Freight rates – the hottest topic in the world of trucking. Rates directly influence your profitability, relationships with shippers and brokers, and ability to stay competitive. For truck drivers and small trucking businesses, understanding how to calculate and set freight rates is essential to running a sustainable operation.
This guide will help you break down freight rates, explain how to set them, and show why it’s critical to strike a balance between competitiveness and realism.
What Are Freight Rates?
Freight rates are the charges for transporting goods from one point to another. These rates are influenced by a variety of factors, including distance, freight type, market conditions, and operational costs like fuel, insurance, etc. Whether you’re negotiating with shippers or working with brokers, your freight rate should reflect your costs while leaving room for profit.
How to Calculate Freight Rates
Know Your Cost Per Mile (CPM)
Your Cost Per Mile is the foundation of your freight rate. It includes:
Fixed Costs: Truck payments, insurance, permits, etc.
Variable Costs: Fuel, maintenance, driver wages, etc.
Miscellaneous Costs: Tolls, parking fees, and unexpected expenses.
Add these together and divide by the total miles you drive to find your CPM. Learn more about how to calculate your cost per mile here.
Add Your Desired Profit Margin
To stay in business, you need more than just covering your costs. Add a profit margin that ensures sustainability and supports your personal and business goals.
Example:
Cost Per Mile: $1.75
Desired Profit: $0.50 per mile
Minimum Freight Rate: $2.25 per mile
Factor in Market Conditions
Freight rates are influenced by supply and demand. Research load boards like DAT, market trends, and seasonal shifts to understand prevailing rates in your lane.
Include Accessorial Charges
Additional services like detention time, liftgate services, or fuel surcharges should be factored in. These charges ensure you’re compensated for extra work or delays.
Adjust for Lanes and Load Types
Rates vary depending on the region and freight type. High-demand lanes or hazardous materials may command higher rates, while low-demand lanes might require more flexibility.
The Importance of Competitive, Realistic Rates
Building Long-Term Relationships
Competitive rates demonstrate your value to shippers and brokers, while realistic rates ensure you’re not overpromising or undercutting yourself. Setting fair rates helps establish trust and repeat business.
Avoiding Burnout and Financial Stress
Unrealistically low rates can leave you struggling to cover expenses, leading to financial strain, potential burnout, or even bankruptcy. On the other hand, inflated rates might drive customers to competitors. Finding the right balance can be a challenge.
Staying Profitable in Any Market
A well-calculated freight rate protects your business during market downturns and maximizes profitability during peak seasons.
Tips for Negotiating Freight Rates
Know Your Value: Highlight your reliability, equipment, and safety record.
Be Transparent: Clearly explain your rate breakdown to brokers and shippers.
Leverage Technology: Use load boards and rate calculators to back up your numbers.
Stay Flexible: While it’s important to stick to your minimum rate, being slightly adaptable can secure valuable contracts.
Setting competitive and realistic freight rates is both an art and a science. By understanding your costs, monitoring market conditions, and valuing your time and effort, you can create rates that keep your business profitable and your customers happy.
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Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC does not assume responsibility for any omissions, errors, or ambiguity contained herein. Contents may not be relied upon as a substitute for the FMCSA's published regulations. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.
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