Setting your rates

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Setting your rates

by Timothy D. Brady

Aug 4, 2005 8:55 AM

The one area that seems to confound a large number of owner-operators conducting business under their own authority is, “How do I determine what my rates should be?”

The decision what to charge a customer (or broker) for use of space in your trailer must be simple but concise. The most important factor in figuring rates is, "What is it going to cost?" The operative word here is “COST,” the cost of doing business! It is not what the competition is charging, or what the customer wants to pay, or checking the wind to see which way it’s blowing. Moreover, it’s not just knowing your costs but the process of breaking them down into the proper expense areas, so your calculations reflect the correct answer for putting your rates together. Without knowing your costs and without categorizing them in the correct expense areas, it’s like attempting to drive a fully loaded 18-wheeler down the Tail of the Dragon (on the Tennessee/North Carolina border) blindfolded: you’re doomed from the start.

In determining your rates, the following factors come into play:

1. Know what it costs you to own and operate each piece of equipment. This must include your Cost of Ownership (fixed cost) per day and your Cost of Operation (costs per mile).

Trick: You need to separate your expense categories into three distinct areas:

Cost of Ownership (fixed cost): expenses that would be paid even if you went on vacation. Add all of the Cost of Ownership expenses that occurred over the last year for your Annual Fixed Cost Total.

Cost of Operation (cost per mile): expenses occur once you turned the ignition key. These must be calculated from the most recent expense figures available. Yesterday would be best, but don’t use any figures earlier than last month. Cost of Operation (cost per mile) figures that include last quarter or, worse, the last twelve months of operation, will make your rate or profit figures calculated with them useless.

Shipment (Load) Specific Costs (variable costs): any expenses directly associated with a particular shipment or load, but which may not be a part of the cost structure of other loads: items like tolls, labor, special permits, special equipment, border-crossing fees, load rearranging costs, etc.

2. Know both your daily and monthly break-even points for each piece of equipment. (This is the point in time where you bridge from a loss or “just covering costs” to actually showing a profit.)

Best way to know this is by knowing what your annual Cost of Ownership is and dividing it by 365 (days) or 12 (months) respectively

With these numbers, you will know what your daily and monthly break-even points are. In addition, these numbers help you determine the profit quality of a load.

3. Have a fuel surcharge strategy in place.

Your best bet here is rolling your fuel surcharge into your rates. Frankly, your customer really doesn’t care what your costs are. He’s interested in: will the shipment be picked up and delivered on time, will it arrive at destination in the same condition it left the warehouse in, and what will the rate be. Note: these are in order of importance for the vast majority of shippers and receivers. The rate is in there, but it comes in third each time. Without the first two, the freight cost has no value to the customer.

4. To determine your rate range:

Take your Cost of Ownership and multiply it by two. This becomes your minimum net profit figure. Lowest amount you want to make after all expenses (including your Cost of Ownership, Cost of Operation, and your Shipment specific Costs) are paid.

The total rate that includes your Profit per Day plus your Cost of Ownership per day, times the total number of days involved in the load, plus your Cost of Operations (cost per mile) times the total hub miles, plus your Shipment Specific Costs. The answer becomes your minimum rate. From this, you can build your rate range so you provide yourself with negotiating room when talking to a broker or a shipper.

Take your Profit per day figure; is it at least two times your Cost of Ownership per Day number?

If it’s not, subtract your Profit per Day from your Cost of Ownership per Day and the total is the amount per day you are short.
Take the amount you’re short (Profit per Day) and multiply it by the total number of days you’ll be involved in the load.
The total from this calculation will be the amount by which you need to increase your portion of the hauling revenue.

NOTE: Time, not miles is the crucial determining factor in whether you make money or not in the trucking business. Remember you can never guarantee the number of miles you drive in a day, a week, a month, or a year. But you can guarantee the amount of time you have available to work each day, week, month and year.

Before you accept a load, ask yourself:

Do I have address-to-address mileage required for the load?
Do I know the length of time required to complete the load?
Are both the cubic feet of space and weight of the shipment to be loaded known?
Is there profitable return tonnage scheduled with little or no sit time? (Drop and pick the same day or the beginning of the next day.)
Is the revenue in line with all my costs of the specific unit and driver assigned to it?
Am I running with a truck filled to capacity?
Is the Profit per Day I’m receiving minimally two times my Cost of Ownership?
Will the load be handled within the hours of service regulations?

When most owner-operators call a broker the first question they ask is “How much does the load pay?” That’s the reason they usually receive the lowest rate. Imagine you walked into a truck stop service department and the service manger asks you, “What can we do for you?”

You answer, “I need a PM Service.”

Has the service manager ever responded with “Great! And how much will you pay us to do the job?” Doesn’t happen, does it!

But if it did, what amount would you tell him? Most likely, the lowest figure you could get away with. Now put yourself in that broker’s shoes. How would you handle the question “How much does this load pay?” Again, you would give the lowest number possible.

Note: Some of the questions you need to ask the shipper or broker are:

What’s the load consist of?
How much space is required?
What does it weigh?
When does it load?
What is the loading address?
When does it deliver?
What is the delivery address?
Are any additional services required?

You didn’t ask them how many miles. You should have the necessary program to determine your actual hub miles for calculating your revenue. Again the most important information you’re asking for is time, when does it load and when does it deliver?

This is why it is important for you to know your rate range, and the shipping environment in which you’re looking for a load. If you know there’s lots of tonnage available in a given area and few trucks, present them with your highest rate and stick to your guns. If there are more trucks than loads, toss them a mid-range rate and negotiate. If you’re not sure what the situation is, always hit them with your highest rate. The broker will let you know what the truck-to-load ratio is, and you can negotiate from there. Never start with your minimum rate. Think in terms of not only selling Eskimos the freezer, sell them the ice cubes too. It is very important that you establish a rate range and rate strategy.

Keeping these details in mind on each load will help to insure you’re operating a profitable trucking operation.

Remember it’s your truck, your business.

For more information, comments, or questions, please contact Tim Brady by e-mail at tbrady@writeuptheroad.com

www.truckersbookstore.com now expanded to include items from Smart Trucker, LLC, Hawkeye Specialties, Above All Company, and American Moving Supplies, Inc.

For those who entered our contest last month: Thank you for the tremendous response.

1. Why is it important to separate your Shipment Specific Costs from your Cost per Mile and your Cost of Ownership areas when determining each load’s profit potential? Because those costs only apply to that specific shipment...they would actually skew your cost per mile and/or cost of ownership. (You don't pay them every time - with every load.)

2. What three things are required in determining what you should charge each customer you’re hauling for? Cost, Cost, Cost:

Cost per mile
Cost of ownership
Shipment-specific costs

Contest: The first person to answer correctly the questions listed below by email to info@truckersbookstore.com will receive a one year subscription to Load Profit Analy$i$ $oftware.

How many turns in how many miles exist on the Tail of the Dragon Highway?
Your minimum Profit per Day is figured by what equation?

For comments or questions, please contact Tim Brady by e-mail at tbrady@writeuptheroad.com.

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