Moore On Pricing: Teaching the next generation

In a meeting a few weeks ago with a small food manufacturing company, the new CEO pulled out a freight bill from a regional less-then-truckload (LTL) carrier and asked me to please explain why the freight bill had a charge of nearly $1,500 discounted by 87%.

“How does that work?” she asked. “What is the rate based on and is 87% a good discount?” Upon review, we also noticed accessorial charges including a fuel surcharge. We proceeded to gather several of her managers together and hold an impromptu seminar on classifications, tariff rates, discounts and accessorials.

Beginning with classifications, we discussed their product, its value, handling characteristics, packaging and risk profile. Then we determined density by measuring and weighing the company’s packages—fortunately less than 10 SKUs. The result would give us one of 18 “classes.”

I explained that most packaged products have been classified and listed in the National Motor Freight Classification (NMFC). We then put this together with origin and destination zip codes and type of service to determine the rate in a carrier tariff rate table.

At this point, these new shippers noted that classifications are really averages for everything except weight and distance. I then explained that weights are in ranges in weight breaks, as are zip code-based distances, so these are really averages too. We then looked at the freight bill and tied our discussion to their $1,500 base rate.

The team then wanted to learn how they earned this sizeable discount, and whether or not it was a fair amount. Well, that took some more explaining about tariff associations—formerly bureaus—and the subscription rate tables that carriers use rather than building their own rate models.

These shared tables have been increasing prices at a rate well above inflation, so discount percentages have become ridiculous. I noted that there are discounts over 90% for large shippers and freight brokers who pool multiple shippers’ freight volumes. For example, a shipper with an 87% discount off of $1,500 is paying $195, and if they received an 88% discount they would pay $180, or 7.6% less—not just 1% less as a novice shipper might expect.

We talked about the fact that bigger discounts in freight meant bigger discounts in fuel surcharges. However, this did apply to minimums and accessorial charges like waiting time and weighing and inspection. These were fixed charges published as a part of a carrier rules tariff.

Following my impromptu seminar, the vice president of operations summed it up best: “Wow, that’s complicated…and all that just to move a few cases?” I explained that, today, this system is being challenged by new pricing models such as “density pricing,” but these still average most of the cost and service factors.

The real answer will come from more sophisticated pricing models that allow the shipper and carrier to adjust for all of the classification elements as well as day of shipment and even time of day. Needless to say, this would eliminate base rates and 90% discounts as well as fuel surcharges and accessorials resulting in a single rate for each shipment. Of course, this would all require the use of a transportation management system and detailed negotiations with a willing carrier.

In the meantime, we’re exploring options, including a shipper-drafted contract that has protections from carrier rules-tariff surprises and a simple product-specific pricing model. As Dr. Karl Manrodt, a professor of logistics and a contributor to Logistics Management, recently told me: “It takes work to learn how to be a smart freight buyer.”