FTL Dynamic Pricing Models. AI-Based Freight Rate Management for Full Truckload Quotes

FTL Dynamic Pricing Models. AI-Based Freight Rate Management for Full Truckload Quotes

Dorota Owczarek - July 12, 2022

Dynamic FTL pricing models are freight rate management systems that use artificial intelligence to provide quotes for full truckload shipments. These systems aim to provide the most accurate and up-to-date rates possible that will maximize long-term profits while also considering the current market conditions. FTL dynamic pricing models are a valuable resource for shippers, freight forwarders, and carriers alike, and can help to streamline the land shipping process.

This article will explore the different types of FTL dynamic pricing models, how they work, and the benefits they offer.

The Emerging Market of Land Transportation and Growing Supply Chain Needs

The land transportation industry has seen a period of immense growth in recent years due largely to the rise in eCommerce and globalization. This has resulted in a greater need for efficient and reliable shipping solutions to meet today’s businesses’ demands. As the transportation and logistics industry continues to grow, so does the need for more efficient and reliable methods of shipping full truckloads (FTL) of goods.

As freight volumes continue to grow, so does the need for a dedicated, highly skilled workforce responsible for providing transportation quotes. The traditional way of delivering FTL quotes manually is no longer feasible due to the sheer volume of requests. Additionally, the complexity of today’s freight market with numerous external parameters makes it especially hard to get an accurate rate in the shortest possible time without the help of technology.

Pricing Strategies

When it comes to pricing, a company can use several strategies, but the goal is always the same: discover the greatest price for goods or services that will result in greater profits for the firm. This is accomplished by considering present market conditions, competitor prices, and other factors that may affect demand.

There are several methods to implement a pricing strategy with dynamic pricing software, and they may all be combined to meet the needs of a particular company. We can list pricing strategies like cost-plus pricing, value-based pricing, or penetration pricing as some of the most commonly used. But, in general, these strategies can be separated into two main types:

  • Fixed Price Strategies: A company offers a set or fixed price for their product or services regardless of market conditions.
  • Variable Price Strategies: A company offers a price that is based on either the current market conditions or their own internal data.

In a dynamic market like truckload freight, where rates are constantly changing, a company needs to be constantly monitoring the market and their competitors in order to adjust their prices accordingly. This is where dynamic pricing models come in.

How Does Dynamic Pricing Strategy Work?

A dynamic pricing strategy takes into account the current market conditions and adjusts the price of a product or service accordingly.

To implement a dynamic pricing strategy, companies need to have access to data about the current market conditions. This data can be gathered from various sources, such as competitor prices, historical data, economic indicators, etc. Once this data is collected, it can be analyzed using artificial intelligence (AI) algorithms to determine the optimal price for a product or service.

AI-based dynamic pricing software constantly monitors the market and adjusts prices in real-time based on changing conditions. This allows companies to be more agile and responsive to market changes, which can lead to increased profits.

Dynamic Pricing Models

Most dynamic pricing models work by taking into account several factors, including the current market conditions, the type of commodities being shipped, the origin and destination of the shipment, and the carrier’s own transportation costs. By considering all of these factors, the system can generate a quote that reflects the actual market value of the shipment.

dynamic pricing model how it works

The shipper can then use this quote to negotiate with carriers, or it can be used as the basis for a carrier’s own pricing system. Either way, the goal is to provide a more accurate and timely quote that reflects the current market conditions.

FTL Transportation Market - How to Calculate the Rate?

As mentioned, when it comes to full truckload transportation, there are many factors that need to be considered to get an accurate quote. What parameters impact the final freight rate?

The type of commodities being shipped

This includes the commodity class, the necessary truck type, ADR, etc.

The origin and destination of the shipment

This includes the zip codes of both the origin and destination, as well as the distances between them and the route to be taken. This would also impact additional payments for highways or ferries or necessary cross-border freight. Here depending on the overall trip time, we also need to accommodate the driver’s overnight stays.

The dates and the required time windows for loadings/unloadings

This includes the pick-up date, the delivery date, and any required time windows for loadings/unloadings (flexible delivery or exact hours).

Loadings and unloadings and additional services required

If the freight needs to be unloaded and reloaded at any point, this will add to the overall cost. Similarly, if additional services are required at loading points, such as dedicated loading machinery or transloading, this will also impact the final price.

The type of equipment being used

There are a number of different types of trucks that can be used for full truckload transportation, and each one has its own costs. For example, a reefer truck (used for refrigerated shipments) will be more expensive than a dry van.

The carrier’s own transportation costs

This includes fuel costs, driver wages, maintenance, insurance, etc.

Spot market vs. contract rates

Spot market rates are the rates that are typically quoted for one-time shipments. These rates can fluctuate based on the current market conditions. On the other hand, contract rates are negotiated rates that are locked in for a certain period of time and are not subject to change (unless the contract is renegotiated).

All of these factors need to be taken into account when calculating the final price. But the above factors are just the easy, base ones. To provide a dynamic pricing strategy, you need to look at external market trends as well.

Forecasting Freight Demand for FTL Transportation

To get the most out of dynamic pricing, it is essential to have a good understanding of how demand for FTL transportation services fluctuates. When it comes to full truckload transportation, there are several external factors that can impact the market and the final price. These include:

The price of fuel along the route

This is the most significant cost for carriers, and fuel price fluctuations can have a big impact on freight rates. The final price needs to accommodate the forecasted fuel prices along the final route.

The availability of truck drivers

A shortage of drivers can lead to higher wages, which will impact the carrier’s costs and, ultimately, the freight rate.

Economic indicators

Things like the GDP, inflation, unemployment, etc., can all have an impact on freight demand and prices.

Weather conditions

Bad weather can lead to disruptions in the supply chain, which can impact freight rates.

Outbound distributions

The attractiveness of the final delivery when it comes to the possibility of further loading/unloading. If the final delivery is not an attractive location for further business (headhauls), then this may increase the freight rate.

Seasonality

Seasonal demands, such as Christmas or summer vacation, can impact freight rates.

Prebook distribution

Capturing the number and locations of prebooks in the system can help to predict demand and ultimately impact freight rates. It can also support the lanes consolidation process.

Lane distribution

The prognosed distribution of loads/trucks for each lane in a particular region showcases the forecasted cargo movement.

Customer segmentation

The type of shipper can also impact rates. For example, a retail customer may be willing to pay more for faster delivery than a wholesale customer.

Carrier preferability

For some shippers or some shipments, some carriers may be more favored than others, which can impact rates.

Trucks’ availability in loading zipcodes and customer proximity

If there are more trucks available in the zip code of the unloading location, then a follow-up freight from a similar location can be more attractive (again resulting in a higher probability of headhauls for carriers).

Market demand for FTL transport

This includes things like the time of year (peak season vs. off-season), economic conditions, etc., and the current levels of incoming FTL quotes and requests.

FTL carrier capacity

The number of carriers available to transport freight can impact rates.

Market speculations

These could include factors like port congestion or the volume of eCommerce consumer spending. Suppose there is news of potential problems in the supply chain. In that case, this can lead to an increase in rates along the whole supply chain as providers try to take advantage of the situation or protect businesses from market turbulence.

It is impossible to manually produce accurate truckload rates that take all these external factors into consideration in a timely manner without some form of automation.

It is impossible to manually produce accurate freight wages that consider all these external factors in a timely manner without some form of automation. This is where an AI-based solution comes in, as it can quickly and accurately adjust prices based on all the above factors (and more).

Automated Freight Quote Management

By considering all factors mentioned in the earlier paragraph, the broker or freight manager can generate a quote that reflects the true market value of the shipment. But what if there was a way to ensure that you were always getting the best possible price without constantly monitoring the market? This is where AI-based freight rate management comes in. Using artificial intelligence, shippers, carriers, and freight forwarders can adjust their prices automatically.

This quote can then be used by the shipper to negotiate with carriers, or it can be used as the basis for a carrier’s own pricing system. Either way, the goal is to provide a more accurate and timely quote that reflects the current market conditions.

An automated solution can help you manage your full truckload quotes in several ways. Firstly, it can help you obtain real-time market rates for your specific lanes, so you always have the most up-to-date information. Secondly, leveraging big data and analytics can help you negotiate better contracts. And lastly, it can automate the entire contracting process, from RFPs to quote comparisons to contract management.

Applying Dynamic FTL Pricing Models

While traditional freight forwarders typically work with a set list of rates, these new dynamic pricing models allow shippers to get real-time quotes based on current market data. This is made possible by the use of artificial intelligence, which can quickly and accurately adjust prices based on all the relevant factors.

However, it is essential to note that not all dynamic pricing models are created equal. Some systems may only consider a few factors, while others may consider dozens of different variables. As such, it is crucial to build a custom system best suited to your specific needs.

The most important factor to consider when choosing a dynamic pricing model is the quality of the data that is being used. After all, if the information is inaccurate, then the prices will also be incorrect.

Key features of a successful dynamic pricing strategy in FTL transportation

Key features of a successful dynamic pricing strategy in FTL transportation

Fortunately, there are a number of ways to ensure that the data being used is of the highest quality. Firstly, you can decide to approach building a dynamic pricing system by approaching data preparation and preprocessing to clean and filter the data. This will help to remove any inaccuracies and make the data more reliable.

Secondly, you can decide to build a system that, with the support of data scientists, will constantly be learning and improving. This means that the system will get better over time, as it will be able to learn from its mistakes.

To build a successful dynamic pricing model within the logistics sector, it is vital to build integrations with all relevant internal tools and external data sources. When combined, this data provides a comprehensive picture of the current market conditions and a 360-degree view of current quotes, requests in progress, and fleet management. This information can then be used to price shipments in real-time, ensuring that you are always getting the best possible price for your business.

Dynamic pricing models for FTL transport - solid base and three key pillars

Dynamic pricing models for FTL transport - solid base and three key pillars

In addition to providing more accurate quotes, when integrated properly, dynamic pricing models can also help to automate the entire contracting process and fleet planning. By integrating with existing tools and systems, they can streamline the RFP process, quote comparisons, and contract management.

On the Spot vs. Contract Market for Full Truckload Shipping

The full truckload market is a large and complex market with many different participants. There are two main types of FTL markets (same as in less than truckload LTL freight): the on-spot market and the contract market. On the spot markets are used for situations where shippers need to ship freight quickly, and they are willing to pay a higher price for the flexibility. These markets are typically more volatile, and prices can fluctuate greatly depending on demand. Contract markets are used for situations where shippers have a more predictable shipping schedule, and they are able to lock in rates for a more extended period of time. These markets tend to be more stable, but rates may not be as low as on the spot markets. Depending on the needs, dynamic pricing models can be constructed to approach both of the problems.

Dynamic Pricing for Shippers

Objectives:

  • Lowering the full truckload rates (both spot rates and contract rates) while maximizing the carrier (or freight forwarder/broker) acceptance rate.
  • Maximizing the probability of successful and on-time deliveries for the freight.

Shippers are always looking for ways to reduce their freight costs, and dynamic pricing models offer a unique opportunity to do just that. By applying machine learning models to adapt prices based on current market conditions automatically, shippers can get the most accurate and up-to-date quotes possible.

This provides them with a number of advantages. Firstly, it gives them the ability to negotiate better contracts with carriers. Secondly, it helps them save time and money by automating the entire contracting process. And lastly, it allows them to obtain real-time market rates for their specific lanes.

Dynamic Pricing for Carriers

Objectives:

  • Minimizing route costs (the total fuel consumption of the fleet during this process, minimizing the time required, driver hours).
  • Maximizing allocation of trucks with more loads.

Trucking companies are always looking for ways to increase their profits, and dynamic pricing models offer a unique opportunity to do just that. By using artificial intelligence to adjust their FTL rates based on current market conditions automatically, carriers can price their services in real-time and ensure that they are always getting the best possible price for their business.

Dynamic Pricing for Freight Forwarders / Truckload Brokerages

Objectives:

  • Maximizing the number of served requests within a time limit.
  • Maximizing profits while maximizing the acceptance rate of shippers and carriers for the proposed rates.
  • Maximizing the number of attractive requests (high profit) with an option of headhauls served.

The success of winning a freight request for freight forwarders or truckload brokerages mainly depends on the time to provide an accurate and attractive quote to the shipper while accommodating the carrier freight rates. Dynamic pricing models provide quotes instantly, which can help reduce the time to quote by integrating with all relevant internal tools and external data sources.

The dynamic pricing model for the freight forwarders model is two-sided as it has to propose two freight rates with different objectives - one for shippers and one for carriers. The shipper and carrier acceptance model needs to maximize the number of served requests (profitability) while maximizing the acceptance rate by shippers and carriers for the proposed rates.

Visibility of the freight marketplace is key here. For example, a dynamic pricing model could suggest higher prices to the shipper for an expedited request but a lower rate to the carrier that has available capacity in their network for that particular lane which would help reduce the empty miles driven by the carrier.

Related case study: Delivering a dedicated IT system to manage and sell freight deals and plan transportation

A logistics company approached us to create a dedicated IT system to handle their core business process - managing and selling logistics deals.

Our challenge? The key challenge in the logistics sector is cutting the time of concluding deals to an absolute minimum. The tool has to be very responsive and help in the smart matching of carriers and freight, fleet management, and other logistics operations. The platform helps shipping agents minimize fuel consumption, maximize operational efficiency, and optimize fleet performance by matching multiple loadings on a similar route with a single carrier.  Read more about this case study.

Benefits of Dynamic Pricing for Shippers, Freight Forwarders, and Carriers

There are several advantages to using a dynamic pricing model, including:

Increased profits: By responding quickly to changes in the market, companies can price their products or services more effectively and increase their profits.

Improved customer satisfaction: Customers are more likely to be satisfied with a company that is able to offer them competitive prices.

Reduced fuel wastage: By optimizing the supply chains and fleet management, companies can reduce the amount of fuel wastage and empty miles driven.

Lower costs: By reducing the need for manual intervention and optimizing resource allocation (trucks and drivers), companies can save on costs.

Improved decision making: AI-based dynamic pricing software provides companies with access to data that can be used to make better decisions about pricing.

Increased accuracy: By taking into account all of the relevant factors, dynamic pricing models can generate more accurate quotes. This means that shippers will be able to negotiate better rates with carriers, and carriers will be able to avoid overcharging their customers.

Increased responsiveness: Dynamic pricing models are constantly monitoring the market and adjusting prices in real-time. This allows companies to automate their quoting process and make it more efficient.

The Future of Efficient FTL Pricing is Automated and Interconnected

Dynamic pricing models are a game-changer for the logistics industry, as they provide a more accurate and timely way to manage full truckload quotes.

By 2025, more than 75% of all trucking companies are expected to use some form of dynamic pricing for their FTL quotes. This shift towards automated and dynamic pricing models is being driven by the need for speed, accuracy, and efficiency in the freight quote process. As the transportation industry continues to grow, so does the demand for faster and more accurate quotes integrated with good planning. It is important to note that an excellent dynamic pricing model cannot exist without proper integrations and complete visibility into the supply and demand of the lanes being considered.

To stay ahead of the competition, freight forwarders and carriers need to start using dynamic pricing models now. By doing so, they will be able to improve their profits, customer satisfaction, and decision-making processes. In the future, dynamic pricing models will become the norm in the trucking industry, as they offer a more efficient and accurate way to manage full truckload quotes.

Are you interested in learning more about dynamic pricing models? Contact us today to find out how we can help you optimize your pricing strategies.

About the author

Dorota Owczarek

Dorota Owczarek

AI Product Lead & Design Thinking Facilitator

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With over ten years of professional experience in designing and developing software, Dorota is quick to recognize the best ways to serve users and stakeholders by shaping strategies and ensuring their execution by working closely with engineering and design teams.
She acts as a Product Leader, covering the ongoing AI agile development processes and operationalizing AI throughout the business.

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This article is a part of

AI in Logistics
25 articles

AI in Logistics

Artificial Intelligence is becoming an essential element of Logistics and Supply Chain Management, where it offers many benefits to companies willing to adopt emerging technologies. AI can change how companies operate by providing applications that streamline planning, procurement, manufacturing, warehousing, distribution, transportation, and sales.

Follow our article series to find out the applications of AI in logistics and how this tech benefits the whole supply chain operations.

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