TRENDS IN TRANSPORTATION-Growing use of DENSITY-BASED PRICING by LTL CARRIERS

by James Durfee

Within the last 3 years, less-than-truckload (LTL) carriers have shifted away from the traditional National Motor Freight Classification (NMFC) rate-setting formula.  In the past carriers assigned a distinct class rating to each different commodity.  Because of new scanning technology that allows carriers to weigh and inspect each shipment it has become easier to utilize more density-based pricing. Density-based pricing prices freight according to the weight per cubic foot of space (cubic feet) the shipment uses in the truck. This model has had a significant impact on shippers’ freight costs.  Due to this change, it’s important to understand the new pricing methods for LTL shipments, how it impacts rates and how to negotiate rate structures.

TRADITIONAL NMFC CLASS RATING

As background, the “class rating” assigned to LTL products, runs from a low of class 50 to a high of class 500. The higher the class the higher the cost. A rough rule-of-thumb is that using class 100 as the baseline, class 50 would essentially be 50% of the baseline cost and class 200 would approximate 200% of the baseline cost. This is a very rough approximation, but it illustrates how significantly costs can vary based on the CLASS RATING of a shipment. Class ratings are normally assigned using the following 4 characteristics:

  • Density – pounds per cubic foot
  • Handling – ease or difficulty handling product
  • Stow Ability – ability to effectively load product in the trailer
  • Liability – cost in dollars per pound to compensate pay for lost/damaged product.

PURE DENSITY BASED PRICING

Pure Density-Based pricing assigns a class to product just using the following formula:

  • Length x Wide x Height in inches= cubic inches / 1728 = cubic feet.
  • Divide weight of product (including pallet weight) by cubic feet = DENSITY

If the density = 6, the product would be classed at class 125

If the density < 4, the product would be classed at class 250

In this case the cost of the shipment could almost double if the density drops by 2 lbs./cubic ft. That’s a substantial difference and points out how important it is to understand the density of your product and how it is classified.  Remember, density-based pricing limits carrier liability.  The reduced insurance risk then falls back on the shipper to have additional insurance for high value items.

If you would like to discuss this topic further, contact one of our sales representatives at 804-729-8189.

By James Durfee