Negotiating freight rates as a small carrier or independent contractor is in many ways different and also has many similarities to the negotiation tactics of a large carrier. Many small carriers operate under the assumption that a large carrier has more negotiating leverage than a small carrier, and to a degree that’s true if you consider the following:
Large carriers typically have
1. A pricing department
2. Individuals managing relationships with their shipper/broker clients
3. Are willing to turn down freight
4. Collective knowledge of the market by lane (see Truckload Market Pricing article)
5. Can offer volume capacity
The fact remains that small carriers (<10 trucks) make up 25% of the capacity over the road providing much needed capacity to shippers (according to MCMIS).
Shippers are negotiating rates with individuals every day. Make sure you don't fall into the most common pitfalls of other small carriers. Let's start with your pricing department.
As an independent contractor, your pricing department is you - a transportation field tested individual with an internet enabled computer (I'm making that assumption seeing as how you are reading a blog). The core function of a pricing department at a large carrier is to communicate to the market, through price, their desire to move each lane and also to ensure they are making enough margin to not only cover the direct cost of moving the truck and paying the driver, but also enough to pay their own salaries, fuel and insurance costs, the lease on the building they operate, air conditioning etc. and still return a profit.
Likewise you must understand what your costs are. You must know how much it is for insurance, maintenance on your truck, tax, etc... You also need to consider the cost of fuel on a dynamic basis, meaning the cost of fuel today from Chicago to Dallas is much different than it was 1,3,6,12 months ago. It even varies several cents per mile on a daily basis. There is no need to lay out how to exactly figure out your cost per mile here, because OOIDA has already done it for you:
Freight Rate Cost Per Mile Worksheet.xls
It is an excel spreadsheet where you can plug in your information and it will figure it out your cost per mile. Use this with the lane specific diesel fuel pricing information that truckloadrate.com provides to its users to determine that lane's real time average diesel fuel price. As of today (7/27/2007 at 4:37 pm) the cost per mile on that lane is a whopping $0.47 per mile!!! That's even with the assumption that you are getting an ideal 6 miles per gallon!!
What it boils down to is you need to be able to say, my cost is $x per mile, so that when you are negotiating a freight rate you know when to absolutely refuse the load, or you will simply be hauling at a loss.
Relationship with your shipper/broker clients
A good healthy relationship is one where you can refuse certain loads and are still offered other freight to carry. It’s a give and take relationship that can benefit both parties. If you’ve tried to build a relationship with a client (broker or shipper) and there is no give on their part, then you just have to break up, take what you learned from that relationship and move on. There are 2 huge benefits here to having a close relationship with your broker/shipper.
First, you set the level of expectation with your brokers/shippers. They know that your cost is $x per mile (including your own pay of course), so they are more informed when pricing the loads on their side. They need to be informed that just because in the past, this load paid $1.00 per mile that this just simply won't do in your business now. Letting your broker/shipper relationships know exactly what you expect up front will help them in their business as well when trying to price freight, and ultimately help you when they try to contract you to move it. With setting the expectation of your own costs, you help them help you.
Second, develop a track record with these customers. Prove your service level is dependable and honest. Customers pay a PREMIUM for that. You might do a good job one time, but consistency over time is worth much more and their highest value freight that absolutely positively has to be there on time will go to you, and you'll be compensated for it, because you have the history to demand it.
Willingness to turn down freight
Simply put: If you're not willing to refuse freight, then you will be out of business and fast.
This is your strong arm negotiating power here if needed. They have freight and they need to move it. Ask any successful carrier, be it 1 truck or 5,000 trucks, if they have ever refused freight because of a low freight rate and you will hear a resonating 'ABSOLUTELY'.
Know the demand for the lane Pricing departments have the most complex mathematical software to track trends, demand and identify where their deadhead can be minimized simply by adding a few lanes here and there to their freight mix. Good news for you is that we've already done the legwork here, and can tell you what the current market freight rate is for any lane within the United States and Canada.
If you're already a user of truckloadrate.com, then you're already familiar with the market freight rate information we provide to our subscribers. If you're not a truckloadrate.com member, then contact us and we'll set you up with a trial account so you can see it for yourself.
Can provide flexibility
Ok, so you're not going to get the 1,000 loads per month that a large carrier can contract, but what you will get are the loads that the large carrier cannot provide service for. Profitable large carriers are trying to provide as much balance in their network to reduce deadhead miles and increase truck/driver utilization. Where their network is not able to support freight, you are available.
Driving up revenue is one component of margin (profit), and controlling cost is the other. One major cost is fuel. You can reduce diesel fuel cost through a combination of good information by using the same technology the large carriers use, but we'll cover that in another posting.
If you have any questions at all, please contact us.
The laws of supply and demand apply to everything in commerce. Market truckload pricing is not exempt from this.
A driver gets a load to the southern tip of Florida, let's say Miami. It's paying 3.00 per mile on a 700 mile route. Sound's great right?
Depends really. You have to consider what that driver is going to get after he delivers that load to the retirement home near the beach. Those retires don't work, they don't really produce anything at all. They've worked their whole life, the last thing they're going to do is go to work at a factory instead of sitting at their condo. Who can blame them though? They've produced their whole lives, and now they only have to sit back and consume. This is true for the majority of the peninsula of Florida (vacationers, Disney World, orchid hunters, The Miami Dolphins, etc...).
What does this mean for a truck driver? It means that there are not many loads to get out of Florida. Not much is produced there as opposed to say Chicago. Shippers and Carriers know this.
The trucking market exists here, where the demand to move loads out of Florida is low and the supply of trucks that supply these retirees, vacationers, etc.. is high. It is not uncommon for a driver to get a load out of Florida for only 90 cents per mile. It is more common that a driver won't get a load at all out of Florida and will be deadheading up to the Carolinas or some other nearby area that had the good stuff.
The truth is that areas like Florida exist all over the United States. Areas that produce little and consume lots and vice versa.
So how do you set your rate? Short answer is you don't, the market has already set it for you. Obviously don't hesitate to turn down some underpaying load that isn't even at market or is not going to cover your costs. Negotiation tactics are a future topic for this blog also. Most importantly, know what shippers are paying carriers directly
- and we have that here at truckloadrate.com :).