The debate over whether density-based pricing will succeed in toppling the traditional National Motor Freight Classification’s (NMFC) classification based pricing in the LTL (Less Than Truckload) industry is seemingly never-ending.While one section of the carriers still believes in the NMFC, a number of LTL shippers are voting for density-based pricing as the way forward.
By a large measure, density-based pricing seems to be the easiest and also the most profitable approach in an age of one-day and on-demand last mile deliveries.
Unlike in the past, the LTL industry today has a massive volume of smaller shipments. There is also the challenge of completing same-day deliveries or at stipulated hours. Likewise, these shipments are not always of consistent size and density, making it difficult for LTL shippers to sustain profitability.
What is density-based pricing?
40″ x 45″ x 60″ = 108000
The area occupied by the package is divided by cubic inches to arrive at a cubic foot calculation. In each cubic foot, there are 1728 cubic inches. The cubic feet occupied by the package is calculated as:
108000/1728 = 62.5 cubic feet
With the weight of the package 500 pounds, the pounds/cubic feet measure of the package for density-based pricing would be:
500/62.5 = 8 pounds/cubic feet
The shipping cost for this shipment will be calculated at 8 pounds/cubic feet.(In other cases, the measurement metric for weight could be kilograms or anything else instead of pounds.)
Regardless of the metric, the calculation process is simple which is what makes density-based pricing a favorable option for LTL shippers. NMFC, on the other hand, has several product classes, ranging from 50 to 500, each with their own unique characteristics.
NMFC has remained the primary mode of pricing for more than seven decades. As a result, all TMS (Transportation Management Systems) are also configured to work for NMFC. But as the e-commerce era has evolved, so have delivery patterns and the NMFC-based computation method has become too complex for carriers and is not aligned with global best practices.
The U.S. is the only country which still follows the class-based pricing model. Globally, LTL players have started following the density-based pricing which yields several benefits.
Density-Based Pricing Benefits
The focal benefit of density-based pricing is that it removes the guesswork involved in pricing each type (or class) of product. The simplified process leads to several other operational benefits that will improve any carrier’s bottom line.
Simple and straightforward
Density-based pricing is easy for anybody with basic math skills. Unlike NMFC, it does not have any tabulated classifications that are complicated. Since the pricing model is based on actual weights and area occupied, the confusion of what commodity class the product belongs to and how it should be charged does not arise. This helps improve transparency and charging of shipment costs between carriers.
Easier cost forecasting
Challenges In Moving To Density-Based Pricing
Like any major change, density-based pricing also comes with its challenges that need to be addressed beforehand.
Configuring Transport Management Systems
All the TMS will have to be revamped to make way for density-based pricing. The NMFC-based pricing has been around for decades; this means that there will be a colossal amount of legacy system data that will have to be moved to the new model. The systems will also have to be configured to allow for recording of density-based pricing model. As you know, these system configurations and customization do not come for free.