Where do freight rates come from?

“How does my carrier come up with the cost of shipping goods?”

It’s the question shippers always ask. I liken the shipper trying to understand carrier pricing to a customer entering an auto showroom. The salesman knows exactly what went into the cost and therefore understands how much latitude there is to discount—or not. In general, the customer has very little idea of his own ability to negotiate.

It’s shocking to me how many shippers really don’t understand what their freight dollars go toward. When we are retained to review their operations, and we track and follow invoices to their origins, we are continually amazed at the cries of “I didn’t know that!” when we detail cost structures.

It’s important for shippers to know what goes into the rates they pay. In this economy, the stakes are higher than they’ve ever been and only the most fit will survive. Understanding pricing can greatly aid your chances of being a survivor.

Different pricing structures

Carriers tend to use two major formulas to determine shipping rates: the linear foot rule and the cube rule.

The standard carrier linear foot rule states that shipments occupying 10 linear feet or more of trailer space are charged for 1,000lb per foot. Usually this rule applies when there are at least five pallets single-stacked or 10 pallets double-stacked. For example, say a 10-pallet order of stackable freight occupies 10 linear feet. If those pallets were not stackable, they would occupy 20 linear feet. In the former scenario, a shipper would be charged for 10,000lb; in the latter, they would be charged for 20,000lb.

Here’s a simple rule of thumb to remember: for stackable pallets, take the number of pallets on the floor of the trailer and multiply by two; that’s how many linear feet you should be charged for. For non-stackable pallets, multiply the total number of pallets by two to get the linear foot count. Review your invoices to see if this rule is being applied.

Then there is the cube rule. Shippers often don’t really understand the nature of cube rates, and, unfortunately, transportation management systems rarely have cube calculation capabilities.

Carriers often establish rates based on a cost per cubic foot of freight occupying the trailer. If the freight actualizes fewer cubic feet than the original rate, then a cube rule is applied. Typically a shipper only sees the cube rate when it turns up on invoices; if the “billed weight” is higher than the “actual weight,” then a cube rule was applied.