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More often than in the truckload market, rates for less-than-truckload (LTL) service can sometimes be shrouded in mystery. Misunderstandings about how rates form can lead shippers to feel spurned or frustrated when the price they pay is higher (sometimes much higher) than expected.
With layers of fees and accessorial charges, higher overhead costs than truckload and percentage-based discount pricing the norm, LTL rates can get complicated fast. And within that complication lies plenty of grey area for confusion about how LTL rates come to be — and the bottom line shippers ultimately pay.
To help demystify the process and help shippers better manage the current industry landscape, here are a few insights into what factors determine LTL pricing.
While several of trucking’s core costs — fuel, maintenance, equipment like trucks and trailers, and driver wages, for example — translate from truckload, LTL rates also encompass overhead costs not associated with truckload.
Chiefly, there are the three brick and mortar facilities that LTL operations must route through. Those include a pickup facility, an intermediate location where freight’s unloaded and reloaded, and a final destination. LTL carriers often foot the bill for staffing, electricity, and other costs to run and manage those facilities.
Thus, LTL carriers lean on their pricing departments to formulate rates that account for those costs from original pickup to the delivery point of a consignee, and they bake those costs into their pricing. Naturally, that produces a higher base rate, often referred to as a line-haul rate, than truckload service.
As we explored in the Redwood blog earlier this year, the LTL space is rife with accessorial charges and fees that carriers tack on to their quoted LTL rate. LTL carriers might price a base rate that looks attractive. However, they regularly hit shippers with unforeseen accessorial fees that weren’t accounted for in the base rate. This alone should, and often does, wipe out the attractive price a shipper thought they were receiving.
Some carriers, including the big-named LTL operators, will have 50 to 100 pages of rules for their freight, many of which carry fines or fees for shippers for noncompliance. Those fees can add up quickly.
For example, one of the largest LTL carriers has already instituted a $1,000 fee for any freight packaged over eight feet long. That’s a hefty charge that could unexpectedly and dramatically drive up the price a shipper pays for LTL service.
Here’s another good example: If an LTL carrier sees a “do not double stack” note on a bill of lading, they’ll charge the shipper for the empty space above that pallet, and shippers often won’t realize it until they receive the invoice with their proof of delivery.
In the past two years, supply and demand dynamics have strained the LTL segment — forcing upward pressure on rates.
Supply chain managers have obviously struggled to find needed capacity to move their freight in the COVID-era economy, and many turned to the LTL sector to try to move smaller loads more strategically.
But like other sectors, LTL carriers haven’t been able to expand capacity to keep up with ramped-up demand. As a result, many of them are struggling to process the amount of freight flowing into their network. In the end, this leads to poor service for shippers, along with a jump in cargo claims. Strategically raising rates on overbooked lanes to deter demand is generally the go-to solution.
This is one reason why shippers increasingly see certain lanes priced sky-high. Meanwhile, others might be operating at a 70% discount.
LTL carriers primarily formulate their pricing bids to shippers with a percentage discount off of their base rate. After an LTL’s pricing department determines a rate for a shipment from one zip code to another, taking into account their costs alongside supply and demand factors, the carrier will then offer the shipper a bid with a percentage-based discount, such as 50-60%.
This makes price shopping difficult for shippers. One carrier might be offering a 60% discounted route, while another is offering 40%. But they often don’t know what the base rate is. This means that they can jump at the larger discount, even if it’s not the more affordable option.
At Redwood Logistics, we make LTL pricing simple. We absorb the variables, accessorial fees, and discount-based pricing models that make LTL rates complicated. Better yet, we provide our shippers with straightforward price comparisons so they can make the right decision for their freight.
Want to know how Redwood can help you navigate the ongoing supply-demand imbalance and ever-changing rules and fees? Reach out to us today and let our supply chain professionals show you where we can save you money.