Density-Based Pricing:The Next Big Change Coming to the LTL industry

The debate over whether density-based pricing will succeed in toppling the traditional National Motor Freight Classification’s (NMFC) classification based pricing in the LTL (Less Than Truckload) industry is seemingly never-ending.While one section of the carriers still believes in the NMFC, a number of LTL shippers are voting for density-based pricing as the way forward.

By a large measure, density-based pricing seems to be the easiest and also the most profitable approach in an age of one-day and on-demand last mile deliveries.

Unlike in the past, the LTL industry today has a massive volume of smaller shipments. There is also the challenge of completing same-day deliveries or at stipulated hours. Likewise, these shipments are not always of consistent size and density, making it difficult for LTL shippers to sustain profitability.

What is density-based pricing?

Density-based pricing is a pricing model where the density and the dimensional weight of the package are considered for arriving at its shipping cost.

For instance, let’s assume there is a package which bears the dimensions 40″x 45″ x 60″ and weighs 500 pounds. The density of the package will be computed as below:

40″ x 45″ x 60″ = 108000

The area occupied by the package is divided by cubic inches to arrive at a cubic foot calculation. In each cubic foot, there are 1728 cubic inches. The cubic feet occupied by the package is calculated as:

108000/1728 = 62.5 cubic feet

With the weight of the package 500 pounds, the pounds/cubic feet measure of the package for density-based pricing would be:

500/62.5 = 8 pounds/cubic feet

The shipping cost for this shipment will be calculated at 8 pounds/cubic feet.(In other cases, the measurement metric for weight could be kilograms or anything else instead of pounds.)

Regardless of the metric, the calculation process is simple which is what makes density-based pricing a favorable option for LTL shippers. NMFC, on the other hand, has several product classes, ranging from 50 to 500, each with their own unique characteristics.

NMFC has remained the primary mode of pricing for more than seven decades. As a result, all TMS (Transportation Management Systems) are also configured to work for NMFC. But as the e-commerce era has evolved, so have delivery patterns and the NMFC-based computation method has become too complex for carriers and is not aligned with global best practices.

The U.S. is the only country which still follows the class-based pricing model. Globally, LTL players have started following the density-based pricing which yields several benefits.

Density-Based Pricing Benefits

The focal benefit of density-based pricing is that it removes the guesswork involved in pricing each type (or class) of product. The simplified process leads to several other operational benefits that will improve any carrier’s bottom line.

Simple and straightforward

Density-based pricing is easy for anybody with basic math skills. Unlike NMFC, it does not have any tabulated classifications that are complicated. Since the pricing model is based on actual weights and area occupied, the confusion of what commodity class the product belongs to and how it should be charged does not arise. This helps improve transparency and charging of shipment costs between carriers.

Easier cost forecasting

Thanks to the actual density-based pricing, it is possible for customers and carriers to forecast costs for each consignment accurately. Accurate forecasting of future costs also helps in better pricing, which passes down as cost-savings.

Challenges In Moving To Density-Based Pricing

Like any major change, density-based pricing also comes with its challenges that need to be addressed beforehand.

Configuring Transport Management Systems

All the TMS will have to be revamped to make way for density-based pricing. The NMFC-based pricing has been around for decades; this means that there will be a colossal amount of legacy system data that will have to be moved to the new model. The systems will also have to be configured to allow for recording of density-based pricing model. As you know, these system configurations and customization do not come for free.

Certain careers may incur losses

Shippers who have been charging lower rates under the class-based system may have to shell out more funds under the revised pricing model. This could hurt their profitability in the long-run. Also, chances are that carriers would resort to revising old FAK based contracts in which the rates were usually charged on a flat for a mix of products. With the implementation of density-based pricing, they would be able to see how much profit they are making or losing in each shipment.

Despite the challenges, density-based pricing will gain popularity as the default option for pricing. After all, almost the whole globe is relying on it. Shippers and carriers would be delighted to have a simple way of calculating freight, which is neither too complicated nor inconsistent in usage.

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