Payment Terms

Smarter Pricing and Buying: The Changing Nature of the LTL Pricing Landscape

The past two years of LTL pricing have made headlines for volatility, astronomical ancillary surcharges, service center expansion, business closures, and M&A activity. Not surprisingly, what somehow got lost in these high profile stories is that LTL carriers have introduced and are moving more aggressively towards dynamic pricing models. There are benefits and challenges for carriers, shippers, and third-party logistics providers (3PLs). As each party understands the challenges and, above all, the opportunities, it is easy to recognize how to create a win-win partnership.

I designed a dynamic pricing process in 2012, patented a process in 2017, and launched two different solutions: one for shippers and one integrated with LTL carriers. I will share shipper and carrier perceptions as well as benefits and strategies for success. Other traders have launched very effective strategies that may differ from what I describe, so please engage with your favorite traders to open the conversations.

Current state: the good, the bad and the average

There are constant changes, both in demand from shippers and 3PLs. They add and lose customers and change the product line and locations. On the other hand, the networks of LTL carriers reflect these variables multiplied by the number of customers. I use these crudely simplified examples to highlight some of the complex variables involved in managing LTL networks. Every variable must be considered to meet customer expectations in a cost-effective manner while distributing dock staff, equipment and drivers across hundreds of service centers every day. Profit is determined by the carrier’s ability to predict most accurately and respond most quickly and efficiently. The software streamlines processes, but in-depth knowledge of a company’s operations and a true artistry of LTL pricing are essential.

Shippers have traditionally entered into annual contracts based on a previous year of average price discount. This is what most of us in the industry have known throughout our careers. Some companies still load static tables and even use routing guides. This is a forum that I will save for another time. The annual price agreement was partly intended so that transport managers could produce a budget estimate for the year. This has been effective with static distribution channels through a few distribution centers and physical stores with predictable demand and seasonal adjustments. This world has changed dramatically with omnichannel strategies such as buy online and collect in store (BOPIS), distributed order management (DOM), home delivery, and hundreds of new micro-warehouses.

Carriers benefit from known static volumes in their network planning, especially large shippers deploying the aforementioned routing guides. The flip side is that annual contracts don’t allow for easy or quick price changes. Risk translates into price padding. Current annual static pricing agreements pay little attention to nuances that impact profitability, such as accessory requirements, dwell times, payment history, pickup, delivery density, and more. Each factor is considered annually as an average factor, but not in individual quotes where it is needed most.

Shippers can also lose out on annual static prices. Because carrier performance is averaged across shippers’ freight, a few bad apples can result in higher prices for all customers or void contracts.

In an ever-changing world, averages have reigned supreme not because it’s best practice. The averages persisted because it was the best we as an industry could do with the tools available.

The sky does not fall

There are changes in behaviors and processes to effectively adopt dynamic pricing. I’ve heard shippers and 3PLs say, “The carriers are just going to raise our rates.” I’ve also heard from carrier pricing executives: “It’s going to be a race to the bottom.” It’s easy to dismiss the concept by imagining the worst, but nothing is true.

Carriers must remain competitive, but they must also be paid for the services rendered and priced according to the specific needs of the shipment. A typical scenario is when a carrier expects a 12-minute delivery, but a shipper’s customer has 45 minutes of downtime. Not only would this compromise the punctuality of all other deliveries the driver has to make, but it also limits the pick-ups he can make that afternoon. While this detention may not be long enough to warrant a detention charge, it will factor into the annual awards discussions. It is likely that the sender is unaware of these events.

This information can be relayed to the shipper, and with dynamic pricing, only that location would be affected by a rate increase over the entire contract. If behavior improves, so do rates.

I’ve also heard time and time again from shippers and carriers: “We’ll never be able to reconcile rates if they’re dynamic, and the traditional audit process will be useless.

There are simple modifications to current practices. Dynamic adjustments live within the carrier’s existing quote engine. A base rate, discount, fuel surcharge, and account-specific accessories are calculated alongside the shipping details qualifying for an adjustment. If the shipment is eligible for an adjustment, it is added to the account-specific quote. Carriers can use a one-time quote number to reconcile billing, but this strategy typically results in an increase in back-office manual work. The most efficient path allows the carrier’s billing department to recall active adjustments for that day, which are part of the billing and corrections process. Changes are published once a day.

Shippers on a dynamic rate can save money on audits and checking if the selected quote matches the invoice. Traditional listeners can’t keep pace with carrier rate changes with loaded static contracts.

Benefits of dynamic pricing

Carriers

• Proactively influence what enters your network and from whom.

• Attract freight from targeted customers and locations that meet operational needs.

• Direct Opportunity Points.

• Fill voids or partial voids.

• Save time by adjusting rates for multiple customers at once.

• Test new tariffs quickly and easily.

• React instantly to weather or infrastructure events.

• Encourage increased loading density when picking up or delivering.

• Drive customer behaviors with specific metrics to improve pricing.

• Get insights and feedback on the performance of adjustments.

• Reduce the need for annual tenders and GRIs with monthly adjustments.

Senders:

• The shipper of your choice can directly result in discounted rates.

• Improve working relationships with LTL carriers.

• Protect your rates by identifying and addressing specific issues with carriers.

• Be eligible for discounts on top of your contracted rates.

• Replace annual tenders with monthly conversations and recover 2-3 months of negotiations.

• Eliminate the need for GRI and material price changes.

Pro tips for engaging dynamic pricing

The general theme is to be accurate, honest and transparent. Be curious about how your client’s or partner’s needs overlap with yours.

This is new to much of the LTL market. Make it easy for yourself by starting with an existing agreement and initially only applying discounts for a few billing cycles to eliminate any process issues. Open it to specific increases based on KPIs and data-driven metrics.

Carriers

• Monthly conversations with shippers.

• Define and communicate shipper expectations.

• Not just committed volumes, but measurable operational KPIs.

• Waiting time, payment terms, data accuracy, etc.

• Know where more or less freight is needed.

• Share recent network changes.

Senders/3PL

• Access carrier APIs for pricing and bidding.

• Monthly conversations with carriers.

• Ask which lanes are not working well and where do they want more freight.

• Share changes in your network.

• Share service issues and other concerns (may find this is not a solid route for this carrier), ask them to raise this fare, and consider lowering the fare to other routes that are more suitable.

• Share your total number of shipments tendered to all carriers. Be specific about the details.

An increase in agility

Dynamic pricing is not intended to replace all current pricing methodologies, but it can provide better results for shippers and carriers if used effectively. Dynamic pricing is an increase in agility that can be data-driven to match the right shippers to the carrier’s operational needs. It opens up detailed, more frequent conversations that can eliminate time-consuming RFPs and difficult GRIs. The nature of LTL is constantly changing. Embrace it and allow your relationships to thrive in it.

Lance Healy is Vice President of LTL Innovations at Optym, a supplier of an optimization software company for the transportation industry.