Why is Density Based Pricing Hard for LTL to Adopt?

 

LTL, or less-than-truckload, has traditionally priced based on rate-setting formulas that take into account commodity classifications.   While some major carriers like UPS and FedEx are moving toward a density based pricing model, the rest of the LTL market has been slow to transition, in part because current Transportation Management Systems (TMS) are not be able to rate cubic dimensions.

With LTL capacity tightening, carriers want a price consistent with the amount of space the shipment uses in the truck. The current system has been a part of the industry and pricing model for so long that change is difficult to adopt.

Determining Density

For LTL carriers, determining density can be difficult because the loaded density of each shipment can vary from the initial estimate. The accumulated density of a package might not be the same as its loaded density once it is put onto a pallet. When a carrier calculated density, the most extreme points of the shipment are used to calculate the cube to create flat surfaces.

TMS Systems Limitations

The TMS systems that most LTL shippers use come with limitations. For example, they are not able to price shipments based on cubic dimensions, incorporate different mileage tables, or dimensional pricing scenarios if the shipments are not able to be applied to a DIM factor (dimensional calculations).   The majority of TMS systems are based on ‘class rates’ and then add a carrier discount, which does not fit the density based model at all. These systems would need to be significantly upgraded before they could support a model based on density.

Shippers Reluctance

Shippers like to know the cost of transportation prior to the shipment moving so they can build the cost into the product, or bill the customer. Since density can change after it is stacked on a pallet, this creates ambiguity for the shippers.

Changing from a freight class system is hard for some shippers to embrace because there are many industries that negotiate for an appropriate freight class and will need to be convinced to use any other pricing method. Some shippers are also questioning how obtaining accurate dimensions would affect the transactional nature of the business.

Carrier Systems

While there are limitations on the technology side with the shippers, most carriers are also not set up to support a different pricing model.   Carriers would be responsible for updating cube and weight in real time to their customers’ systems, which they are not currently set up to do. Larger carriers would be able to adopt a density based pricing model more readily than smaller carriers, who might need to make a large investment in operations to be ready. Many of the larger carriers have installed dimensionalizers in their systems, but it has not trickled down to the medium and smaller carriers yet.

Customer Resistance

Shipping companies have had density based pricing available to their customers, but find they are reluctant to use it. Old Dominion, for example, has had it available to its customer base for more than eight years, with little success. LTL carriers and shippers are not able to make definite cube based pricing based on shipment by pallet in real time, thus discouraging customers for even asking for it.

Cube based pricing for pallets could certainly be used more in the LTL industry, but only if TMS functionality can support it. Carriers’ systems will also need to be handle this new pricing model to be fully embraced by the LTL shipping industry.

 

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