Density based pricing is nothing new

  (Photo: Shutterstock)

(Photo: Shutterstock)

A push for density-based pricing is happening in the less-than-truckload (LTL) segment of the transportation industry. This idea is not new as most freight in the LTL market has a density component included in the rating already.

To provide a little background you need to have a basic understanding of LTL rating as it stands today. Currently most LTL rating is listed as a discount percentage off a rate base. The percentage is not as important as the base. The rate base is a matrix of numeric values that represents the cost of moving freight from zip to zip at a specific weight and “class.” An example would look like this from an example OD pair from Chicago to Dallas:

 Origin   Destination         Class      L5C        5C          1M         2M         5M         10M      

  60120    75216                   50           54.16     51.58     48.21     45.05     42.10     39.35

The numbers to the right of class are dollars per hundredweight (CWT). Notice there are tiers for each weight break. L5C equals less than 500lbs, 5C is anything that weighs between 500 and 999lbs, and so on. The important number in that line is the one under class. This is the number that accounts for the density, but that is not all. Class is derived from numerous points of input from the National Motor Freight Traffic Association (NMFTA) which produces the National Motor Freight Classification (NMFC)

The NMFTA is a membership-based non-profit organization consisting of LTL carriers across the United States. It is generally accepted as a governing body of the LTL world. The members pay an annual fee and can participate in studies and have access to the repositories of information aggregated from the results. The main factors the carriers influence outside of density are handling, stowability (stackability), and liability. Density is the one component the carriers have no impact on changing as it is a straight calculation based on natural physics. This objective value is why pricing managers prefer to use it as the basis for pricing.

The main purpose of the NMFTA is the publication of the NMFC. The NMFC provides classification for every commodity that is shipped on a truck based on the factors described previously. There are 18 classes ranging from 50 to 500. In general, the lower the class, the denser and easier to handle the commodity is. It also provides general guidelines for packaging and legal documentation on bill of ladings.

The classifications and general guidelines are a form of standardization in the industry as it pertains to pricing. This categorization allows carriers and shippers to have an objective source for identifying what freight characteristics are for pricing purposes while creating a democratic platform for agreement. As both shippers and carriers can lobby to have commodities reviewed for appropriate classifications.

Pricing solely on density would bypass the vetting that occurs in the classification system and rate shipments straight from the density number. For example, a standard 1000 lb 40" x 40" x 48" pallet would have a density of 22.5 lbs per cubic foot. The carrier would utilize the density as the number replacing the classification system. Carriers would still need to account for either the weight or cubic feet of the shipment to figure total cost of the shipment. Density by itself is not enough to rate a shipment. There would still need to be a matrix based on one of these two variables. Then there are all the other factors that the classification system covers. 

Once you have figured how to factor handling, stowability, and liability into your rating, then comes the redesigning of internal rating systems. Uprooting this infrastructure is one of the larger challenges since billing is one of the more complex functions in the LTL industry. The shippers would need to agree to the change of methodology as well, which requires them to change their internal systems. 

Density is already factored into current rating structures in the LTL industry. The talk about moving closer to this method of rating would make it easier for carriers to more accurately mirror cost with price, but the implementation is a challenge that may not be worth the effort.  

Stay up-to-date with the latest commentary and insights on FreightTech and the impact to the markets by subscribing.