How Do the Truckload Motor Carriers Determine Their Rates/Prices?

These fuel price fluctuations are typically added to a "base rate" for motor carrier services, so the initial question arises as to how the carriers determine a base rate.

Of course, actual fixed costs are a first step in the calculation. After that, though, several elements and supply-and-demand factors come into play to reach a "published" or base-rate level for motor carrier services.

The investment necessary for a truck/tractor and trailer is a large one. There are fixed costs that occur regardless of whether the unit runs one mile or one hundred thousand. Consequently, as more miles are operated, fixed costs are spread over more miles, resulting in a lower cost per mile.

Certain cost elements that remain the same regardless of miles run include: Insurance, license fees, general and administrative overhead, permits, phone, depreciation, and general supplies. Costs that increase as more miles are driven annually are driver compensation, fuel, maintenance and amortization, tires, and tolls.

As for any commodity, (and freight transport is arguably a commodity), supply-and-demand factors play an important role in price determination. For the past several years, supply and demand have driven the price levels of truck transport, in too many cases, even more than underlying costs. Nevertheless, basic supply/demand factors play out in an unusual way in trucking. The "regional differences" that make one region of the country exhibit higher or lower rates need to be understood. Given our space constraints, let's concentrate on making outbound shipments from defined regions of the United States.

The commodity flow measurement research done in TRANSEARCH® confirms certain geographic areas as simply having more freight coming in and less being shipped out. The destination areas with the highest costs to ship a truckload of freight are identified in dark blue. New England is one of those areas where inbound traffic far exceeds the outbound freight available for motor carriers to haul once they have delivered their loads.

The dark blue states are not only those where inbound prices are highest, but conversely, the outbound rates in these states are also lower than average. These are states where industrial and commodity production is low; hence, the lower-than-average demand for truck transport drives a lower price charged by the motor carrier. The other states typically have an average price point of the medium- and lightest-blue areas.

Freight imbalances mean motor carriers run the risk of their trucks and drivers having to run empty miles to get the next load or to lay over until a load materializes. Either way, the investment is idled or moving without compensation—two situations motor carriers strive to avoid or at least to minimize.

While this is a simplification of a more complex costing process, supply and demand are the primary determinants of the price paid in today's transport marketplace. Other elements, such as: a) the type of commodity transported, b) the volume and frequency a shipper tenders loads to the carrier c) and the competitive environment existing with the shipper, are all certainly important as well.

Of course, motor carriers must make a profit from their efforts. This can best be determined by the average rate and total revenue generated for all miles travelled on a run. The total miles on a "trip" should not only include those miles for which the carrier received compensation, but also the empty miles traveled to pick up the compensatory loads. As is evident, not every load produces the same revenue per mile, and empty miles are nonrevenue producing. As a result, negotiations between shipper and motor carrier can better be conducted when both sides have an understanding of each others' cost/price positions, needs, and driving factors that ultimately decide the final price.

Charles W. Clowdis, Jr.
Managing Director – Transportation

Steve Owens
Consultant