How to Negotiate Freight Rates: A Guide For Carriers, Freight Forwarders & Shippers
Freight rates account for about 58% of a company’s overall logistics cost and can have a significant impact on its overall profitability. While freight rates differ between various modes of transport, the majority is spent on trucking.
In a highly competitive market where freight rates fluctuate due to a variety of reasons, rate negotiations between shippers, freight forwarders, and carriers are an important component of a company’s competitiveness and profitability.
Negotiating freight rates effectively is more than just being charismatic and confident. It’s a skill set that is honed through learning and experience. It requires a thorough understanding of the market, your company’s unique value propositions, as well as your customers and competitors.
In this article, we will be teaching you the best ways to negotiate freight from a carrier’s, freight broker’s, and shipper’s perspective:
Negotiating Freight Rates For Carriers & Truckers
Trucking companies are service providers to shippers and consignees, transporting their cargo from one location to another. While market rates are generally fairly stable, there are various aspects that can affect it, including demand, type of cargo, special handling requirements, and location, among various others.
As such, it’s important for carriers to understand their internal costs and determine what their customers are willing to pay for their service. The better these types of costs are understood, the better they are able to negotiate freight rates with their customers.
1. Understand Your Operating Costs
Carriers (such as trucking companies and shipping lines) have various costs that they need to consider before negotiating freight rates. These costs include truck driver expenses, labor, vessel and truck leasing, among many others. Here are more examples:
Upon deriving these costs, trucking companies typically compute their average Cost Per Mile (CPM), which indicates how much a traveled mile costs them to transport cargo. They can then use this to better determine and negotiate the freight rates with their customers.
On the other hand, shipping lines and airlines have various types of fixed and variable costs that they need to account for when negotiating their rates.
2. Communicate Your Value Proposition
The more clearly carriers define and communicate their value proposition to their customers, the more they are able to differentiate themselves from their competitors.
For example, carriers who practice effective route planning, understand customer requirements, have special knowledge in certain sectors or industries, or can provide value-added services such as lumper services or drop trailer arrangements, have better leverage when it comes to negotiating more favorable freight rates.
Customers place emphasis on the quality of services, experience, and expertise. In essence, the more reliable trucking companies, shipping lines, and airlines are able to differentiate themselves from competitors, the more revered and in-demand their services will be perceived.
3. Consolidate Your Rates
Another important factor in negotiating freight rates is to price effectively. This entails using industry benchmarks, market research, and customer surveys to understand which sectors and routes return higher margins.
In some circumstances, rejecting offers may be more favorable than undercutting your competition at the expense of higher profitability. Therefore, have a clear pricing strategy and understand what type of loads, industries, and customers you are targeting.
Having a good understanding of the industry and your rate structure will make your negotiations more effective, at the same time increasing your trustworthiness and transparency with your potential customers.
Negotiating Freight Rates For Freight Forwarders
Freight forwarders are intermediary service providers that organize and coordinate the transportation of cargo on behalf of shippers and consignees. While these activities add value to their customers, freight forwarders are often regarded as “middlemen”, operating on thin margins.
Therefore, they’re required to procure low rates from their service providers such as trucking companies and shipping lines, and sell them to their customers with a margin. Freight forwarders who are adept at doing so would be able to earn better profit margins.
Here are three key aspects of how freight forwarders are able to effectively negotiate freight rates.
1. Understand Your Buying Rates
It’s common for freight forwarders to work with multiple service providers, such as customs clearance agencies, trucking companies, airlines, shipping lines, and even fumigators.
As such, it is vital for them to leverage existing shipping volume, reputation, and relationships when negotiating freight rates with their service providers. Let’s take a look at these considerations in more detail.
- Shipping Volumes – Freight forwards move huge volumes for their customer base and therefore have a substantial amount of freight under management. Through economies of scale, they have the ability to effectively negotiate more favorable rates and terms with their service providers.
- Contract Length – As freight forwarders have a broad and large customer base, they are able to secure long-term contracts with their service providers and secure more favorable rates throughout a longer time frame.
- Relationship – Building solid business relationships with logistics service providers builds trust and can help to offset perceived risks. This gives freight forwarders more negotiating power in securing lower buying rates in the long run.
- Supply & Demand – Freight forwarders have a unique business model with access to a broader range of market intelligence. Using this knowledge, they can easily identify service providers that have a preference for specific routes or are looking to expand their reach to specific industries. This shifts the negotiation priority from rates to fulfilling supply and demand, allowing freight forwarders to improve their margins.
2. Consider Competitor & Market Rates
Keeping track of your competitor’s rates and pricing strategies allows you to position your own rates more effectively. Using current market data and trends should be a crucial element of your pricing strategy, which helps benchmark your rates against your competitors.
As market conditions can change at any time, it’s vital to stay up-to-date with price movements of the market, innovations within the industry, and similar aspects that can impact your pricing strategy and your ability to negotiate rates with your customers.
3. Optimize Your Selling Rates
In essence, freight forwarders generate profit by selling services to shippers and consignees for selling rates that are higher than their buying rates.
To optimize selling rates as a freight forwarder, it’s crucial to conduct comprehensive market research and analysis, which entails understanding current market rates, as well as customer demands and budgets (how much they are willing to pay).
It’s important to highlight the value your company brings to your customers, which helps to improve your opportunity to negotiate more favorable rates and terms.
Negotiating Freight Rates For Shippers
Shippers are typically companies that manufacture and ship goods. As large shippers sell domestically and internationally, it’s crucial to secure competitive freight rates to lower their overall cost of goods sold (COGS).
In order to negotiate favorable rates with logistics service providers, shippers must first understand their internal costs (manufacturing, raw material, handling, etc).
1. Understand Your Costs
As with any other company, shippers need to first understand all internal costs associated with manufacturing, fulfilling, and shipping products.
Manufacturers have to account for product costs (costs that are directly related to the production of goods) and period costs (costs that incur indirectly in the manufacturing process).
Here’s a general list of costs that should be considered:
- Direct Materials
- Direct Labor
- Manufacturing Overheads
- Selling Expenses
- Administrative Expenses
2. Determine Your Freight Spend
Determining freight spend for shippers requires you to calculate the total cost associated with the transportation of goods. This may include pickup and delivery charges, courier fees, freight forwarding fees, customs clearance fees, and similar.
Understanding industry benchmarks gives you an idea of how much your freight spend should be, compared to the overall cost of goods sold. For example, the total freight spend for food manufacturers accounts for about 5% of their overall cost of goods sold.
3. Offer Value Propositions
Negotiating freight rates with logistics providers such as freight forwarders and trucking companies is an important strategy to reduce transportation costs and improve the overall efficiency of their supply chain.
Here are some key value propositions to consider when negotiating freight rates:
- Volume Consideration – Having stable shipping volumes and showing year-on-year growth can entice better rates from service providers, as this gives them a stable base load to work with.
- Integrate Your Service Providers – Treat your service providers as business partners and integrate them into your supply chain. This gives them the ability to understand your processes and also price more effectively and transparently.
- Payment Terms – Having shorter payment terms gives logistics providers (especially freight forwarders) better cash flow. In turn, this allows them to pay their vendors faster and therefore allows you to negotiate more favorable freight rates with them.
- Convey Experience & Knowledge – Logistics providers are more inclined to offer competitive rates when shippers understand their business model, the overall market conditions, and the logistics industry. Therefore, it’s critical that your service providers understand your company’s position in the market and that it possesses relevant supply chain experience.
In summary, formulating and communicating a compelling value proposition can incentivize logistics service providers to offer competitive rates and favorable terms, as it presents a mutually beneficial opportunity for both parties.
In other words, a strong and coherent value proposition demonstrates the value you bring to them. This is particularly effective if you’re a market leader in your industry.
Resources: Getting Market Rates
Understanding market rates and benchmarks when negotiating freight rates is crucial for carriers, freight forwarders, and shippers alike, as it allows for fair and competitive pricing.
It also promotes transparency during the negotiating process and prevents parties from overpaying or undercharging for freight services. Here are some key resources that you can use to your advantage to ensure that you understand the latest market trends and rates in your industry.
Conducting surveys can provide valuable insights into current market rates. This can be done with your customers and service providers and also offers you additional insights into your service quality or performance.
Staying updated with the latest news and trends in the freight industry will help you stay attuned to changes in your supply chain. It will also allow you to project and anticipate freight rate changes.
Subscribing to industry newsletters will provide you and your company with market updates, trends, and competitor information, which can give you an advantage when negotiating freight rates. Here are some popular supply chain newsletters:
- Supply Chain Digital
- Supply Chain Brain
- Supply Chain Management Review
- Supply Chain Dive
- Supply Chain Digest
Load boards are online tools that help shippers find loads by advertising them to carriers to bid on. Most load boards come with sophisticated features including market rate visibility, negotiating functions, and more.
- More Information: Best Load Boards
Benchmarking websites provide critical insights into market rates by industry and location. These websites aggregate data from multiple sources and provide a comprehensive comparison of available rates on the market.
Websites like Xeneta give you direct access to air and ocean market rates. You’re then able to use this information to negotiate more favorable freight rates with your service providers.
Co-Founder & Writer
About the Author
Andrew is a multi-business owner with over 10 years of experience in the fields of logistics, manufacturing, operations, training, and education.
Being the co-founder of freightcourse has given him the ability to pursue his desire of educating others on manufacturing and supply chain topics.