LTL pricing has always been of particular interest to me. When I began my career in the LTL industry in 1982 with TNT Overland Express , one of my first projects was to lead the marketing of their “Flexrate” pricing program. This initiative was designed to provide shippers with a “multiple shipment discount” or incentive if they provided a larger percentage of their freight to Overland Express. While this produced a short term spike in revenues, this pricing program was matched by the other carriers with similar multi shipment incentives. The net result is that within a few months, all carriers returned to their previous pricing programs.

Until recently, LTL pricing has not been a bastion of innovation. For many years, U.S. based carriers have used the complex National Motor Freight Classification System (NMFC) and have provided discounts off the various class rates. Each rate class (e.g. 60, 85, 92.5, 100 etc.) is tied to a well established set of variables (e.g. density, stackability, packaging etc.). In Canada, discounted class rates have been used on cross-border freight and commodity rates have been prevalent on doemstic LTL shipments for many years. In the case of the latter, carriers create product specific rates for particular types of freight.

Over time, some new pricing programs have been put in place. They include pallet pricing, where the carrier charges a rate per pallet that is tied to density and space occupied. Multi pallet shipments are rated either on a per pallet basis or as quarter loads, half loads and full loads depending on the volume of freight. To siphon off the lower weighted shipments, the courier companies have offered hundredweight pricing programs to attract market share from LTL carriers.

In recent years, two hybrid pricing approaches have been gaining some interest, “Cube Based Pricing” (see my Oct. 1, 2007 blog) and “Density Based Pricing.” In each case, these programs focus on dimensional weight measurements, cubic space occupied and distance to compute shipping costs. Density is computed by dividing the weight of the item by its dimensions (length, width and height). The typical units of measurement are pounds per cubic foot and kilograms per cubic meter. The supporters of these approaches argue that these pricing methodologies bring LTL pricing more in alignment with the actual cost of moving freight and also place them more in line with international freight shipping pricing methodologies. For shippers using load optimization software, these pricing approaches allow for better planning and cost savings. Cube and density based rates can be used as pallet pricing by relating the cube and weight components. Both of these LTL pricing initiatives are a “work in progress” since there is such widespread utilization of the existing class rate system and so much resistance to change.

With the current economic downturn, the “heavy” end of the LTL freight spectrum has come under attack. To fill trucks, truckload carriers have been attacking the “heavy LTL” segment of the LTL market. To fight back, Con-Way has introduced “True LTL Pricing.” The company is capping rates on heavy LTL shipments - - shipments that fall between 2,000 and 5,000 pounds - - at prices that will not exceed truckload pricing. To simplify the pricing scheme, the company is using a rate formula applied in truckload pricing and removing some accessorial charges. The company is also offering guaranteed delivery with the assurance that these rates will never exceed truckload rates.

Con-Way found that shippers begin looking at truckload pricing when an LTL shipment hits as little as 2,000 pounds and they will consolidate freight and hold it in inventory in order to create a full load. Truckload carriers and 3PL’s have been dipping into the LTL pool as demand for full truckload shipments has declined and additional truck capacity has become available. This move by Con-Way comes on the heels of its decision to merge its three LTL divisions into one unit and the closure of 43 terminals in its 343 terminal network.

If history is a guide, this move is likely to precipitate action from Con-Way’s competitors similar to what took place back in the early 80’s with the multi shipment discount programs. With heavy LTL freight representing somewhere between 10 and 15 percent of the total LTL freight spend, watch for other carriers to follow Con-way’s lead.