Many have seen the headlines: rate increases are coming. Estimates for van truckload spot rates continue to rise and rates reached $1.98 per mile last week according to DAT. But what about contract rates? Those too are going up, and in some cases, by a lot.
The impending electronic logging device rule is expected to impact truck capacity as some estimates peg a capacity decrease of 20% as possible as those drivers currently driving over hours will be unable to continue doing so. Additionally, an economy that continues to grow and a growing shortage of drivers is keeping capacity tight. These factors and more are contributing to an environment that is conducive to contract rate increases of at least 3% to 4% for next year, with some raising the possibility of 10% increases.
John Larkin, managing director of Transportation and Logistics for Stifel Equity Research, told FreightWaves in August that contract rates were beginning to show upward movement after trailing spot rate increase for most of the year.
“Having said that, few contracts come up for renewal in the third quarter, so the sample size regarding contract renewals is admittedly small so far,” he said. “However, most carriers are optimistic in that they believe the stage is set for at least low single digit contract rate increases when most annual contract renewals are up for negotiation in the fourth quarter of 2017 and the first half of 2018.”
So rates are going up, but how can your carrier grab the largest increase possible? There are many things to consider when it comes to rates, but it all starts with knowing your own costs. If you don’t know how much it costs to operate and maintain your equipment, pay your overhead costs and employees, and ensure a positive and regular cash flow, then setting a starting price in any rate negotiation becomes a guessing game. On top of that, the shipper is likely to ask for a discount, so you need to know how low you can go without hurting your bottom line.
Go into any negotiation fully armed. That means not just knowing what rate you want, but what rate you can get. A little research ahead of time can pay off with a higher rate. Start by understanding what services you can deliver and what services the customer will need. Don’t try to negotiate in unneeded services just to boost the rate.
Your pre-negotiating analysis should include all the necessary information to formulate a good rate. This includes how much time your truck(s) will be involved with this customer – and this includes all the time involved in delivery and pickup, but also time spent waiting. Does this shipper typically hold up drivers for 8 hours before loading? That should be considered.
How much competition is there in this lane? If there is little competition, then a premium rate is possible.
Before you make any offer, be sure you are familiar with the potential customer’s business. Suggesting a much higher rate to a customer that is barely hanging on financially might not make for a long-term customer. With that said, some suggest carriers announce general rate increases and then negotiate specific rates with individual customers. There is also some evidence that you can achieve a rate increase by considering accessorial charges. For instance, you may be able to offer a lower rate per mile but increase lumper fees or fuel surcharges.
Stuart Sutton, writing for Full Circle TMS, a startup transportation management system provider, providing some tips to achieving better rates in a LinkedIn blog earlier this year.
Sutton suggests conducting a competitive rate analysis so you know where your rates stand with competitors. He also advises carriers to communicate individually with customers and be prepared to receive negative feedback on the request, and then to defend the request.
When making a proposal, consider the lanes the freight will travel and whether there are opportunities for backhaul freight. If there is no backhaul opportunity, then those empty miles need to be factored into the original request.
Communicate why this rate increase is required; simply telling the customer you need a 5% increase is not sufficient, but by showing that customer why 5% is the appropriate figure is more likely to win you the contract. Where is that increase going? Did your overhead costs increase? Are you paying more for insurance or utilities? Did you expand your capacity or staff to handle an increase in loads from them? Justify the increase.
Perhaps the most important piece in any rate negotiation is understanding your value and selling that to the customer. If you sell your service based only on price, chances are you will continually be negotiating adjustments as the shipper knows you are willing to haggle over price.
A few years ago, DAT’s Mark Montague posted a blog on how to win a request for proposal, but some of the concepts can certainly apply to asking for rate increases.
First, DAT advises knowing how much of the contract you want. Do you want all the business or just a portion of it? If you want the entire package, craft your bid competitively to do that, which may mean compromising on price or service in one area to get business in another. Alternatively, maybe there are only one or two lanes within the contract that make sense financially for you – perhaps these are lanes you can secure backhauls on or lanes that end in areas where you can easily find loads going somewhere else. In this case, you may have to offer a lower rate to secure these lanes. Long term, though, this gives you a chance to build a good rapport with the shipper, perhaps leading to more profitable business opportunities down the road.
When making any proposal, make sure you are negotiating on the services the shipper requires. “Clarify what services you provide and differentiate your services from your competitors’ offerings. Shippers usually provide a framework for the rules of engagement, including the format for your response, the additional materials you can provide, and the amount and type of contact permitted between you and their contact person,” Montague wrote.
When starting your negotiation, use benchmarking tools to set a proper price structure. Use additional information to build the most accurate price possible. DAT’s RateView provides both contract and spot market rates derived from actual freight bills and rate agreements for tens of thousands of truckload freight moves across North America. Know this information, because chances are the potential customer knows it.
Also consider seasonality and peak volume/congestion times. You may be able to offer a shipper a better price (and one that is more profitable for you) if your driver can pick up on a Saturday morning, for instance, allowing him to cover more miles on a Saturday/Sunday when there is less congestion on the roads.
There are plenty of opportunities to get a good rate deal for you and your shipper, if you know how to ask.