April 2004 | Commentary | Viewpoint

Why Motor Carriers are Turning To Pallet Position Pricing

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Here are two scenarios that involve the same freight market. In the first instance, a truckload carrier looks for freight to fill out a three-quarter load from Los Angeles to Atlanta. If the carrier can add a quarter load, the revenue on the load suddenly jumps to a highly profitable level. But there may not be other freight available, or visible to the carrier. Often the open space goes unused.

In the second scenario, an LTL carrier stumbles across a seven-pallet shipment. The carrier occasionally gets large shipments, but may not have a targeted program to attract large shipments and handle them efficiently. The LTL rate structure, cubic foot rule, or linear foot rule is applied.

Do these two carriers know their situations are in the same market? Probably not. The truckload carrier might see this as the low end of the truckload market, where it looks for opportunities to boost margin by using a stop-off. The LTL carrier sees this as the high end of the LTL market—not its core shipment base, but profitable when it head-loads the freight and applies the usual tariff.

In fact, the carriers' freight is in a distinct market. Not truckload, not LTL, but partial-load. These are shipments that often fall into the 5,000- to 15,000-pound range by weight, or the five-pallet to 15-pallet range by cube (i.e., floor space). This is a market that can be pursued with unique pricing structures and operating methods.

Many LTL and truckload companies, however, are limited by existing operations and pricing structures. Fortunately there is a distinct way of pricing and operating in this market to more accurately represent costs.

Pallet position pricing has been growing in popularity, and offers several benefits. These include:

1. A common language for shippers and carriers. Everyone can relate to the term "pallet" and immediately translate this into a representation of space on a trailer (a stack of boxes or pallets is a pallet). LTL pricing using the National Motor Freight Classification (NMFC) system is too complicated, while truckload pricing per mile doesn't apply to a partial load.

2. Measuring cubic space for more accurate pricing. Freight characteristics have been gradually shifting. Density has declined due to factors such as the types of products in the U.S. economy, for example, the replacement of metal with plastic. Cubic space, in the form of a pallet position, is becoming a better measure of carrier cost than weight.

3. Incorporating weight for increased accuracy. Weight adjustments can easily be incorporated into pallet pricing for situations where density is high, converting weight into an equivalent number of pallet positions.

4. Uniformity in shipments allows for easier price comparisons. Prices are clear and easy to compare among carriers because they are all in the same base unit: a pallet. Shippers can easily identify up front how many pallet positions they need for their freight, eliminating the need for classification debates.

Carriers need to keep in mind two key principles when setting up pallet position pricing. First, make sure the pricing is consistently profitable. Too many carriers utilize pallet ranges, only to find out later their profit/loss varies widely within the ranges.

Second, compare prices with several LTL carriers, and gradually move toward full truckload market prices as shipment size increases.

In addition, the pricing bias in one lane vs. another is different in both the truckload and LTL markets. The price relationship between lanes, therefore, has to balance the pricing bias of the two groups of competitors. Be competitive with both LTL and truckload carriers without leaving money on the table as the low-cost leader.

Pallet position pricing gives focus to the blurring lines between LTL and truckload carriers, and eliminates the headaches of the classification system and complicated tariffs. Shippers can relate to the size of a pallet, and may view pallet position pricing as a progressive component of 21st century freight management.

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