Most people can understand why Truckload rates go up and down based on the lanes, and based on the time of the year. In the TL world it is all about capacity, so when capacity is low rates are high, when there is too much capacity the rates are low.
Then why is LTL pricing so complicated? Consider this, LTL carriers have a network of Terminals, scheduled Line haul operations, they know their capacity, and they can usually add or subtract capacity fairly quickly. So LTL pricing shouldn't be complex, it should be fairly simple, right?
To get an understanding of why LTL pricing is what it is today we first need a little history on LTL Pricing. Before 1979, all LTL prices were regulated by the government, every lane, class and commodity had a fixed price, and that was that. After de-regulation came about, competition begin to take hold in the LTL industry, and Carriers began to compete by offering discounts off the base rates that had been carried over from the days of regulations. This idea was fairly simple because initially all of the carriers had the same base rates, and now carriers were offering discounts on those prices. As time went on the LTL carrier community, without the customer’s knowledge, began to develop their own base rates so that a 5% discount resulted in very different prices from carrier to carrier. Most of these tariffs were based on the carrier's network of terminals, capacity, and whatever niche the carrier was targeting. Now there are as many tariffs as there are carriers, so you could have 80% discount with 10 carriers and you would get 10 different rates from each carrier for the exact same shipment.
LTL pricing has only become more complex as more competition entered the market and competition has grown fiercer. In economic theory there is a pricing model known as Dynamic Pricing, which in its simplest definition is a pricing model that will command the highest possible price that the market will bear on a particular product or service. The best example of this is in the Airline industry where it is very probable that nearly everyone on the same flight paid a different price for their ticket, even though the exact same service is being rendered to each person on the flight.
So what the LTL industry has done is to develop tariffs that will maximize the profit margins based on their Network Design, and the price changes in very fine increments based on weight, lane, freight class, and freight dimensions. Then when the LTL carrier negotiates their rates with the shipper, their goal is to design a pricing agreement that maximizes both revenue and profit based on the customer's shipping history and what the competition is offering the customer. What this means for the even the most savvy customer is that the best price the customer is able to get is still close to the maximum price based on what the market has offered i.e. competition, and what the customer is willing to pay. To further complicate matters, LTL pricing is also broken up into segments which are the discount, class exceptions, and accessorial charges, and this further complicates LTL pricing and further ensures that the Dynamic pricing model will hold.
There is an alternative approach however that will allow the shipper to circumvent the dynamic pricing model that LTL carriers offer. This is what I call an engineered pricing solution. An engineered pricing approach is where a shipper has a deep understanding every carrier's pricing structure, costing model, network design, on which lanes carriers need freight, what types of freight each carrier prefers and so on. A shipper can spend years studying every carrier and come to an understanding of how to engineer the best price, or the shipper can partner with a 3PL that has the knowledge and technology that will allow the customer to realize the best possible price on each and every shipment.
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