The last two years of less-than-truckload (LTL) pricing produced headlines for volatility, astronomical accessorial surcharges, expansion of service centers, business closures, and M&A activity. It is not surprising that what somehow got lost in these high-profile stories is that LTL carriers have introduced and are more aggressively moving towards dynamic pricing models. There are advantages and challenges for carriers, shippers and third-party logistics providers (3PLs). As each side understands the challenges and, most importantly, the opportunities, it is easy to recognize how to craft a win-win partnership.
I conceived of a dynamic pricing process in 2012, patented a process in 2017, and launched two different solutions: one for shippers and one embedded within the LTL carriers. I will share perceptions from shippers and carriers and benefits and strategies for success. Other carriers have launched very effective strategies that may differ from what I describe, so please engage with your preferred carriers 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 are adding and losing customers and changing product mix and locations. On the other side, LTL carriers’ networks reflect those variables multiplied by the number of customers. I use these grossly simplified examples to highlight a few of the complex variables involved in managing LTL networks. Each variable must be considered to meet customer expectations profitably while allocating dock staff, equipment and drivers across hundreds of service centers every day. Profit is driven by the carrier’s ability to predict most accurately and react the fastest and most effectively. Software streamlines processes, but deep knowledge of a company’s operations and true artistry of LTL pricing is critical.
Shippers traditionally drove annual contracts based on a prior year of averaged pricing discount. This is what most of us in the industry have known our entire careers. Some companies are still loading static tables and even using routing guides. That is a soapbox I will save for another time. The annual pricing agreement was partly so that transportation managers could produce a budget estimate for the year. This was effective with static distribution channels through a few distribution centers and brick-and-mortar stores with predictable demand and seasonal adjustments. That world has changed dramatically with omni-channel strategies like buy-online-pickup-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 from larger shippers deploying the aforementioned routing guides. The flip side is that annual contracts do not allow for easy nor quick pricing changes. Risk translates to the padding on pricing. Current annual static pricing agreements do little to account for the nuances that impact profitability like accessorial needs, dwell times, payment history, pickup, delivery density, etc. Each factor is considered annually as an average factor, but not within individual quotes where it is needed most.
Shippers can lose on annual static pricing too. Since the carriers’ yield is averaged across all the shippers’ freight, a few bad apples can cause increased pricing across all customers or cancel contracts.
In a world of constant change, averages have reigned supreme not because it is the best practice. Averages persist because it was the best we, as an industry, could do with the tools available.
The Sky Is Not Falling
There are changes in behavior and processes to adopt dynamic pricing effectively. I have heard shippers and 3PLs claim, “The carriers are just going to jack up our rates.” I have also heard from carrier pricing managers, “It will be a race to the bottom.” It is easy to dismiss the concept by imagining the worst, but neither is true.
Carriers need to remain competitive, but they also need to get paid for the services rendered and pricing according to the specific needs of the shipment. A typical scenario is when a carrier expects a 12-minute turn-on delivery, but a shipper’s customer has a 45-minute dwell time. Not only would this jeopardize the on-time performance of every other delivery that the driver needs to make, but furthermore, it limits the pickups they can do that afternoon. While that detention may not be long enough to justify a detention charge, it will be considered in the annual pricing discussions. The chances are that the shipper is not aware of these occurrences.
That information can be relayed to the shipper, and with dynamic pricing, only that location would be affected by a rate increase versus the entire contract. If the behavior improves, so do the rates.
I have also heard numerous times from shippers and carriers, “We’ll never be able to reconcile the rates if they are dynamic, and the traditional audit process will be pointless.”
There are simple modifications to current practices. The dynamic adjustments live within the carrier’s existing rate quoting engine. An account-specific base rate, discount, fuel surcharge and accessorials are calculated parallel to the shipment details qualifying for an adjustment. If the shipment is eligible for an adjustment, that is added to the account-specific quote. Carriers can use a spot quote number to reconcile billing, but this strategy usually results in increased manual back-office labor. The more efficient path enables the carrier billing department to recall the active adjustments for that day, which becomes part of the billing and corrections process. Changes are published once a day.
Shippers on a dynamic tariff can save money on audits and check if the quote selected matches the invoice. Traditional auditors can’t keep pace with the carrier rate changes with loaded static contracts.
Benefits to Dynamic Pricing
• Proactively influence what comes into your network and from whom.
• Attract freight from targeted customers and locations that fit operational needs.
• Direct points of opportunity.
• Fill empty or partial empties.
• Save time adjusting rates across multiple customers at once.
• Test new pricing quickly and easily.
• Instantly react to weather or infrastructure events.
• Incentivize to increase load density at pickup or delivery.
• Drive client behaviors with specific metrics to improve pricing.
• Gain insights and get feedback on the performance of adjustments.
• Reduce the need for annual RFPs and GRIs with monthly adjustments.
• Shipper of choice can directly translate to reduced rates.
• Improve working relationships with LTL carriers.
• Protect your rates by identifying and addressing specific issues with carriers.
• Be eligible for discounts over and above your contract rates.
• Replace annual RFPs with monthly conversations and reclaim 2-3 months in negotiations.
• Eliminate the need for GRIs and significant shifts in pricing.
Pro Tips for Engaging Dynamic Pricing
The general theme is to be specific, honest and transparent. Be curious about how your customer’s or partner’s needs overlay with your own.
This is new for a lot of the LTL market. Ease into it by starting with an existing agreement and only applying discounts initially for a couple of billing cycles to eliminate any process concerns. Open it up to specific increases based on KPIs and data-driven metrics.
• Monthly conversations with shippers.
• Define and communicate expectations for shippers.
• Not just volumes committed, but measurable operational KPIs.
• Dwell time, payment terms, data accuracy, etc.
• Know where more or less freight is needed.
• Share recent network changes.
• Get on to the carriers’ APIs for rating and tendering.
• Monthly conversations with carriers.
• Ask what lanes are not operating well and where do they want more freight.
• Share changes in your network.
• Share service issues and other concerns (may find that is not a strong lane for that carrier), ask them to increase that rate, and consider reducing the rate to other lanes that are a better fit.
• Share your total number of shipments tendered across all carriers. Get specific on the details.
An Increase in Agility
Dynamic pricing is not intended to replace all current pricing methodologies, but it can deliver better results for both 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 operational needs of the carrier. It opens detailed and more frequent conversations that can eliminate time-intensive RFPs and difficult GRIs. The nature of LTL is constant change. Embrace it and enable your relationships to thrive in it.
Lance Healy is VP of LTL innovations at Optym, a provider of optimization software company for the transportation industry.