possibly quality of service) or allow profit margins to erode (which can affect a carrier’s financial stability).
For this reason, it is important for freight services customers to understand how a carrier prices services. For example, while you may benefit from a carrier that hasn’t increased prices in years, you might also wonder how that carrier is coping with greater costs. Similarly, a customer might question a carrier that increases its rates significantly above others and wonder if there might be room for negotiation.
Generally, carrier rates are dictated by two cost categories. First, those outside their control, such as government-mandated increases to CPP, WSIB and other health benefit costs. No matter how efficiently they operate, a carrier cannot avoid these costs.
Second, there are costs “within their control.” In reality, though, some of these are not truly voluntary. Labour, fuel and maintenance costs, for example, are significant, but few carriers want to compromise on those at the expense of quality of service. In the near future, this will be even more apparent as carriers continue to struggle with a qualified driver shortage (the average driver age is 56+) and are forced to upgrade aging fleets that weren’t replaced during the recent recession.
The bottom line, if you will, is that both carriers and their customers would be wise to keep a close eye in the coming months on how freight rates are set and whether quality of service is at stake. To learn more about freight rates, please speak directly to your DTA Client Manager.
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