Why Small Shippers Take LTL Carriers’ General Rate Increases in the Shorts
General Rate Increases (or GRIs) are the black box of shipping and logistics. The average shipper typically knows very little of the LTL carriers’ annual rate increases of between 4-6 percent, other than possibly coming across the news in a transport trade journal.
This post peeks inside the black box a bit to help shippers big and small better understand what’s behind General Rate Increases and how to avoid those “gotcha” moments when getting your freight bill.
First, each LTL carrier owns proprietary rates based on class, dims, origin, destination, assessorial charges and more. This may seem like a basic statement, but in reality, most SMB shippers don’t realize rates differ by carrier.
Second, when establishing their annual GRI, an LTL carrier takes its proprietary base rate and figures out how to adjust it based on increasing cost of labor, benefits, equipment, operations, insurance and more. They then model this by a group of factors, including key lanes, weight classes, and weight breaks.
The result is a varied list of percentage increases (and even some decreases). For example, the carrier may increase rates bound for Florida by 20 percent, Class50 freight by 12 percent, 1000lb break by 10 percent, and 500lb break by just 1 percent and so on.
They then take a few sample shipments modeled by lane, weight breaks and class to come away with their annual increase, typically about 4-6 percent. Of course, hard-dollar assessorial charges vary frequently. Inexplicably, this range is roughly 2-4 times the rate of inflation.
With the general mechanics established, here are some dirty little secrets behind GRIs:
Discounts are meaningless. An 80 percent discount is NOT really an 80 percent discount. The average variant between the high and low cost base rate is actually 36 percent. So when an SMB shipper is told they get an “80 percent discount” it’s not really the case. When there’s a rate change, the net change comes right out of shipper’s pocket.
GRIs impact only 20 Pct of an LTL carrier’s accounts. Remember that LTL carriers depend on 80 percent of their business through contract rates and GRIs have zero direct impact on those contracts. However, the new rates set the stage for future contract negotiations/renegotiations.
Small shippers take the hit. So, if 80 percent of shippers are under LTL contract, who’s the unfortunate 20 percent most impacted? You guessed it. Small business shippers. They don’t ship the volume to command contract rates, and pricing agreements are not contracts. Any discount received just comes off the higher base rate.
Lost in translation. In the past, LTL carriers used to send letters, put out press releases, fully communicate their GRI. I’ve noticed the approach has changed recently. Most GRI news is picked up by industry trade media, but outside of that, you really need to dig for it. They never proactively tell the customer, so pay attention to the net change, not the discount. And they know it takes a couple months before customers catch on and want to renegotiate.
My advice? Know that General Rate Increases happen every year, that amounts always vary, and they’ll be higher than inflation. Also, pay close attention to your invoices. You may discover rate increases after the fact that you paid without knowing.