Rich area, poor area

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It’s a good bet that when you started a trucking company, you didn’t think that knowing what to charge would be one of your biggest challenges. Start a restaurant and finding out what competitors are charging is as simple as going out to lunch or dinner. But there is no menu of services and prices for trucking. Even less-than-truckload carriers that still use published rate tariffs have so many discounts and special deals that only the shipper and the carrier really know the prices.

If your business is dedicated mostly to a single account, knowing what to charge is fairly straightforward. Simply total up all costs on a daily, weekly or monthly basis; add on profit; and then divide by expected miles, hours, weight or shipments.

Many trucking companies start out this way. But to grow, sooner or later you need to expand beyond that one shipper. Typically, your major shipper starts offering freight that takes your trucks into areas where the shipper does not have any backhauls. So you have to find loads to bring the trucks back home. Sometimes you can do this with one load; other times it may take stringing together two or more loads.

Getting those trucks home requires pricing, either for quoting rates to shippers or for deciding which loads to accept from brokers. Hold out for too high a price, and your trucks may end up sitting. Too low a price, and you will leave money on the table.

For most truckload traffic, you need to know whether the destination market area is poor, balanced or rich. To keep from losing money, you should charge more when heading into an area that’s poor. On the other hand, you might be willing to discount a load if it gets you to an area where the odds are high that you can pick up premium freight.

For van truckload carriers, a good example of a poor area is Miami, where loads are cheap and hard to find. Rich areas usually have more loads than trucks available, so rates are bid up. An example of a rich area is Memphis, Tenn. The table accompanying this article predicts the rate level on loads going from one market area to the other based on whether the area is poor, rich or balanced.

For example, the table predicts that carriers will charge a premium rate for going from a rich area, Memphis, to a poor one, Miami. This is not surprising, as virtually every carrier that prices a load into Miami builds in enough money ($500) to pay for a 400 to 500-mile deadhead back to Georgia or the Carolinas. Most truckload van carriers try to achieve revenue per total mile of a $1.20. To build up $500 on a 1,000 mile haul such as Memphis to Miami, carriers will add 50 cents a mile to $1.20 for a rate of $1.70 a mile, which certainly is a premium rate.

Now, consider the reverse. You have a truck in Miami, and you are offered a load at 70 cents a mile back to Memphis. Taking the load means avoiding a long deadhead out of Southern Florida that may cost $500. The carrier is no worse off taking this 1,000-mile load even though the rate is 50 cents a mile off its target of $1.20. Rates at 70 cents a mile are at the bottom as predicted by the table. This is why rates out of backhaul areas get so depressed as many carriers decide that taking any load is better than deadheading or sitting a truck.

The table is a good predictor of rates, but it’s no substitute for knowing the markets and prevailing rates. Carriers do not make money hauling loads at 70 cents a mile unless the previous load brought in $1.70 a mile. There are some areas of the country, such as the Carolinas or Southern California, where neither the rate in nor out offers much of a premium. When you find markets that appear to violate the prices predicted by this chart, it is a red flag on whether a truck can make money serving that lane.

Whatever segment of trucking you are in make it a habit to seek out market rate information, even for business you do not currently have. Active research is time-consuming, but it’s better than finding out market rates through trial and error. Sources of data may be fellow truckers, former sales staff or dispatchers of other trucking companies, current or former customers, or even brokers. Successful entrepreneurs who build large trucking companies always seek out this type of information, and they keep notes of what they find out.