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February 18, 2020

Understanding Freight Rates For E-commerce Merchants

Finding a reliable way to calculate freight rates is an ongoing problem for e-commerce merchants. Many of the free online tools return inaccurate info, which can eat up profits.

I’m going to show you that freight rates aren’t as mysterious as they might seem. Let’s take a look at what goes into the cost of shipping.

The factors that affect freight rates include:

  • Shipping mode.
  • Freight density.
  • Distance.
  • Added services.

We’ll take a look at each in turn, and I’ll share some tips on how to keep freight costs down.

Shipping modes

Air

A big plus in sending freight by airplane is it gets there fast. You might think that airfreight is the most expensive freight mode, but not always.

If you’re sending a small shipment overseas, airfreight might be a better option. Here’s why:

Ocean freight is billed at a flat rate per container. Weight isn’t factored in. Airfreight is billed by weight, so lighter loads may cost less.

You’ll also want to consider the warehousing costs - it’s usually cheaper at airports.

Ocean

Freight travels in an intermodal container on an ocean vessel. It may be a cost-effective choice for shipping across continents.

Inland Waterway

Shipping by barge has declined since the arrival of railroads and interstate highways. But it’s not extinct.

It has one huge downside - It’s slow!

For example, if you ship from Tulsa to Chicago, a barge would take 11 days. Pittsburg to Fort Smith would take 14 days.

But it has a few advantages that are worth considering:

  • Fuel efficiency. A barge shipment uses about ⅕ the amount of diesel fuel per ton as an over-the-road truck shipment.
  • Low Cost. Lower fuel costs mean lower freight rates.
  • High Capacity. A single tugboat can pull several barges.

Railroad

Shipping by rail has some clear advantages:

  • Reliable transport schedules.
  • Uses less fuel than trucks.
  • Lower cost than trucks.

Truck

Over-the-road trucking dominates as the preferred mode for moving freight. Its greatest strength is that it needs less coordination than rail or air shipping.

Intermodal

When freight travels by multiple modes, it’s loaded onto shipping containers. The containers can travel on a ship, barge, train, and can be fastened to a trailer chassis to transport by truck.

Freight Density

Billing for truckload (FTL) shipments is based on distance. Less than truckload (LTL) freight is a little more complex.

The National Motor Freight Traffic Association (NMFTA) publishes the National Motor Freight Classification® (NMFC®). It provides a standard for carriers and shippers to negotiate freight rates. 

The product’s “transportability” determines its freight class, based upon these four traits

Density

Expressed as weight per cubic foot, density is the key factor the NMFC uses to determine the freight class. 

To get the density of your shipment, multiply the width, length, and height in inches of each pallet or other shipping units.

Divide the total by 1728 (the cube of 12) - this is the volume in cubic feet.

Divide the weight of the shipment by volume.

Handling

If your shipment needs some special attention, you’ll pay for a higher freight class.

For example, if your shipment contains fragile items that need special handling. Another example is if it has hazardous materials.

Stowability

This is how well your freight travels with others. For instance, if the shipment has protrusions that would make it difficult to stow with other freight could put it in a higher freight class.

Another example is if government regulations or carrier policies prevent it from sharing a trailer or dock with other kinds of freight.

Liability

The value of the item and the risk of damage during the freight handling process get factored in. Higher risk of damage or theft can move the freight to a higher, and more costly, freight class.

Distance

Distance is the primary factor in determining truckload (FTL) freight rates. But not all routes are priced equally. That is, a 40,000 lb shipment from Dallas to Chicago might cost more than the same shipment from Chicago to Dallas.

The rates will vary according to market conditions. In other words, if the number of trucks available to haul freight in an area is low compared to the available shipments, the rates increase.

Other circumstances affecting distance charges include:

  • Fuel surcharge.
  • Tolls.
  • Border crossing.

Added Services

Carriers charge fees for extra services. Some common services include:

  • Inside pickup or delivery.
  • Liftgate pickup or delivery.
  • Driver load or unload.
  • Residential pickup or delivery.
  • Collect on delivery (C.O.D).

How To Reduce Shipping Costs

Negotiate Volume Discounts

LTL carriers will almost always offer discounts for larger shipments. If your shipment weighs more than 4,000 lbs and takes up at least 10 feet of trailer length, it’s likely eligible for a volume discount.

Partner With a Third-Party Logistics Provider (3PL)

The term Third-Party Logistics, or 3PL first became part of business lingo in the 1970s. At the time it meant transportation services which an intermodal marketing company (IMC) offered.

The meaning of 3PL grew to include all kinds of logistics services. Section 235 of the Consumer Product Safety Improvement act of 2008 defines 3PL as anyone outside of your company that handles your product without owning it.

Every 3PL shipping company has its own unique business model, but they generally center around these two:

Gainsharing Model

A gainsharing 3PL shops for carriers that offer low rates. You pay the shipping rate plus a finder’s fee.

The low up-front costs make this model appealing to a lot of small businesses.

But watch out - some will use inferior cut-rate carriers. I’m sure I don’t have to tell you that the cheapest isn’t always best. You don’t want to lose your customers’ trust because of unreliable carriers.

If you go with a gainsharing 3PL, look for a reliable track record for at least the last two years.

Reseller Model

Freight resellers get deep discounts based on volume. Then they add a margin or markup rate and offer them to you.

If you do a lot of business with a single reseller, you can often negotiate a lower margin. In other words, if you ship less than 100 times per month, you’ll pay a higher margin than another account who ships more than 100 times per month. But if you increase the number of shipments, you can get a lower rate.

When you work with a reseller, you can pick which carrier you use. That way, you’re in control and don’t have to get stuck with poor service.

Consolidated Freight or Partial Truckload

Freight consolidation is different from traditional LTL freight. You share space with other shippers like LTL, but it’s treated as FTL.

In LTL shipping, the freight travels with other shipments bound for the same region. Then it’s unloaded at a warehouse or cross-dock and loaded onto another truck with freight headed to the same state.

The carrier may unload at another dock, then reload with freight going to the same city.

The process may repeat a few times until the shipment shares space with freight bound for the same neighborhood.

When you ship consolidated freight or partial truckload, your shipment is loaded with one or more loads headed to a similar destination. In other words, it’s not unloaded and reloaded several times as with LTL.

There are a few advantages to consolidated shipping:

  • No need to calculate freight class.
  • Pricing is straightforward - you pay for space the shipment uses on the trailer.
  • Costs less for shipments with 5 or more pallets.
  • Less risk of damage.

Final Thoughts

Freight rates are complex, but they don’t have to be difficult. At Eniture, our mission is to make e-commerce easier. That’s why we developed off-the-shelf solutions for getting accurate LTL and parcel shipping quotes. Check them out here.

About Eniture Technology

Eniture Technology specializes in helping e-Commerce merchants grow by providing useful information, digital marketing services, off-the-shelf apps that solve common problems, and custom programming services. Please contact us if you need help growing your online business or implementing the concepts presented in this blog post.

If you are interested in offering LTL freight as an option on your online store, take advantage of our free guide on LTL freight.

LTL Freight Primer - Free Guide

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