Your individual spot rates are driven by forces out of your control. Tons of factors impact the larger transportation market, driving rates up and down on a macro scale.
Understanding the forces that dictate freight shipping prices is important; this will help you budget, explain these costs to your boss and ensure the price you pay is calculated to get the job done.
In a role like yours, it can be tempting to take measures to cut transportation costs whenever possible. For this reason, plenty of logistics managers seek the lowest freight rate. That said, in an industry where price often equates to quality, taking a price-first approach to carrier selection is never recommended.
Recently, transportation spot rates have experienced unprecedented volatility. Throughout 2020-21, spot prices began a steep upward climb, peaking in early 2022 only to finish the year well below these levels.
When this happens (spot rates hit a downward trend) transportation providers (in a very fragmented industry) begin a cycle of undercutting each other’s prices. As a shipper, this presents a dangerous pattern. Even with an untested provider, the lowest freight rate can be really tempting to accept.
As a trucking company with nearly seven decades of history, here at Anderson Trucking Service (ATS), we’ve seen the fallout companies can experience when they make a habit of accepting the lowest possible freight rates.
You see, like any other business, trucking companies have fixed costs and variable costs. For this reason, freight prices can only go so low; to remain in business, carriers must (at the very least) cover these expenses.
Since this business is incredibly competitive and fragmented, it’s not unusual for trucking companies to battle for market share when rates are low. Typically this is done by competing to price their service lower than the competition.
However, it’s important to keep in mind how low freight costs can, realistically, go. This will help you make educated decisions when the transportation market is “soft.”
And, should your boss ever wonder why your rates over a certain period weren’t lower, offer them one of these six factors as an explanation — as long as it’s applicable, of course.
The six expenses that, together, set a floor on freight rates are:
- Equipment maintenance costs
- Insurance prices
- Driver pay
- Equipment purchase prices
- Fuel prices
- Miscellaneous overhead costs
1. Equipment Maintenance Costs
Maintaining their semi-trucks and trailers is a premier expense trucking companies shoulder. In recent history, parts shortages have made these costs skyrocket, making it difficult for under-resourced carriers to keep their trucks moving.
To meet equipment maintenance expenses, trucking companies need to adjust their rates accordingly.
2. Insurance Prices
Paying for insurance is a huge expense each year, but it can’t be avoided. Recently, nuclear verdicts — court-awarded rulings that are exceptionally high — have become increasingly common in the transportation industry. For this reason, the insurance premiums paid by transportation companies have increased over the past few years, creating a pattern of insurance-cost inflation that continued in 2022.
Insurance premiums keep freight rates from bottoming out.
3. Truck Driver Pay
Truck drivers keep their companies moving, without them, no freight would move. That’s why paying them adequately is a must. To remain competitive with other transportation companies and similar industries, driver pay has been rising lately.
Truck driver salaries are yet another factor fortifying freight rates.
4. Equipment Purchase Prices
Purchasing trucks, trailers and equipment is a major expense carriers incur. Each year, healthy trucking companies look to expand their fleets and/or swap out older equipment. Maintaining an adequate fleet age is expensive, particularly over the past five (or so) years when manufacturers haven’t consistently met desired replacement volumes.
In turn, higher semi-truck purchase prices impact the rates you pay as trucking companies need to bring in more revenue to stay afloat.
5. Fuel Prices
The factor on this list that makes, perhaps, the largest impression on your bottom line is fuel prices. These expenses are unavoidable and aren’t paid by trucking companies alone. Instead, the cost of purchasing the fuel used to haul your shipment will usually trickle down to you. Because the price of diesel on any given day can be so unpredictable it can be difficult to budget for this expense.
That said, since trucks only get around 6.5 miles to the gallon, the price of fuel makes an impact on every shipment, setting its floor.
Related Content: An Explanation of How Rising Fuel Prices Affect Transportation (+ 3 Budgeting Tips)
6. Miscellaneous Overhead Expenses
Every business has fixed and non-fixed overhead expenses to pay for and transportation companies are no exception. The diversity and scale of these expenses, of course, fluctuates based on a company’s size.
Single-truck owner-operators, for example, have far fewer overhead commitments than a larger outfit. These companies may only need to pay for the things listed above (equipment costs, fuel, insurance, etc.) allowing them to avoid other forms of overhead.
By and large, though, trucking companies have expansive overhead costs (both fixed and variable) to plan for each period.
This includes, but is not limited to, things like:
- Employee salaries and benefits
- Facility/warehouse rental/mortgage payments
- Property taxes
- Miscellaneous administrative costs
- Marketing costs
- Power, water and utility fees
Each of these costs, though not directly related to servicing your individual freight, is top of mind for transportation companies. To remain in business, the rates a trucking company offers have to cover its overhead expenses. In some cases, this may impact a company’s ability to remain competitive with another that has fewer expenses.
That said, regardless of the situation, overhead is another factor setting the floor on freight rates.
Master Your Budget by Understanding These Transportation Market Cycles
Whenever spot rates fall in the transportation marketplace, it’s natural to wonder where the bottom is. Could it be risky to accept the lowest rate? Should you be wary of steadily-falling spot prices? What can you expect going forward?
These are important questions to ask, particularly if you’re newer to the industry.
Now you know that there is a “floor” for spot rates; they can never be less than the total cost of equipment maintenance and purchase, fuel prices, insurance premiums, driver salaries and trucking company overhead expenses. If a carrier’s revenue falls below its expenses, it will go out of business. That’s a pretty simple conclusion to draw.
With so much on the line for your company, reputation and customers, the last thing you need is to trust your freight to a provider that can’t get the job done at the rate it originally promised. And, while “softer” markets present a good opportunity to save some money, you don’t want to do so at the expense of your supply chain efficiency.
As such, always keep these six factors in mind when vetting and selecting your transportation providers.
At the end of the day, managing your transportation supply chain — and budget — comes down to understanding the ebbs and flows of freight pricing. This isn’t always simple though.
Going forward, you’ll want to understand the common transportation-industry market cycles, what causes them and what each market means for your business. This knowledge will help you make educated decisions depending on which market cycle you’re in.
So, read this article, Common Transportation Industry Market Cycles: What They Are and What They Mean for You. And, if you have any questions, please don’t hesitate to contact us here.