Keeping a keen eye on your shipping budget can be tricky, especially when you don’t understand where your money is going, how shipping rates are calculated or how to make the most of the dollars you have.
At the end of the day, the rate you pay is completely subjective to your situation. This doesn’t mean we can’t explain exactly how these rates are calculated so that you can make the best decision possible.
Here at ATS, we’ve been working in the trucking industry since 1955. During this time, we’ve seen large fluctuations in the market and are here to talk you through why prices fluctuate and what impacts your rate when shipping freight from A to B.
Freight Shipping Rates Are Calculated Based On:
- Supply and demand in your freight's origin.
- The type of equipment (trailer) you need.
- The urgency of your shipment.
- Your freight's length of haul (LOH).
- Current weather conditions.
- The specific requirements of your freight (accessorials).
- Supply and demand in your freight's destination.
Transportation Industry Supply and Demand
Supply and demand are part of the backbone of our free-market economy and a leading component in all price-related fluctuations. Just like any other industry, the shipping industry is influenced heavily by these two factors.
Supply: We define supply as the amount of equipment (trucks, vans, reefers, etc.) available to move a shipment. In today’s market — a market that has seen a steady decline in the number of new drivers available — supply is limited. Because of this, prices are consistently higher than they were in years past.
As the supply of carriers available increases, the price of shipping your goods decreases.
Demand: In the shipping industry, demand is the total amount of goods that need to be moved. When demand increases, so do the prices associated with hauling a shipment.
Right now, we’re seeing more goods ready for shipment than there are trucks available to move them. When this is the case, price is sent on an uphill climb, causing the companies hoping to ship their products to pay more in order to do so.
This balance between supply and demand depends on several different factors. Prime among these are region, seasonality and equipment type.
Fluctuations to the balance between supply and demand can be attributed to these three factors, oftentimes in tandem. For clarity, here is a quick definition of each:
Region: An area comprised of unique physical and environmental characteristics, weather patterns and inhabitant behaviors.
Seasonality: Changes that occur in predictable, consistent patterns, dependent on the changing of the seasons.
Equipment Type: The kind of equipment needed to move a particular type of freight (We’ve put together this list of common equipment types used in the shipping industry and how they'll impact the price you pay.)
Here is an example scenario showcasing where all three of these factors come into play:
Mid-to-late fall is harvest season in the midwestern region of the U.S. As such, the price for booking a truck to haul raw produce rises as the demand for those services increases. The seasonal uptick in the supply of raw produce in that region leads to an increase in the number of trucks equipped with the necessary capabilities as they rise to meet demand.
On the flip side, if you’re a company that ships a product requiring a refrigerated trailer (reefer) or a different equipment type out of South Dakota during this peak harvest season, your price will also rise, but for a different reason. The cause of this price hike can be directly tied to a lack of trucks pulling these trailers in that region during that season.
The good thing about price fluctuations based on these factors is they’re both cyclical and predictable. By this, I mean that harvest season happens every year without fail and for this reason, planning for these scenarios is very manageable.
The Urgency of Your Shipment
The urgency with which you need your freight delivered directly correlates to the amount of money you will end up paying for it. If possible, it’s best to plan for your shipments in advance.
In the trucking industry, the amount of warning you provide your transportation provider before a load’s departure is known as lead time. When it comes to the budget-sensitive and on-time delivery of your freight, giving adequate lead time is essential.
You should note, in this industry, there are only two bargaining chips on the table: time and money. Consider the following scenario:
Joe has a load he needs to move. The receiver has been waiting on him for days and any more delays will lead to the significant congestion of their supply chain.
In a free-market economy, these types of delays are rarely tolerated and to retain his partnerships, Joe must get his freight out the door ASAP. The type of urgency needed to move this last-minute shipment, a shipment that Joe didn’t plan ahead for, comes with a steep price tag.
Because Joe’s transportation partner wasn’t notified ahead of time, they are left with a shorter supply of available trucks as many have already pre-planned their upcoming days. This, in turn, can lead to an increase in the price Joe pays due to the limited options available.
Your Freight’s Length of Haul
The distance your freight has to travel to get to its final destination is another prime indicator of the price you will pay. Generally, the longer your freight has to travel the more it will end up costing, however, it should have a better rate-per-mile (RPM).
In the trucking industry, we break length of haul (LOH) into these five categories:
Any load that needs to be moved less than 250 miles from its starting location falls into this category. This type of haul typically has a day rate or minimum charge attached to it. This means if you need to move freight for a distance shorter than 250 miles, you’re still charged for the whole day and not on a rate-per-mile basis.
This is done to accurately compensate the truck driver for their work. When factoring in the time needed to load and unload a shipment, the driver still does a full day’s worth of work and should be compensated as such.
This is the category we use to classify those hauls that are 250-400 miles in distance. This type of haul is typically accomplished within one work day and, like the short-haul, is priced a little differently than longer hauls.
Mid-hauls also have a day rate attached to them to ensure fair compensation for drivers. Although a haul of 270 miles may be accomplished before the end of the day, the front and backend preparation put in by the drivers leaves them with a full day’s work.
Aptly named, the “tweener” is the LOH that falls between the mid and long-haul distances. Tweeners cover a distance range of 401-800 miles. Because of their longer distance, tweeners typically take one to two days to accomplish and are commonly referred to as “overnighters.”
The tweener is where we begin seeing rates billed on a rate-per-mile basis. This is done because there is no need for the compensation contingencies used on shorter hauls.
With a distance range of 801-1,200 miles, the job of a long-haul trucker is no joke. As truckers slip into a rhythm of cruise control, good weather and partnership with the road, the long-haul can become a highly effective option for moving your freight great distances. Like the tweener, long-haul loads are billed on a rate-per-mile basis.
Note, the rate you pay is dictated by the ebb and flow of the transportation market as a whole.
Just as the name suggests, extended-long involves the shipment of a product for any distance greater than 1,200 miles. Without needing to pick-up/drop-off any load for an extended period, extended-long hauls can reach a great level of efficiency for the carrier.
This efficiency, in turn, can translate to a more cost-effective rate-per-mile for the shipper than a shorter shipment.
How Weather Impacts the Price of Your Shipment
Weather is a great disruptor in the shipping industry. Any time there are significant weather events in your starting or ending points, a price hike is sure to follow.
This is for good reason. These weather events bring safety concerns and a heightened threat of incident. As such, truck drivers are less keen to move freight. When situations like this occur, shippers that need to get their product out the door are left with far fewer options to do so.
This brings us back to supply and demand as we mentioned above. When there are fewer drivers, there is less supply to meet demand. In this case, any driver who is willing to move your shipment amid severe weather can, essentially, name their price.
As you may suspect, this leads to an increase in the price you pay and you will likely see a significant uptick in your rate per mile associated with those longer hauls.
How Do Accessorials Impact The Price Of Your Freight?
The transportation world is full of unique service offerings developed to make the lives of shippers a bit easier. That said, things like drop trailers, tarping and driver assistance don't come free of charge. In fact, without proper supply chain management, accessorial charges can truly add up.
In the interest of saving money on your freight rates, make sure work with your transportation provider to select only those accessorials you absolutely need. Anything more can quickly get out of hand.
Your Freight’s Destination Matters
How much a load costs to haul from point “A” is directly tied to the supply of goods waiting for the empty vehicle at point “B.” Carriers are extremely plugged into the ebbs and flows of supply and demand. As a result, shippers are more reluctant to agree to a shipment where they know they won’t have anything to carry out of point “B.”
For example, if you wanted to move a truckload of steel from your facility in Minneapolis, Minnesota, down to your customer in Omaha, Nebraska, the price you pay to move your shipment is directly dependent on what is available for haul in the Omaha area.
If a truck driver or carrier knows there won't be anything to haul out of the delivery destination, there's a good chance they will need to 'deadhead' (or drive somewhere with an empty trailer to get to the next paying load pickup destination).
Neither the driver nor the carrier gets paid for this. As such, in these situations, their reluctance to move your shipment rises. As their reluctance rises, so does the price you pay.
Carriers do not want to end up in a situation where they are left ‘deadheading’ after dropping off a load. Because of this, they are highly motivated to either find a shipment to haul out of your endpoint or to charge you extra to make it worth their time.
So, what should it cost to ship from A to B? The truthful answer is: It depends.
With the knowledge of how freight shipping costs are calculated, though, you now have a better understanding of why it depends. In an industry as complex as the trucking industry, it’s difficult to properly articulate and accurately predict exactly how much your load will cost.
Luckily, as a shipper, you don't always need to know exactly where the market is or what is going on in the areas of the country you need to ship to. A great transportation provider will be well aware of the market environment and will provide the best guidance as to how/when/where you can move the shipment you need most affordably.
But how do you know when a transportation company is a good fit for your business?
Here at ATS, we understand how difficult filling your network with great providers can be. To help you do so, we put together a comprehensive list of questions to use when vetting potential carriers. Download the Freight Carrier Vetting Guide today and become the supplier that always delivers for your customers.
That said, when you have shipping questions, please do not hesitate to reach out to one of our sales professionals who are ready and willing to assist you in any way they can.