The 12 Traits of Highly Profitable Trucking Companies: Centralized Pricing – A Winning Structure
KSM Transport Advisors (KSMTA) has worked with over 200 trucking companies since our inception. Our primary service focuses on guiding trucking company leaders in understanding their freight network and determining strategies to improve the density, velocity, and ultimately the profitability in their geographic footprint. In delivering this service, the KSMTA team has observed and documented 12 key traits of highly profitable trucking companies.
This article is part of a series highlighting the key traits and focuses on trait number five of 12.
In the insurance industry, an actuary’s role is multi-faceted but primarily focused on risk accounting and premium setting. Insurance actuaries use statistical analysis, mathematics, and financial theory to help insurance companies determine appropriate premiums and manage risks. They analyze data and assign probabilities of future events, work closely with underwriters and claims adjusters, help develop new insurance products, and ensure insurance companies’ financial stability and profitability. They must stay up to date with changes in industry regulations, potential risks, and technological innovation.
Like the insurance industry, carriers can benefit from using the actuarial model of “centralized pricing.” The spot and contract rate environment has been in a nosedive over the last 12 months, and this change rapidly affected the typical truckload carrier’s margins and balance sheets.
Exploring “Price Discovery”
It can be beneficial for organizations to embrace a more scientific journey of price discovery. We have observed the traits of the best-performing trucking companies in any market, and one trait that stands out is having a centralized pricing model. This model includes a group of math-driven professionals that are master collaborators and operate like a third-party objective price discovery team. Establishing a centralized pricing model is critical in moving a carrier to the next level while eliminating the finger-pointing that is inevitably part of operations in a down market. In the current market, moving toward this model now will prevent further margin erosion and set carriers up for higher-than-average margins with the next up cycle.
Over the past six months, there has been an explosion in mini-bid requests from shippers. This attempt at resetting rates has significantly increased the workload of already overburdened employees. Most carriers were not ready for this onslaught, and the requests were packaged with an unreasonable sense of urgency from the shipper, resulting in many factors not being considered in the rates submitted. These situations can snowball and cause trust erosion within the business. The more pressing issue is that regardless of our current cycle, the more frequent price discovery trend will continue. Perhaps we will one day see the elimination of spot versus contract rates, replaced by dynamic pricing akin to the airline industry. This whitepaper by MIT professor Chris Caplice thoroughly explains the evolution of truckload pricing and hints at what the future holds for price discovery.
Observations of carriers that have used the actuarial model of centralized pricing to their advantage have led to the following suggestions to move towards this model and profit in the future.
- Elevate the role of pricing: For LTL companies, the responsibility of pricing is always handled by an executive-level leader. It is arguably the most critical role aside from the CEO. Elevating the pricing leader to an executive position establishes new expectations for them personally and within the organization for proper rate-setting.
- Establish clear pricing policies: Establish policies that outline pricing guidelines, discounting policies, and the process for making pricing decisions. Since price is one of the most impactful components of a profitable trucking operation, it would seem that pricing documentation is paramount for every carrier. However, this is not typically the case. When an actuary sets a price, they also provide underwriting guidelines that establish allowable discounts and up-charges based on the unique attributes of the insured risk. For carriers, this starts with defining the organization’s core freight network – the concentration of the most density and which markets are prime for future growth. It’s also important to account for cost factors unique to specific lanes, customers, and locations.
- Mandate collaboration and accountability: For an actuary to be successful, they must collaborate with their peers to account for both quantitative and qualitative factors that may not appear in available internal and external datasets. Too often, rate decisions are made without the input of all key department leaders (operations, finance, sales, logistics (if applicable), and safety). If one of these groups is left out, there’s a risk of not accounting for costs that have occurred, potential liabilities, or rate guidance. A great best practice is having each department leader provide high-level commentary on each event as it is received and sign off before each submission with searchable comments. Many high-performing carriers have built databases and interfaces to manage bids, which requires mandatory collaboration and accountability. However, similar processes can be established with Excel or common CRMs.
- Invest in data: Access to an external market rate index is table stakes in trucking. A crucial part of rate or price discovery is understanding your company’s position in relation to the overall market. However, the primary focus should be understanding how assets performed with the freight hauled on a given set of lanes with specific customers. Many carriers don’t understand the profitability of their freight network on a customer-by-customer and lane-by-lane basis. Investing in a profit-mapping method will allow companies to know where they need to hold firm and where they can grow market share with below-market rates. For a pricing department to be scientific in its analysis and decisions, access to data and analytical tools is crucial to support their choices.
- Provide training and support: The pricing team’s responsibility does not end with a rate submission. To build trust in the centralized pricing model, this team must continually refine its assumptions and pricing guidelines and make that information available to the rest of the organization. Doing simple things like sharing details of each round of rate submissions for specific events, along with eventual awards, keeps the team aware of freight that may be entering the network in the future and the thresholds for what is considered profitable and why. Continually reinforcing the complexity of truckload pricing and all factors that play into rate setting will force everyone to understand the true costs of hauling freight.
By implementing a centralized pricing model, carriers will be better positioned for future growth while also reducing the potential for conflict and culture erosion.
Our next article in The 12 Traits of Highly Profitable Trucking Companies series will highlight the key trait of the Courage To Shrink.
To learn more or discuss any of the ideas shared above, please contact a KSMTA advisor or complete this form.
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