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A Guide to Understanding Freight Rates and Pricing
If you’re in the freight business, things can get complicated. When it comes to freight rates, the trick is figuring out where to spend your money - and where to save. There are many factors which can determine freight price, so the variables do matter. Fixed costs are the things you can’t change. Variable costs include everything else; including supply and demand, competition and fuel surcharges. For carriers and shippers, it's important to understand the basics of freight rates so that you can set budgets and expectations accordingly.
What is a freight rate?
In the transportation industry, the price a shipper or broker pays a carrier to haul loads, is the freight rate. These often vary based on many factors, including supply and demand, carrier, cargo type, and competition. Negotiation is a very important part when it comes to freight pricing or rates.
How do you calculate a freight rate?
In the the trucking industry, the primary way freight rates are determined is based on per-mile cost.
You would take the total rate and divide it by the total mileage between sender and destination. So if the total rate is $3000 for a load, for example, you would divide that by how many miles it is traveling. If the cargo has to travel 700 miles. 3000/700 miles = $4.28 rate per mile. You will want to be aware of your base rate, which is the amount you’ll have to charge as a carrier, in order to break even.
Shippers and carriers can save money and time, by using a few efficient methods in the transportation process. Look at: 6 Ways To Cut Costs and Time in Freight Shipping
You also may need to factor in other special handling, fuel surcharges and added costs; so the rate per mile is not truly the final total for freight being shipped, for shipper or company. There is a little bit more to how freight is priced.
What affects freight rates?
When determining freight rates, driver or fleet availability does factor into the price. If there is a shortage in capacity, the prices go up. Loads which require special handling or instruction will cost more. As available loads increase and take up trucks, the competition leads to rate increases.
Some carriers do give shippers discount for constant shipping or using the same carrier often, so research your options.
The weight of the shipment will affect the price. For example, LTL (less than truckload) freight price is determined based on weight and number of palettes used. If you are trying to save money or make money, do keep in mind that carriers will start at a higher rate for heavier loads.
Security, handling and transport fees will affect freight rates. Some freight requires a special classification due to its content or size. The NMFTA (National Motor Freight Association) has 18 classes to help sort freight, and numerous factors contribute to this classification. They look at density, product value, liability and handling needs when classifying freight. If a load has a lot of classifications that require special handling, the load is less easy to transport and thus may cost more, so it is a higher rate. Reefer rates, for instance, which require refrigeration or added regulations are more complex to transport so the freight rates will reflect this.
The biggest factor that determines freight rate is the distance a shipment will travel. Gas expenses, wear and tear and type of route all add up here, to determine the freight rate. If the road to the destination is rural or city also affects transport and so carrier rates can vary. Fuel surcharges also affect the rate, making the changing fuel prices a significant factor in the cost of freight.
Types of Shipping Methods
To determine prices of freight, you also want to look at the type of shipping method used. Some methods may be cheaper than others, but take into account the delivery date and location, to understand the full cost of a shipment. Keep in mind most shipments will require a ground carrier at some point, to get the shipment to its final place.
In the transportation industry there are a few key methods to ship freight:
Full truck loads (FTL) takes an entire trailer. If you are not sure which freight to choose then FTL may be the better option for cargo that takes up more than half a trailer, or the shipment in itself is time sensitive or requires special handling.
Partial truck load (PTL) takes a portion of one truck trailer. Partial allows carriers to take on multiple shipments at once and it is point to point delivery usually. PTL is determined per mile, and weight or dimension is also used in consideration.
When shipping less than truckload (LTL), though it is similar to PTL, the challenge here is that freight may be transferred between vehicles in the process, so rates will vary more.
Expedited shipping has the highest freight rates due to the time and delivery constraints. Overnight or direct freight costs more, so carriers can earn more but also shippers need to spend more.
You also do have the option of intermodal shipping, which uses multiple shipping methods, such as truck, rail or ocean. Non-road carriers do tend to be less expensive, lowering the cost for shippers, but it becomes more complex because the freight has to get to its destination on ground too one it arrives, so estimating rates takes some effort.
In cross-border transport, the freight rates vary based on regulations and specifics of each country. Keep in mind for international transport that you are working with different currency, so when figuring out the rate, make sure you get a quote in a currency you use or understand first. You can also use the Zipments Currency Converter to instantly calculate the difference, when shipping across borders.
Supply and Demand
Freight rates will vary based on demand and supply of loads and trucks. Some products may be seasonal, and in some cases, like in Summer, rates may increase for certain products like agriculture, because there is a lot being shipped out and more trucks are needed.
If you are a truck driver, it is important to know which lanes you are looking for or the types of goods you want to transport. Oversized freight, gas tankers and HAZMAT freight tends to have higher earning potential, due to the complexity of transporting and the special endorsement which may be required to transport. However, for the average trucker, flatbed and LTL shipments tend to be the most profitable due to the likelihood of higher freight rates. LTL pays more due to potential multiple stops for the truck loads.
Freight costs can vary significantly even within the same mode of transportation. You can't get the best freight rate without knowing your shipment well, as well as the delivery needs. Freight transportation is one of the most complex logistics operations. While there are many factors that affect a carrier rate (such as number of drop offs/pickups, the weight of the load, etc.), keeping up with current market trends is a great place to start. For drivers, knowing the market you are going into, as well as the competition, will help you get the better rate each time.