Understanding how Less-Than-Truckload (LTL) pricing works is important when negotiating freight rates. While LTL has earned a reputation of being a slower and more expensive way to ship, it does offer shippers flexibility. And when it is used correctly, it can decrease shipping rates.
Many companies struggle when it comes to understanding what goes into LTL rate calculations, which can cause them to shy away from using this shipping mode. However, by making a few small alterations to their shipping process, companies can improve their service and rates from their carriers.
Determining LTL rates is easy to figure out with just a few pieces of information. A shipper is able to choose origin and destination zip codes, put in the shipment weight, and determine a total cost of delivery. A LTL tariff table is built off of several factors so inputting this information will calculate the rate. An easy way to estimate this calculation is the cost per pound between the zip codes multiplied by a base rate per pound.
All of the factors that go into the LTL pricing agreements are important to know to determine a final rate:
Weight and Distance: It is no surprise that weight of a shipment and how far it has to go will be the main factors in LTL rates, just like with other shipping modes. The more a parcel weighs, the more equipment, fuel, and space it will take. The further it has to travel, the more labor and transport it will take to handle the shipment. Carriers build a single weight figure into their tariffs, but it can become a very complex issue.
Class: The value and density of a product determines their shipping class. A shipment that is light but large in size takes up a lot of space for a carrier so they need to make sure they charge accordingly. A shipment of high value creates more risk for the carrier and increases their liability for damages. The class of a shipment compensates for these different types of shipments. A LTL pricing agreement will designate the class of products.
Service: With LTL shipping, service options are often limited. Most carriers have shipping schedules that they like to adhere to, in order to take advantage of economies of scale. Therefore, pricing agreements will be based on standard delivery dates designated by the carrier. For quicker service, there is an additional cost.
Add-ons: For services beyond what is covered in the LTL contract, there is an additional cost. For example, accessorial delivery requirements like the use of special equipment, driver assistance, or an address correction, will be invoiced separately. These fees are part of LTL shipping, but if your products regularly require additional services, it can be negotiated in the agreement.
Discounts: Although they make LTL contracts more complicated, they are a negotiation point between shippers and carriers. LTL pricing uses base rates, which are the starting point from which they come up with their rates on a per pound basis. Discounts are offered off of the base rate as incentive for shippers to keep their business with that carrier. Base rates remain standard, and only the discounts are negotiated in the agreement.
Discounts are not comparable between companies, however, as base rates differ between carriers. So, trying to compare carrier rates solely on discount percentages is not possible. Base rates must be standardized before being able to make comparisons for the cost of every shipment.
Being able to make sense of these factors that affect LTL shipping enables businesses to better manage their logistics budgets. They will also have more leverage when negotiating pricing contracts with carriers.