Around every turn in the trucking media, it’s being preached how important it is to know your operating cost. I agree that it’s vital for you to know what it cost to operate your business. However, knowing your market and how freight rates are determined doesn’t seem to get the same degree of coverage.
In the early years, while putting my business plan together I met a friend who owned a small fleet to get some advice. When I asked him how to negotiate freight rates, he laughed at me and said “this is one of the most difficult items to figure.” He explained to me that if my phone doesn’t ring, my rates are too high. However, if the phone is very busy, then my rates are too low.”
Next, he told me “freight rates have absolutely nothing to do with what it costs to operate a truck.” This puzzled me at first and I wondered why I spent almost two years working on a business plan when according to my mentor it has nothing to do with the prices charged for service. I decided to do some research on my own.
My study concluded that the only things that affects rates is supply and demand. The focus of my business was to run from two main regions which made learning the markets less difficult. The real lesson I learned early on was “your service is only worth as much as someone is willing to pay or for as little as provided by your competition.” The trick to this knows when you have the upper hand.
Looking back on my early “flatbed” days, I could get a much higher rate in Southern NJ than Northern NJ by a substantial amount. This may have changed as it’s been years since I’ve run that particular corridor. To explain the market forces at play, a large amount of empty flatbeds would come out of New York City and into New Jersey. So why didn’t those trucks just pick up loads in New York City? The reason is because New York City is what I call a “market economy” which to me means they consume more than they produce. All the trucks pouring into New Jersey upset the balance of supply and demand. To take this to an extreme level, if you get to an area and there’s a thousand trucks requiring a load and only a couple shipments to be had, whoever takes those loads will most likely take them for a low rate. However, the opposite occurs when there are one thousand shipments and only a few trucks in the area to take them.
Now, you have some negotiating power to charge a higher rate. Carriers not choosing to enter or frequent a particular location can affect supply and demand just as if every carrier wants to serve a popular area. Don’t expect to charge high rates as you’ll have plenty of competition. Also, seasonal freight can be a major factor as well. Many of these items have a two to three week period in which they need moved. Examples: (pumpkins and Christmas trees.) Due to market demands, rates can dramatically swing from low to high on any give shipment.
As a truck owner, the challenge of your job is to connect the dots between the markets you serve in order to maintain your income per mile at a profitable level.
With the upcoming holiday season upon us we can put this in perspective and ask ourselves… how much is a Christmas tree worth on December 26th?