Setting freight rates

Determining how to set freight rates can be confounding for small carriers. Before we get into the nitty-gritty of how to go about it, however, ask yourself whether any of the following factors play a role in how you set your rates: An amount determined by the shipper. The number of dispatched miles in a load. What the competition charges. The highest rate per mile that will make the most money. If

Determining how to set freight rates can be confounding for small carriers. Before we get into the nitty-gritty of how to go about it, however, ask yourself whether any of the following factors play a role in how you set your rates:

  • An amount determined by the shipper.

  • The number of dispatched miles in a load.

  • What the competition charges.

  • The highest rate per mile that will make the most money.

If any of those play a role, it's time to re-evaluate your hauling-rate structure.

The decision about what to charge a shipper for use of space in your trailers should be simple. The most important factor is what it will cost to deliver the freight. The operative word here is “cost,” as in the cost of doing business.

Moreover, it's not simply knowing what your costs are, but also how to break them down into the proper expense areas so your calculations reflect the correct answer for putting your rates together. Without knowing your costs and without categorizing them accurately, it's like attempting to drive a fully loaded 18-wheeler down Vail Pass blindfolded — you're doomed from the start.

Expenses fall into three categories: fixed costs, consistent variables and load-specific variables. When the figures from each are used correctly, you arrive at your break-even point. This is where the line is drawn between covering costs and making a profit. Anything at or below your break-even point will start you spiraling down a slippery slope to financial failure.

The good news is that your break-even point isn't difficult to calculate. However, you do have to recalculate it when your cost of doing business changes.

Knowing the daily and weekly break-even points for each piece of equipment you own and for your overall operation will help you determine your profit-margin range.

If you don't hit your break-even point plus your profit margin range on each load, your company will lack the financial ability to grow. Be sure and include your draw (salary) as a fixed expense. Anyone who depends on the profit his trucking operation makes to support his family will eventually fail.

You must also have a fuel surcharge strategy in place. Your best bet here is to roll your fuel surcharge into your rates. Customers don't care what you have to pay for fuel. They care whether the shipment will be picked up and delivered on time, whether it will arrive at its destination in the same condition it left the warehouse, and what the total cost will be.

Fuel prices will be one factor in calculating your break-even point each week. If they change, you can adjust your rate accordingly.

What is your hauling-rate range? The high end of the range is used when your trucks are in an area where there's lots of tonnage and few trucks; the low end is used when there's not enough freight to fill available trucks. Both rates must cover your costs and provide a profit.

The hauling rate is based on the number of days required to drive to origin from last delivery, load the shipment, transport it to destination and unload. Just like any other service industry, you should be compensated for time on task. Miles are a part of the equation, but time is the most important factor.

Whether you quote a customer per mile, by the load, by the day or by CWT (hundredweight), start with a number that includes your break-even point plus profit, based on revenue needed per day. After you have figured your per-day rate, then calculate the number of days required by the per-day rate, then divide by number of miles, CWT, etc.

Once you have established your hauling-rate range, you need the following information to determine what rate to quote a particular shipper or broker:

  • What does the load consist of?

  • How much space is required?

  • What does it weigh?

  • When does it load?

  • What is the loading address?

  • When does it deliver?

  • What is the delivery address?

  • Are any additional services required?

With this information, you can determine the following:

  • Your break-even point.

  • Your hauling-rate range.

  • The true drivable miles from last load destination to the new load's destination.

  • The time required for your truck to travel from last load destination to pickup, and then to final destination.

  • The weight, height and cubic feet required for the load.

  • The number of gallons of fuel required to haul the load and the cost of fuel per gallon.

  • If you have any return loads at destination once your driver has delivered this one.

  • The freight-to-truck ratio at all delivery and pickup points along the way.

That should help you determine a profitable and fair hauling rate.

If the rates you calculate are too high to be competitive, then it's time to go back and see what costs can be cut. If this doesn't bring you in line with what you can charge, there are additional steps you can take. We'll discuss those in a future article.

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