Cube Based Pricing – The Scoop on the new LTL Pricing System
There is a lot of "buzz" surrounding Cube Based Pricing and for good reason. For decades U.S. and cross-border LTL shippers have been using a complex, convoluted LTL pricing scheme that dates back to the pre-Deregulation era. Class rates, published by rate bureaus or by individual transport companies have been based on the National Motor Freight Classification System (NMFC), a set of 18 product groupings that vary according to the density, stowability, handling and liability of the products in each selected class. These 18 groups contain a massive list of products. NMFC experts meet on an ongoing basis to debate whether a four pronged widget should be categorized as class 55 or class 60 freight. LTL carriers compete by offering discounts off the published class rates.
Certain tariffs such as Czar-Lite published by SMC3, the former Southern Motor Freight Carrier Association, has become one of the de facto industry standards. In addition, individual carriers (i.e. Yellow) published their own tariffs (Yellow 500) and specific (Commodity rate) tariffs have been developed for individual shippers. These are all based on the same set of product classifications and the same set of pricing principles. The hundreds of tariffs and the complexity of the system have only served to confuse shippers as they try to compare an 81 percent discount off tariff A to a 79% discount off tariff B.
Over the years there have been some refinements to this system. More shipper friendly approaches such as pallet pricing have gained acceptance by some carriers and freight brokers in some situations. Nevertheless the class rate system has survived since there has been no viable option or acceptable industry standard.
So what makes cube based pricing so attractive?
It is Simple
In addition to being a “breath of fresh air,” one of its most attractive features is its simplicity. The 18 classes have been shrunk down to 5 cube groups. The five groups are classified into stackable and non-stackable with the latter having an uplift charge. These groups are summarized below:
|Cube Group||NMFC Class||Dentist
|D1||50, 55, 60||30.0 – 50.0||1.0 – 17.0|
|D2||65, 70, 77.5||13.0 – 29.9||17.1 – 38.0|
|D3||85, 92.5||10.0 – 12.9||38.1 – 50.|
|D4||100, 110||7.0 – 9.9||50.1 – 71.4|
|D5||125 and up||<1 – 6.9||71.5 or more|
It Makes Sense
Cubic space occupied is a critical dimension in freight transportation. Since each trailer and container has a finite cubic capacity, this pricing methodology brings focus to the importance of product assembly and packaging. The Wal-Mart “green” initiative is focused on reducing shipping costs and product wrapping costs by 5% by 2013. Of course it also reduces fuel consumption and carbon emissions. As everyone knows, fuel costs have become a major component of freight costs in recent years.
The current LTL class system breaks shipments down into various weight breaks from less than 500 pounds through 1000, 2000, 5000, 10000 pounds and up. Shippers that move palletized freight are often required to pay for a minimum pallet weight of 1200 pounds or a minimum charge of $135 for a 50 pound box. Even if a company ships an 800 pound pallet, the company pays for 1200 pounds.
The cube based pricing system takes an entirely different perspective to shipment weights. With cube based pricing a carrier can quote on any weight. Since so much freight still moves at either less than 500 pounds and/or in a non-palletized form, shippers moving a group of packages that add up to 200 or 300 pounds are required to divert their freight to the courier companies’ small parcel shipment programs (i.e. UPS hundredweight program).
Under the cube based pricing program, the weight breaks have been reduced to five groups with four of them under 500 pounds. Here is how it works.
Cube Group     Shipment Weight
W1                          100 pounds
W2                          200 pounds
W3                          300 pounds
W4                          400 pounds
W5                          500 pounds or multiples of 500 pounds
From a shipper perspective, the benefit of cube based pricing is that a shipper pays for the space occupied by the company’s freight and the precise weight of the individual shipment, not according to some arbitrary pallet weight. Cube-based pricing more accurately reflects the true costs of handling and delivery.
It is Flexible and offers a menu of customer designated options
Everyone in the freight business is aware of the end of the week, end of the month and end of the quarter shipment surges. Currently, LTL shippers are given no incentive to ship freight at times when carriers have more capacity and emptier docks. The current class rate system does not encourage shippers to offer freight to carriers at dates and times when freight is less plentiful.
Cube based pricing changes this paradigm. The new system creates a “Win – Win” scenario for carriers and shippers. It provides shippers with attractive pricing for tendering freight at non peak days. It encourages shippers to provide carriers with freight when there is more capacity.
Another attractive option is allowing shippers to specify and pay for a designated delivery time (i.e. next day by 10:00 AM, next day by 2:00 PM, second day service by noon etc.) for each individual shipment. Again this provides shippers with expedited and standard group service options rather than having to call multiple carriers for each service. For each shipment, you pay for the precise level of service required.
Similarly, freight insurance is an option that shippers can elect to pay for. This will range from no cost for no cargo insurance to $0.50 per $100 dollars for more expensive cargo. Another option on the drawing board is a prompt payment discount. Shippers will be offered a scale of incentives according to whether they pay, in less than 30 days, less than 15 days or less than 7 days.
Putting Cube Based Pricing to Work
So how do you calculate your rate under cube based pricing? The shipper and carrier first agree on the cube group and density class. If a shipper is moving freight that corresponds to density group 3, the two parties agree on a class (say 85) and then on a base rate. A 1200 pound shipment in density group 3 would be priced at 500 pound rate and then scaled up to 1200 pounds. Any additional requirements (i.e. next day delivery by 10:00 AM, insurance would be priced separately and added to the bill. That’s it.
Cube based pricing is still a work in progress. It is being refined as this blog goes to press. Initial response from those who have seen a demonstration of its capabilities has been quite enthusiastic. This refreshing new development is one that should be monitored closely by LTL carriers and shippers. It has the potential to have a dramatic impact on an industry and pricing system that have long been in need of change. It could lead to a more unified approach to the pricing of parcel and ground shipments. More importantly, it offers LTL shippers the option of determining the precise shipping characteristics for each individual shipment and paying a specific rate custom designed for that shipment. It encourages every shipper to use the most efficient packaging possible to minimize space occupied while protecting the integrity of the product. For LTL carriers, it offers a simple, flexible pricing system that can be custom tailored to their customers’ requirements. Now, that is something to talk about. For more information, contact Hank Mullen at The Visibility Group (770 241-6630).