On April 30, Van’s Delivery Service delivered its last load on a $500,000-a-year account. A few weeks earlier, John Nieuwenhuis, chief operating officer of the 65-truck Grand Rapids, Mich., carrier, had tried to negotiate a 4 percent rate increase with the shipper. The customer declined and put the contract out for bid. A competitor bid the same job at 5 percent less than Van’s Delivery Service had been doing it.
“Our price was already structured on backhauls,” Nieuwenhuis says. “We were already hauling it below cost.” Rather than lower rates to beat the competition, however, he refused to budge and moved the five trucks and drivers assigned to that shipper into other areas. Although the lost revenue hurt initially, Nieuwenhuis believes Van’s Delivery Service will be better off in the end.
“All that mattered to them was their bottom line,” Nieuwenhuis says. “We can’t afford to do marginal work anymore, not with the cost of fuel and drivers. We need guys who are partners, not just customers.”
The frustrations Van’s Delivery Service faced are hardly uncommon. In a recent survey of more than 200 Commercial Carrier Journal readers, the No. 1 frustration with customers was refusal to pay a fair rate (see chart on page 34). Surrounded by competition, you offer a discounted rate and the shipper accepts. Later on, a competitor comes along and decides he can do it cheaper. The shipper agrees, and unless you compromise your rates again, you stand to lose the account.
With the fear of losing business, negotiating a rate increase can be intimidating. With capacity plentiful, shippers always seem to have the upper hand, especially with small carriers. But you can improve your chances by ensuring that you seek the right price and trying to show the customer or prospect why it might be worth paying a bit more. Start by fully understanding your costs. Then look for ways to demonstrate that you are a true business partner – that you have the flexibility to offer exceptional customer service and meet specialized needs.
Recognize, however, that the rate isn’t everything. At a given rate, two customers can have dramatically different effects on your profitability (See “Waiting to go broke,” page 35).
Knowing your costs
You can only negotiate a fair deal if you know the rate you need to make a profit. And you can only know what you need to make a profit if you understand your costs.
Rich Johnson, president of Paul Watts Trucking, prepares monthly financial statements to calculate his overall cost per mile and fixed costs. Using month-old data to calculate costs for the 34-truck carrier in Norton, Ohio, gives Johnson a “rough idea” of what he needs to make per mile. To get an accurate figure, you have to look at the specifics of each operation, such as the equipment used, the routes, and loading and unloading time.
Nieuwenhuis calculates weekly profit-and-loss statements for each tractor in the fleet. This chore might sound complex and time consuming, but Nieuwenhuis insists that he calculates P&Ls on all 65 tractors in fewer than two hours each week. He has customized a spreadsheet program to break down costs entered into the general ledger during the week.
“If you’re bleeding, you need to know where you’re bleeding from,” Nieuwenhuis says. “[The spreadsheet] is the best tool we’ve ever come up with.”
Nieuwenhuis lists fixed costs and direct costs separately and computes them on per-mile, hourly and daily bases. By using data that’s no more than a week old, he gets a realistic picture of his fleet’s financial situation. And he can easily identify lanes where he either needs to push for a rate increase or reallocate his resources. By separating fixed costs from direct costs, Nieuwenhuis also knows whether a rate on a load is at least paying the costs of moving the truck.
Many trucking company owners find tracking revenue and costs by tractor or, perhaps, by customer to be essential. If you only have data on a fleet-wide basis, you may realize that you need more money, but can’t target rate increases appropriately. Do you need a rate increase from a particular shipper because you are losing money on that haul, or are you raising a shipper’s rates because business is bad elsewhere?
The shipper is more apt to listen to the first reason, says Roger Amhof, vice president of Amhof Trucking, an 80-truck carrier in Eldridge, Iowa. If you haul for a shipper into several different markets, Amhof suggests concentrating on increasing rates in problem lanes and not on seeking an across-the-board rate increase with a shipper. Amhof believes that the more specific you are with your costs in a certain lane, the better chance the shipper will grant you a rate increase.
“What you’re trying to do is educate them as to why you can’t accept those moves,” Amhof says. “Normally you don’t have a problem, but one shipper wanted me to go to El Paso. Generally when you go to El Paso, you have to bounce 400 to 500 miles to get a backhaul. You’ve got to have that built into the rate,” he says. By showing the shipper the costs of going to El Paso, Amhof says he succeeded in getting a 20-cent increase per mile.
Most customers will understand and pay rate increases, Amhof says, if you have a good working relationship and show honesty and integrity.
“Make sure that everything you discuss is on target,” Amhof says. “Don’t try to disguise the truth. There’s really nothing else a shipper can do if you know your costs and can give a shipper a justification for an increase. We use specific numbers right out of our fleet.”
Increases due to fuel prices, inflation, excessive waiting time at docks and other costs out of your control may require you to renegotiate with the shipper. Richard Thompson, president of Thompson Trucking, a 100-truck carrier in Concord, Va., says he always explains to his customers up front about fuel surcharges and any other market-induced cost increases, such as inflation.
“Rate changes are not a secret,” Thompson says. Most customers are already aware of cost increases in the market. Just because they are aware of inflation or fuel costs, however, does not mean they will be willing to renegotiate rates. Thompson addresses this problem by including stipulations in his contracted hauls to raise rates in conjunction with the inflation rate recorded in the Consumer Price Index, published monthly by the federal government. He also includes a fuel surcharge based on the weekly fuel prices posted by the U.S. Department of Energy.
Tying some rate increases to national data, such as fuel prices and inflation, may work for most of Thompson’s customers. Some customers, on the other hand, require more convincing if the carrier, for example, wants to raise rates because of excessive time loading and unloading at docks. Automatic vehicle locating systems have helped Jerry Mitchell, president of Tampa, Fla.-based Mitchell Transport, in this regard. Mitchell Transport uses @Track’s HighwayMaster system to keep an electronic record of time spent at docks.
For one shipper, Mitchell Transport was hauling foliage out of south Florida to retail stores that were using retail clerks to receive the products, Mitchell says. Waiting time had become a problem.
“We can now use our HighwayMaster system to track when the truck got there and when it left,” Mitchell says. “We can identify excessive times and improve it instead of just complaining to the shipper about waiting time. Now, after two hours, we charge $65 per hour. Prior to having a tracking system of any kind, one guy says one thing, and another says something else. You’ve got to have a check and balance.”
Lane-by-lane financial results and onboard recorders are great tools, but many shippers won’t care that you can establish a need for more money if they can save a few cents per mile by using another carrier. Getting a rate increase, therefore, also depends on how the shipper views your relationship. If transportation is just a commodity to the shipper, you are in trouble. But if you can convince a shipper you are a business partner and not just a budget line item, you have a chance at a fair rate.
A good way to begin a partnership is simply to visit the customer and listen. Find out what the customer needs to make his operation work and customize your rates just for him, Nieuwenhuis says. “We will give him rates by the mile, by the hour, by the weight, whichever works best.”
If a customer is unwilling to accept your proposed rate increase, Nieuwenhuis recommends turning the tables back onto the customer.
“Ask the customer, ‘What, then, can you do to lower my costs?'” he says. For example, Nieuwenhuis says you can ask the shipper to guarantee detention at docks for fewer than two hours. “The key is to work with them; make them a partner.”
By getting the customer to focus on efficiency and total cost rather than just the rate, you may be successful in winning business that previously went to competitors.
“Our best growth has been taking over jobs from other trucking companies,” Nieuwenhuis says. “One trucking company had seven trucks doing a particular haul. We bid on the same job, and in two weeks had it down to five trucks doing the same volume of work.”
“It was a fair deal for both of us,” Nieuwenhuis says. “We are looking for more opportunities like that, where we design a distribution system, consolidate operations and create a win/win situation,” he says. “We try to look for niche things – that’s where the market is going.”
Frequent communication with the customer – even just idle chatting – gives you the opportunity to offer value-added service. Listen for complaints, not just about your service but about anything related to his business. If you can respond with a solution, you have improved your standing as a business partner.
When the complaint is about your service, recognize that there’s probably some justification for it. Rather than becoming defensive, focus on resolving the problem, even if it’s more perceived than real. You can’t expect the customer to work with you on rates if you are hesitant to work with the customer on his concerns.
The keys to successful rate negotiation are closely tracking costs, adapting to new and niche markets, and thinking of customers as business partners rather than customers. A partner is someone you work with; a customer is someone you work for. If a shipper can’t compromise and meet you in the middle on rate or efficiency, it may be time to walk away and build business with a shipper willing to negotiate.
Walking away is easier said than done, of course. That’s why knowing the profitability of each truck is so critical. You might stick with a haul that’s barely breaking even until something better comes along. But if you aren’t even recovering direct costs, what are you waiting for?
Living with the market
In some cases, rate negotiation isn’t really an option. For example, Keith Johnson, president of H&J Trucking in Charleston, S.C., hauls containerized freight from harbored ocean vessels.
“In this business, you don’t have a lot of dedicated carriage or contract negotiations. The ocean container business is a lot different. It’s a horse with a different color,” he says. “Shippers will change truck lines for $10.”
Spot-market hauling is another area in which you rarely have leverage. If you are scrambling for a backhaul, the market rate is the rate – period.
“When you have trucks go all over the country, you are driven more by market rates,” says management consultant David Goodson. “Sometimes it’s 90 cents a mile, and sometimes $1.60. The prices fit into a network.” (For more on network pricing, see page 76.)
The goal, as Amhof Trucking realized on hauls into El Paso, Texas, is to structure headhaul rates to take into account the freight market leaving your destination. If you are almost certain of losing money on the backhaul, you must make the case to the shipper that this is a real cost to you. The perfect situation, of course, is to have steady customers at each end of a lane.