How Carriers Set Their Prices

Negotiating pricing with a carrier is similar to buying a car. There is always the notorious sticker price. Yet, you expect to get a discount, and you assume that you have negotiated well after several rounds of enduring the salesperson going back and forth between you and the finance manager (the mystical force behind the black curtain). Once the deal appears to be finalized, they add a destination charge, and you find that you will pay considerably more than you had budgeted. You don’t have good ways to benchmark the results, however, so you settle.

The car buying process has changed quite considerably, due in large part because the Internet makes information readily available. Don’t expect the same from the carriers, however, as contracts are protected by legal language, which limits information from being shared with the public.

So, (fast-forwarding), you receive an invoice one week and then ask yourself, are others paying what I’m paying for the same shipments? Are other companies receiving greater discounts or reductions on any of the fees that consistently increase year over year? Bottom line, you ask, how does my pricing measure up, and how did the carrier establish the pricing?

Although there are guidelines that carriers follow when negotiating pricing with shippers- rates, fee concessions and rebates certainly are not set in stone. Profit margins are protected, as a result of approaching opportunities, based on charging the maximum amount they expect a shipper will pay. This applies not only to small-to-medium-sized businesses but also to national and global-sized companies. The following are the five Cs that the carriers consider when establishing the price for a shipper.

Customer Needs

A carrier will evaluate what the needs of the customer are. An experienced account executive anticipates the questions that are likely to be asked by his or her pricing analyst (the minimum level of involvement that is required for competitive discounts, fees, and incentives). Questions will include:

As volume is a key driver, what is the size of the shipper?

Is service, price, technology or another requirement the primary component that will drive the shippers’ decision?

Will the customers shipment methods require special attention? Although it may increase the cost, will applying a fee generate revenue that could potentially lead to overall greater profitability for the carrier? The additional costs versus added revenue will need to be considered.

If a change in carriers is desired, it is important to consider why. If the current provider is unable to properly service the account, less aggressive pricing is likely going to be needed for the shipper to consider the switch. If price is the driving factor, but the shipper is highly integrated with the current carrier, additional concessions may be required in order for the shipper to consider a change.

Most importantly, what is the customers shipment profile? It will need to be understood, as its the core basis to help determine what the costs are and the revenue that will be needed to meet margin expectations.

Cost

The carrier evaluates the fixed and variable costs that are associated with managing the customer and moving its packages. These costs are viewed based on the activities that occur at the point(s) of origin, at the hub(s), during linehaul as well as at the destination(s). The following are some factors that can impact the cost, which carriers will consider when establishing the price: commodity; conveyable/non-conveyable; dangerous goods Hazmat; implementation feasibility; international requirements; length of haul; locations (volume per location); oversized packages; package dimensions; pickup and delivery density; product mix (air, ground and international.); remote deliveries; residential deliveries; signature requirements; special handling requirements; spills; temperature control; value/security; weights (actual/billed/dimmed); zone distribution.

Fees, which often account for 30% or more of a shippers’ cost, are applied to not only offset costs that may be associated with these factors but in many cases turn less-desirable shipments into highly profitable shipments. Fees are viewed as a control factor. Historically, applying fees has ensured that the costs associated with the worst-case scenario are covered, and that the fee is aligned with what competitors charge. With operational improvements, fees have increased while costs decrease, often making many fees lucrative profit centers.

Conditions

What are the carriers’ conditions internally? The carrier has specific factors to consider on global, national, regional and local levels. The following are some examples:

Whether it involves bringing on a new prospect or protecting a customer, the impact on the regional hub, local station, or fleet is analyzed. One thing is certain: planes must fly, and trucks must drive, in order to meet delivery times. In markets where fleet is operating at 90% to 95% capacity, the cost of adding or switching fleet will be considered. On the other hand, pricing can be more aggressive, should fleet require additional volume in order to cost-effectively transport shipments.

What is the current market share, and how does the business that is in play relate to the company’s overall strategy? Are goals in the shippers local, regional and national markets being met?

There can also be initiatives to pursue business in particular industries, based on common time sensitivity requirements (air versus ground) or certain density (weights and dimensions). Incentives may be offered to promote growth in these areas.

Competition

Just as importantly as understanding its market conditions, the carrier who is involved needs to understand the goals and strategy of its competitors. Service levels are typically quite consistent, so if FedEx or UPS charge more than the other, most shippers will consider making a switch.

 

Comprehension

The carrier will consider how well the shipper understands what discounts, rebates, and fee concessions are available to them. Asking for a 10% reduction will seldom provide desirable results. Requesting changes to be made, focusing on discounts at specific weights or zones as well as reductions on minimums, fees, dim divisors and in other areas goes a long way. Having access to and understanding of one’s data is therefore critical during any discussions about price.

Although some factors are uncontrollable, identifying the factors that are flexible will position one to impact their organization in a positive way.

The following are some of the basic things that should be considered in order to benefit from superior pricing.

  • One must be well-equipped to understand their agreement with the carrier. Some questions are: Which service levels are not included? Is a service guarantee waiver in place? Will shipment or piece rating apply? Do all account numbers qualify for the same discounts and fee concessions? Are fee adjustments impacting the business that one expects? Are anticipated qualifiers being met?
  • Invest time and resources to analyze, negotiate and monitor your parcel contracts and spend. Most companies believe that they have good negotiated rates. The large majority have the opportunity to reduce costs significantly, however. Cost reduction means immediate positive impact on the bottom line, as it is much easier to cut costs than to increase profitable revenue. Cross-referencing one’s data with the carrier agreement often leads to many surprises.
  • Most agreements suggest terms that last two to three years. Review shipment patterns quarterly, and be prepared to negotiate contracts annually, at minimum. The 30-day out clause positions you to receive appropriate discounts and fees based on your shipment profile.
  • Make the carrier aware of service failures and incorrect charges on their part. 96% to 98% on-time delivery still means that two to four percent of your customers are dissatisfied with delivery times and may decide not to use your company in the future.
  • Although you may be pleased with your carrier, be open to change. Allow other carriers to bid on your business and test a selection of shipments. Significant savings may be experienced as a result, with little or no impact on service levels. Having proper visibility and knowledge positions one to reduce shipping expenses and maximize the value of each shipment.