- Supply and demand at your origin
- The urgency of your shipment
- Your freight's length of haul (LOH).
- Current weather conditions
- Accessorial charges
- Supply and demand in your freight's destination
Keeping an 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 subjective to your situation. But that doesn’t mean we can’t explain exactly how these rates are calculated.
Anderson Trucking Service (ATS) has been providing reliable transportation services for 70 years. During this time, we’ve successfully navigated major fluctuations in the market, and have the experience to help you understand how freight shipping rates are calculated and why they may fluctuate.
In this article, we'll break down the six key factors that influence freight shipping rates, starting with the basics: Supply and demand.
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
The trucking industry defines supply as the amount of equipment (trucks, vans, reefers, etc.) available to move a shipment.
As the supply of carriers increases, the price of shipping your goods decreases. Carriers are motivated to keep their trucks loaded and moving, so trucks sitting empty tend to translate to cost savings for shippers.
But that cuts both ways. When business is booming for carriers (because of high demand — more on that below), their supply of available trucks decreases. As such, shippers will have to pay more to secure capacity from this limited supply.
Demand
Demand is fairly self-explanatory in the trucking industry; it's the demand for carriers' supply, i.e. trucks. You could also define demand as the total amount of goods that need to be moved.
When demand increases, so do the prices associated with hauling a shipment. If there are more goods than there are trucks to transport them (high demand), carriers know space on their trucks is at a premium and will raise rates accordingly. Likewise, when demand is low, rates will follow.
In today's rapidly-paced, e-commerce-driven market, high demand is our "new normal." But that doesn't mean there's nothing that can influence the balance between supply and demand and push rates one way or the other.
Fluctuations to the balance between supply and demand can be attributed to these three factors, oftentimes in tandem:
- Region: The geographic region(s) in which you are shipping. This includes your point of origin, destination, and route your freight will take during transportation.
- Seasonality: Predictable changes to supply and demand based on season, like the annual holiday shopping season, produce harvest season, or construction season. This may also apply to weather-related changes, like the shift away from open-deck freight in winter months.
- Equipment Type: The kind of equipment (trailer) 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 how all three factors can 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 news is that price fluctuations based on these factors are both cyclical and predictable, so with the right transportation provider in your corner, planning for these scenarios is very manageable.
Urgency
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.
In this industry, there are only two bargaining chips on the table: Time and money. Let's take a look at another example to illustrate this.
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.
Related: How Does Lead Time Impact Freight Shipping Costs?
Length of Haul
The distance your freight has to travel to get to its final destination, called its "length of haul" (LOH), is another prime indicator of the price you will pay.
Generally, the further your freight has to travel, the more you will end up paying; however, longer hauls should have a better rate-per-mile (RPM).
In the trucking industry, we break length of haul (LOH) into these five categories:
- Short haul: An LOH of less than 250 miles. Typically has a day rate or minimum charge attached to it, so shippers are still charged for a whole day regardless of mileage rather than a rate-per-mile basis.
- Mid-haul: An LOH of 250-400 miles. Also has a day rate or minimum charge attached to ensure fair compensation for drivers.
- Tweener: An LOH of 401-800 miles. Typically billed on a rate-per-mile basis because of their longer distance; tweeners usually take one to two days to complete.
- Long-haul: An LOH of 801-1,200 miles. Like tweeners, long-haul loads are billed on a rate-per-mile basis.
- Extended-long haul: An LOH greater than 1,200 miles. Extended-long hauls typically deliver the most cost-effective rate-per-mile for shippers, as carriers prefer to keep their trucks loaded and moving for as long as possible with minimal downtime.
Weather
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.
Accessorial Charges
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.
Destination
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.
Find an Expert Transportation Provider
So, what does 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 aware of the current market environment and can provide guidance on moving your shipment in the most cost-effective way.
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.
