I started working for a truckload carrier in 1995. I’ve been quoting truckload rates for 24 years. In all of the things that I have done in truckload transportation, from sales, to operations, to now owning our own business the past six years, I enjoy quoting truckload rates most. Quoting truckload rates is also most company’s greatest weakness. Unless computers have taken over truckload pricing and I’m not yet aware of it. Which is why I am writing this primer. This is designed to be used by both asset-based carriers and by freight brokers. I am now taking a hands-on approach with our staff here on how to price truckload freight.
Let’s start with the basics. Why is it important to know how to quote truckload rates?
Many shippers, particularly the larger shippers, do an annual bid of their truckload business where they ask you to quote rates for them that will be good for the coming year. These are called contract rates and they make up the majority of truckload rates. Spot rates are also a form of rate within the truckload industry, but spot rates make up a much smaller percentage of total rates. Think of it like the 80/20 rule. Eighty percent of truckload rates are contract rates and twenty percent are spot rates. Spot rates generally cover those lanes that have lower volume, sporadic volume, or when a contract rate carrier drops a load and the shipper has to go to the spot market in order to recover it.
From my perspective, the most significant difference between a contract rate and a spot rate is that as the list of things below happens, contract carriers maintain rates and spot market rates change, and sometimes change significantly, both up and down. Some shippers will take advantage and move between contract and spot rates. Others will honor rate agreements.
A contract rate is much more difficult to calculate than a spot rate simply because of the time that the rate will be in place. A contract rate will typically last a year. A spot rate is typically a one-time rate.
Think about all of the things that will take place over the course of a year that will influence your contract rate. The possibilities are endless. Here are a few that I came up with without even trying:
- The Economy
- Diesel Prices
- Availability of Drivers
- Balance of freight
- Shipment Weight
- Revenue Per Day
- Loading and Unloading Times
- Type of Equipment Required
Where to begin? Establishing Costs
If you are an asset-based carrier, you first need to know your costs. If you’re a broker, and have no assets, then your costs will vary depending on the carrier you use and what their main motivation is.
There are lots of sources to tell you about what it costs to operate a truck. Here are a few:
Transport Topics says $1.69 per mile in an article published in 2017. That’s up from $1.59 per mile in 2016.
The Truckers Report shows it costs $1.38 per mile plus driver’s wages. Several other firms agree with the $1.38 per mile.
DAT ran an article about a year ago where Chad Boblett, owner of Boblett Brothers Trucking indicated the rate was $1.31 per mile plus drivers’ wages.
Once you know what your costs are, then you can calculate what profit margin you want to operate at in order to come up with your competitive contract or spot market quote. If you are quoting as a broker, you’ll need to add your margin into the calculation.
What if you don’t have trucks and you really don’t know what your costs are? Some brokers will use a load board, like DAT or Truckstop, in order to see that the price should be for a particular lane. Here’s an example of a DAT rate from Billings MT to Great Falls MT:
Keep in mind that the vast majority of trucking companies in the U.S. do not have a DAT or Truckstop subscription. Generally, DAT or Truckstop is used to quote the one-time spot rate. I’ve found that if you quote based on your costs, and not based on what DAT or Truckstop says, you’ll win more business. DAT rates and balance are also easily manipulated by truckers who do not post their trucks, but are located in the market. Think about that.
Things You Can’t Control
Weather – Flooding, hurricanes, other natural disasters and even winter weather wreak havoc on what trucking companies will and will not do. Flooding in 2019 was a disaster for farmers and agriculture companies. In 2017 it was Hurricanes Harvey, Irma and Maria that sent the entire trucking economy into a whirlwind like we’d never experienced.
Weather not only affects the areas it hits, but it also affects other areas as well. Trucks that would normally go to Florida don’t go there after a hurricane. Instead, they go somewhere else which saturates that market with more trucks than they would normally have. This, then, impacts truckload rates both inbound and outbound.
Elections – National elections impact business, especially if there appears to be a change from Republican (known more for being pro-business) to a Democrat (known more for being anti-business) or vis versa. If there is a Republican incumbent that looks like they will lose to an opposing Democrat, business will accelerate plans. Likewise, if there is an incumbent Democrat that appears to be losing to an opposing Republican, business will delay plans until a more friendly legislative environment exists. While the affect may be minimal, elections do influence the U.S. economy. Watch in 2020 and see what happens.
Seasonality – Ah, this is a big one. The seasonality of so many different products impacts truckload rates greatly. Let’s start with the biggest of the seasonal products: Produce.
Produce season starts in the southern United States as early as March and gradually moves north. Coyote has an excellent produce map they produce each year. It looks like this:
Item like corn and plants, onions and fruits begin being harvested at the end of the first quarter and into the second quarter. Items grown in Mexico begin crossing the border at Brownsville TX, McAllen TX and Laredo TX. This starts the rate surges in the refrigerated market that can increase prices anywhere from 15-30%. This does not only apply to refrigerated carriers. Think about it. A reefer carrier going to the Texas – Mexico border hauls whatever they can, including dry freight, until produce starts moving. Then they abandon the freight they were hauling to cover the higher paying produce loads. This then increases prices even on non-produce commodities because produce season has started.
Keep in mind though that weather can make the start of the season, or even the length of the season very unpredictable. A late freeze or early hurricane in Florida can all but erase an entire produce season.
The largest produce region, California, generally starts shipping in April or May with strawberries being one of the first commodities. By May and June and peaking in July, the west coast is a hotbed of activity where rates increase substantially. Most known produce carriers will not negotiate on a year-round rate for produce any later than about March. Choosing instead to provide trucks to the higher priced seasonal spot market instead. Once the season is over, the negotiations begin again. Three states, California, Arizona, and Florida accounted for 76% of the U.S. vegetable production in 2017 according to the USDA. And that doesn’t take into consideration what crossed the border from Mexico. Keep in mind though that again, weather, like an El Nino year, impacts California produce.
As summer moves on, the Midwest farmers crops begin to be harvested and your local fruits and vegetables begin to become available. Grocery store chains love to feature “locally grown” produce in their stores at this time of year. This again changes shipping patterns and as shipping patterns change, rates do also.
It’s not just produce season though that impacts seasonality.
To see if you’re still paying attention, how about this one. Did you ever think about the year end, and quarter ends, of your customers? For years we loved hauling Hewlett-Packard freight because their year-end was January 31st! That meant their quarter ends were April, July and October. They never conflicted with our other customers and they kept us very busy at a month end where most were not. Those large public companies don’t all have a calendar year-end!
Let’s look at some other commodities as well.
While not a major business holiday, did you know that 4% of the candy consumption in the U.S. happens at Halloween? That’s a season spike.
Christmas shopping isn’t the only part of Christmas that’s seasonal. Think of all the Christmas trees that are grown and shipped so your local non-profit can make some extra money.
Everything from pumpkins to swimming pool chemicals to lawn and garden supplies are seasonal and impact truckload rates to some extent in many areas.
The policies of our government have much to do with our economy. Have Trump’s Chinese tariffs affected you or your business? Pretty likely they have whether you know it or not. One thing I’ve learned to watch over my career is the 10-year U.S. Treasury yield. The 10-year yield is used as a proxy for mortgage rates, and other measures; it’s also seen as a sign of investor sentiment about the economy. A rising yield indicates falling rates and falling demand for Treasury bonds, which means investors would rather put their money in higher risk, higher reward investments; a falling yield suggests the opposite. If you don’t pay attention to it, do some research. I think you’ll start.
Is there any question that major holiday’s send rates skyrocketing in the spot market? Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas all cause truck rates to increase. You should also remember that DOT Inspection Week’s and the inevitable deer hunting season opener also should be considered. Many drivers consider the deer hunting opener to be sacred.
Sure, there is a fuel surcharge that most shippers have in place that increases and decreases as diesel prices go up and down. But a lot of smaller shippers don’t have a fuel surcharge program in place. They want an all-in rate. So, when diesel jumps, like it did last week after the attacks in Saudi Arabia, you’ll find your carrier asking for more money. Be careful when you are completing bids to note what the fuel surcharge schedule says. Once upon a time all the fuel surcharge schedules were similar. Not so any longer. We have customers today that pay as little as .02 cents per mile while others are at nearly .40 cents per mile. Don’t get caught misquoting because you didn’t pay attention.
As the economy ebbs and flows and as weather comes and goes, shippers will alter their shipping habits. In good times LTL shipments become truckload shipments. In bad times, they go the other way. As the rail adds capacity, you’ll find long haul shippers looking more toward rail service than truck service to save on costs. Then weather hits and a good flood takes out a rail line and all that rail traffic needs to go over the road temporarily. These are the kinds of things that cause spot market rates to increase and decrease wildly.
At the end of 2017 Electronic Logging Devices were required to be in place by December 2018. That legislation was then pushed back to go into effect by the end of 2019. Most larger carriers have already implemented ELD’s. But a lot, some say as many as 80%, of the smaller carriers have not. ELD’s cause the driver who likes to drive illegally to have to change his way of driving.
The FMCSA announced that they’re postponing the new rules that would measure a carrier’s Safety Fitness Determination. Most carrier associations opposed the SFD because the guidelines were based on safety data they considered to be flawed.
New standards for transporting food went into effect in April 2018.
Hours of Service regulations are changing.
California’s governor is expected to sign into law a bill that critics say would make it difficult, if not impossible, for trucking companies in the state to use independent contractor owner-operator truck drivers.
If signed into law, Assembly Bill 5 “will put tens of thousands of owner-operator truckers, who service agriculture, retail and other industry sectors, out of business,” said the California Trucking Association in a press release. The law, if signed, would go into effect January 1, 2020.
Legislation can impact trucking rates significantly. It seems the older I get, the more regulations we have. The more regulations we have, the more drivers seem to exit the industry.
Availability of Drivers
The American Trucking Associations published their Truck Driver Shortage Analysis in July 2019. It stated that in 2018, the trucking industry was short roughly 60,800 drivers, which was up nearly 20% from 2017’s figure of 50,700. If current trends hold, the shortage could swell to over 160,000 by 2028. Here’s a link to their report:
Trucking has unique barriers to entry because federal law does not allow drivers between the ages of 18 and 20 to drive Class 8 commercial motor vehicles across state lines.
Federal regulations are a significant reason so few young people pursue trucking. There is support for the Developing Responsible Individuals for a Vibrant Economy (DRIVE) Safe Act, a two-step program addressing the driver shortage in the trucking and logistics industry, and enhancing safety training and job opportunities for young truckers. Young drivers are required to complete at least 400 hours of on-duty time and 240 hours of driving time with an experienced driver in the cab with them.
Of course, the impending “driverless truck” causes many to pause. Why would I want to start a career that may end within a decade because a self-driving truck took my job? Something to think about.
Balance of Freight
Supply and demand are the backbone of any market economy. You’ve probably heard the term in the news or maybe you learned about it in your high school economics class. It’s an important term to understand as it affects your life as a carrier or freight broker. Demand refers to how much of a product or service is desired by buyers. Supply refers to how much the market can offer. The price of a product or service is the result of supply and demand.
Let’s look at a trucking industry example. You’re in Missouri with two other truckers. A couple of businesses have five loads each that need to be shipped to Washington. There is an excess of loads (demand) with a limited number of trucks (supply) thus the price of a load goes up. Alternatively, let’s say that there are 10 trucks with only three loads. Now the supply of trucks is high and the demand is low for loads that need transport. The price is low because there are too many trucks willing to take the limited number of loads. Drivers will accept a lower rate in order to get work. Supply and demand in the trucking industry is often driven by the density of population centers where people need goods shipped into them, and also by the density of manufacturing and products being shipped out of an area.
Supply and demand are the primary forces driving the differences in pricing between one area and another. It’s common to see a shipper pay a carrier $2.80 per mile, also known as a headhaul rate, for hauling a load from Chicago to Philadelphia and then immediately turning around with the same freight heading back west from Philadelphia to Chicago for $1.15 per mile, known as a backhaul rate. The higher price in Chicago tells you there are consistently fewer trucks and more loads in Chicago and the lower price in Philadelphia tells you that there are more trucks available and fewer loads.
Hauling headhaul and backhaul is a balancing act. When leaving a headhaul area with a load and going into a backhaul area, the price has to pay enough going there to make up for the low price of the backhaul. Think of it this way; the headhaul is subsidizing the backhaul. When leaving a backhaul market, you can’t afford to be super picky or you’ll force a layover on yourself that will cost you more money in the end. When hauling headhaul and backhaul loads it is important to always remember to manage the average of the backhaul/headhaul revenue instead of each load individually. In the example above the average price between Philadelphia and Chicago is $1.85 per mile, which isn’t bad if you go back and look at what it costs to run a truck.
Backhaul market areas in the United States are like magnets for inbound loads, but can be slow for outbound loads. Areas like this include Colorado, Massachusetts, Maine, North Dakota, Utah, Florida, and Wyoming. Carriers who take a load into these states you should remember not to be too picky about what you haul out of these states. The guiding principle is, get out of there as fast as you can – preferably to a headhaul market area.
You don’t have to be an economics major to understand the basic principles of supply and demand. However, understanding and identifying specific markets can be confusing. Don’t be afraid to ask questions. Often times experienced operations staff or sales staff are more than willing to spend a few minutes chatting about markets. Key words to pay attention to include: power lanes, hot-spots, and headhaul and backhaul.
If you are a broker, you know what I’m talking about regarding shipment weight. We have a customer who routinely sends over loads that weigh 20,000 lbs. that we tender out, only to have the truck show up and have the load be 40,000 lbs. They’ve continued to add product to the order since it was tendered. That spot market truck wants more money to haul 40,000 lbs. compared to 20,000 lbs. And generally, they aren’t too reasonable in their negotiations. There is a fuel used difference but it is never anywhere near what the carrier thinks they should be paid for the additional weight.
You won’t find that type of negation in the contract carrier world. At least not in my experience.
Revenue Per Day
Most trucking companies have a revenue per day number that they want to hit. It will vary from carrier to carrier but I think many would say it falls somewhere between $700 and $1,000 per day. Mileage will influence this number as well.
Loading and Unloading Times
In 2018, when capacity was tight and shippers were struggling to cover loads, you heard a lot about shippers wanting to be a “shipper of choice”. That meant they had facilities for drivers and that they got trucks in and got trucks out in a timely manner. As capacity has loosened in 2019, that concept has moved to the back burner for many. Still, detention and hours of service and ELD’s are all causing the driver to suffer and it is an area of the trucking industry that requires attention. New companies, like True Load Time, now provide carriers and brokers with real times so they can determine how long it is going to take to get loaded and unloaded at a particular dock. If a driver only has so many hours in a day to drive, he can’t be sitting at a dock all day waiting right? The longer the loading and unloading times, the more likely carriers and brokers may be to shy away from a particular shipper.
Type of Equipment Required
Tractors and trailers cost lots of money. They type of freight you choose to haul, be it dry van, refrigerated, bulk or flatbed, all pay differently. I know this goes without saying but someone out there who is just getting started in the business needs to know this. Also remember that hazardous materials and/or tank endorsed loads will often times command more money. And the truck driver in bulk generally has to do a lot more work than the truck driver in a box trailer. Regardless of the weather.
I almost forgot this one. But quarter end just happened and many of the spot market carriers were gouging like they often do at holidays. We were quoted upwards of $300 to $500 more on lanes just because it was quarter end. Your contract carriers don’t do these kinds of things.
Let’s Try Some Examples
Here’s a random load from Atlanta GA to Indianapolis IN. Let’s say it is moving during the southeast produce season. Let’s look at it as a dry load and as a refrigerated load and also compare using a contract carrier with year-round pricing with a spot rate carrier. For the contract carrier we will use actual costs. For the spot rate carrier, we will use DAT.
Contract Dry Load – Using the $1.38 per mile costs and assuming a driver pay of .40 cents per mile we have total costs of $1.78 per mile. It’s 534 miles from Atlanta to Indianapolis so 534 x $1.78 equates to carrier pay of $951.
Spot Market Dry Load – Using DAT, the high carrier cost in May is $997. There will be an imbalance of freight meaning that there will be a lot more loads out of GA this time a year than there are trucks, and in Indiana the market will not be as good as Georgia.
Keep in mind that the contract carrier likely has a customer base anywhere they move their trucks and that the spot market carrier may be moving the truck to get it from a bad market to a better market. These are real generalities, but I believe they are often true. Also remember that if the truck is moving from a headhaul market to a backhaul market or vis versa, then the rate has to change in order to offset where the truck ends up.
Here’s another. Let’s do a reefer load from Little Rock AR to Greensboro NC.
Contract Reefer Load – Using the $1.38 per mile costs and assuming a driver pay of .40 cents per mile we have total costs of $1.78 per mile. It’s 812 miles from Little Rock AR to Greensboro NC so 812 x $1.78 equates to carrier pay of $1,445. Keep in mind though that this is a two-day transit. If a carrier has a revenue per day minimum, it may cause the price to be higher.
Spot Market Reefer Load – Using DAT, the typical carrier cost is about $2,170. The two markets are fairly balanced meaning that there are about the same number of loads out of Arkansas as there are in North Carolina. Both of these states do have seasonality though so depending on the time of year, that does change. North Carolina has a summer produce season and Arkansas has a turkey season in the fall.
You can see in this example that there is quite a disparity between the contract price and the spot price.
Truckload pricing is very much an art. It takes years to master, particularly if you are pricing annual bids or any rate where the shipper is asking for a year-round commitment. I hope this discussion has helped you to understand more about factors to consider.