2023 has certainly been a year full of change in LTL…
And 2024 is lining up to be another year with more of the same.
One major shift we foresee? A continued move towards dynamic, density-based pricing. That type of pricing often is dynamic in nature, relative to traditional LTL pricing based upon static rate bases, discounts, FAKs, and accessorial charges.
💰 Framework for Dynamic Pricing
The two largest LTL carriers announced branded dynamic pricing programs in late 2022 where the price for a given shipment is set dynamically based on the shipment’s attributes.
Rather than determining the NMFC Item/class for that shipment and then computing charges from a base rate tariff, these dynamic programs operate more as a “black box” that inputs the variables and then outputs a price.
Several other major carriers have already rolled out their form of Dynamic LTL pricing. SMC3, a digital connector in LTL, has built a framework for dynamic pricing that any other LTL carrier can utilize.
These models are like renting a car online. You pick the car rental company, the dates, the location, and the type of car you want, and the rental car company gives you a price based on those variables.
Change the date, the location, and or the car type, and the car company can quickly provide an alternate price based upon those changing variables.
The “black box” that carriers often use for their Dynamic Pricing program is their Costing Model, or a cost estimator version of this Costing Model.
The idea is to input the parameters of a shipment that impacts its cost, and the “black box” spits out a price. Variable shipment parameters are components like the verified pickup and delivery address, piece count, packaging type, weight, and dimensions of each handling unit.
That price may be solely based upon cost-plus target margin, but it can also account for market rate levels, carrier appetite (or lack thereof) for certain freight profiles, and long-term need for freight in specific lanes, just to name a few factors.
Bottom line: Dynamic pricing allows a carrier to set a specific price they want for a specific shipment that the shipper is offering and allows the carrier to put their best foot forward on each shipment quoted.
🦠 The Role of the Pandemic
COVID-19 had major impacts on the LTL industry and the ways that LTL carriers conduct business - one being how carriers are generally much more accepting of sharing a shipper’s business with other carriers post-pandemic.
Each carrier has an ideal profile of freight they want and a profile of freight they don’t necessarily prefer. While one carrier may readily accept liftgate and residential delivery freight AND bulky freight that they can “Tetris” into their trailers, another carrier may detest liftgate/residential freight and prefer only pallets that are very dense to maximize trailer weight.
Carriers can’t quite target the specific freight profiles, services, and lanes that they want with traditional LTL pricing - but they can with Dynamic.
Example: Carrier X may have very few liftgate trailers at their terminal in Birmingham, AL. They really don’t want Liftgate freight because they can’t service it…but they’re in the process of adding more trailers with liftgate, so it’s in their horizon.
Their goal is to have a high Liftgate charge that they can reduce over time to encourage more Liftgate freight…but that can be pretty challenging with traditional LTL pricing. The carrier would have to renegotiate pricing agreements with all of their customers who may ship to the Birmingham area.
With Dynamic pricing, however, they can adjust the price for Liftgate service behind the scenes. For Birmingham shipments needing Liftgate service, rate quotes are dynamically adjusted to secure the amount of Liftgate business this carrier wants.
If it’s done right, dynamic pricing will be advantageous to small to mid-sized shippers. Carriers will be able to quickly and easily set up these small to mid-sized shippers with the right pricing program without having to go through negotiations on the discount level, FAKs, all that fun stuff.
Just put these shippers on the Dynamic pricing program and give each of them the best price the carrier can offer for each shipment they have.
Dynamic pricing has to be done right, though; it can’t be too “dynamic” that its prices rise/fall too quickly or become too expensive in a given lane that the shipper has to source other carriers.
So there may be a need to set “governors” on Dynamic pricing programs to ensure rates offered are within a market range and don’t harm shippers.
🤝 How will Shippers + Carriers benefit?
The benefit of Dynamic pricing for shippers is a pricing program that forgoes the NMFC… so there’s no need to understand and stay on top of such a complicated guidebook.
Pricing is straightforward, based on objective data points like weight and dimensions. Not subjective data points like material composition or intended use of product.
The result is a pricing program where each shipment covers its own cost, eliminating inefficient cross-subsidies.
Carriers can evolve towards accepting accurate shipment data from carriers as long as it’s accurate and “good enough”. Shippers are routing their freight with the carriers who want it most.
The big sell here is a pricing program with greater cost visibility, lower prices as carriers compete for the shipments they want, and fewer invoice discrepancies. That’s a lot to like for shippers.
The major benefit for carriers is that they don’t have to accept money-losing freight due to an inefficient pricing program, hoping that other shipments make enough profit to offset. They instead have a real mechanism to offer pricing to encourage and discourage freight daily on a lane basis.
It can encourage shippers to provide them with the critical shipment profile data they need to price and cost shipments, meaning fewer invoice discrepancies and thus less payment friction and faster payments. That’s a lot to like for carriers.
We expect to see more and more carriers adopt Dynamic pricing models in 2024 and expect carriers who already have Dynamic pricing model to continue pushing it to their customers more and more.
Pricing dynamically will gain wider acceptance with 3PLs and shippers; in fact, by the end of 2024, we expect virtually all transactional “blanket” 3PL pricing from carriers to be Dynamic in nature.
The future is here… so let's live dynamically! Reach out to someone on our team today here to chat more about leveraging dynamic pricing. We're always down to #LetsTalkLogistics 🚀
This article was collaboratively written by “LTL Observers” - a collective of industry veterans spanning the carrier, shipper, 3PL, and tech provider spaces who are willing to report their findings and share opinions.
Want to get involved with these opinions we release? We'd love to add you to the line-up to make sure we're including a diverse set of LTL observers. Contact us today.