Dollars & Sense
When is a good time to implement a rate increase?
Last month my subject was "Growing your business by firing customers." It generated a lot of very good feedback (thanks to everyone who responded). My favorite response came from Dave Herber, Vice President at LB Transportation Group in Bridgeport, MI. Here is his email.
Thanks. Again you have sent out a newsletter worth reading! I have run this exercise in the past and have also profited by doing so. Of course I cannot take credit for the idea since I heard it from you first. I have not fired a customer, but have reduced service and directed assistance to more profitable/flexible customers. In most cases the questionable customers have been large brokers or some of the other larger company. But even they will negotiate when having problems covering freight. It took a long time to get my dispatchers to buy into not covering questionable customers just because we had never turned them down in the past. Most of my dispatchers are now believers in the process.
Thanks again for keeping me in the loop!
So ... the follow up discussion to "firing customers" is "When can you raise rates?"
The concept of implementing any kind of "rate increase" over the past twenty years has really changed. In the late 90's, I recall working at a trucking company where we implemented a rate increase annually. But the economic turmoil, competitive nature of the industry, wildly fluctuating fuel prices, supply-demand imbalances and ongoing tenuous economic recovery has resulted in transportation companies implementing rate increases at strategic points in time. That is to say, when they believed the market was "stable enough" where a rate increase could be effectively absorbed.
Is now such a time?
First, consider what the big transportation companies are doing. Big companies like FedEx and UPS will announce their general increases which will get picked up by the trade journals (for an example, see FedEx follows lead of UPS, announces 2017 rate increases) . The value of these companies making this kind of public announcement helps condition shippers to potentially expect other companies to follow suit. So if you are planning to raise rates, you could ride on the coat tails of these major players.
Second, consider the timing of a rate increase. The transportation world has cycles within the year and your rate increase should not occur when freight volumes are typically low (like January or July). Freight volumes are typically strongest in the August to November time frames. So if you are going to implement a rate increase this year, now is the time to start the planning so you can implement when demands are at or near their highest.
Third, consider the cost side of your business. Costs are always going up (insurance, staffing, licensing, etc.) and there is only so much you can do to trim the cost side of your balance sheet. Eventually every company must increase their rates, otherwise they become unprofitable and fail. In most transportation companies, the biggest cost factor is people (drivers, dispatchers, administration, etc.). Let's focus on drivers. Over the past six years, there have been many articles written on the driver shortage and the impact of the new Hours of Service regulations. A recent Transport Topics editorial (Truckload Turnover Rate Drops to Lowest Level in Six Years) shows driver turnover is improving, but the rate is still a whopping 64% per year! And the reason it is dropping is not driver satisfaction with their current employer. Instead it is "the choppiness of the freight market". Some companies have raised driver pay packages to stem the driver churn. The cost of recruiting is high. The cost of retention is high. Driver rates are going up. This cost either needs to be absorbed by reducing other balance sheet costs OR rates need to rise.
Fourth, consider the economic situation.
- Fuel rates seem to be relatively stable. This stability is a window of opportunity to implement a rate increase.
- Line-haul rates have been relatively stable in the industry for the past 12 months.
- Driver shortage and capacity issues remain a threat to transportation stability.
- The world has been dodging another economic crisis with North America being the most stable. If we slip into another recession, the window of opportunity to implement a rate increase disappears.
Fifth, a rate increase does not need to be huge and all encompassing. If you look at the announcements by FedEx and UPS, they announce a "general rate increase". Usually that means their tariff and standard rates are going up, but their best customers will likely get a smaller rate increase, if any. So you can announce a "General rate increase" to your customers of x%, but then go to your better customers and explain they are getting a much better deal than x%. Also, your rate increase doesn't need to be as large as the big players. For example, in the article cited above, FedEx was implementing a 4.9% "average" increase. You could announce a 3.9% general increase, but tell your best customers their increase is only 1.9% (50% less). But at least it is an increase.
Sixth, following the previous point, understand the customers that give you the best return (profitability) and which customers give you the worst. The article I wrote last month called "growing your business by firing your customers" listed instructions on how to selectively choose who should get the lowest and highest rate increase.
Seventh (my last point, but there are many more), consider your accessorial rate structure. Why? Because smart companies realize they can increase accessorial rates without the need for a major justification to the shipper. Accessorial rates are usually applied on an "as needed" basis (detention time, holiday and weekend premiums, special services, etc.). When was the last time you increased your accessorial rate structures? While I am on the subject of accessorial rates, let me just say that whoever was the first person to offer a "free waiting time period" was an idiot. Of course, for the rest of the transportation world to follow suit and offer "free waiting time" was not very wise either. With the new Hours of Service rules, trucking companies and drivers are hurting profitability by offering "free waiting time." Maybe now is the time to either reduce or eliminate this gratuity to shippers. Do I hear an "Amen!"?
Eighth (Ok ... this really is my last point), it doesn't need to be your rate that goes up for you to become more profitable. It could by your "unit of measure". A good example of this is the article I cite above. FedEx air changed their "dimensional factor" that calculates the "cube weight" of air freight. It went from 194 to 166 and as of January 2017 down to 139. Adjusting this "dimensional factor" without changing their rate-per-pound allowed them to make more money. As far as the customer is concerned, they are paying the same rate, but the cost of moving the same goods just went up. In your scenario it might by the miles you travel. If you augmented your miles by 2 percent and left the rate the same, would your customer notice? Even if they did, could you justify the increase in miles based on the work you do? By the way, this happens to you as a consumer every day. Think about things you have bought at a grocery store over the years where the packaging gets smaller, but the price stays the same.
Of course, rate increases can only be done if you are providing excellent service to your customers.
Ten steps to achieving better rates.
After reading the above points you decide now is a good time to increase rates, you need a plan. It may be something like this:
- Do a competitive rate analysis. How do your rates compare to your competitors. Be sure your rate structures are in line with the industry.
- Review my article from last month about "firing customers" to get an understanding of how to rank customers for rate increases.
- Understand your current rate structures and how long it has been since you last increased your rates.
- Establish your new "tariff" rate structure and the percentage increase. Then work backwards to understand how you will apply a reduced rate structure to the various levels of customers you have. Pick a "date" when the new rates become effective.
- Be sure to analyze your accessorial rates too. What kind of revenue gems await to be mined here??? What about leaving your rate/mile stable, but augmenting your mileage calculation by 2 percent?
- Communicate your new "tariff" rate structure to your customers in a press release or email blast. In the press release, be sure to cite your reasons for the increase (improved service levels, your increased costs of business, etc.). You must spin this the most positive way possible.
- Communicate individually to your customers about the new rate structure. Your best customers deserve a phone call, your other customers deserve at least an email. Explain they are not paying the whole increase, instead a reduced increase.
- You will get "negative" feedback from some of your customers. Be prepared to either "negotiate" with them or "stand firm". This will need to be done on a customer by customer basis in conjunction with the analysis you did in step 2. However, do not ignore their feedback. Deal with it quickly and professionally.
- A few months after the rate increase takes effect, determine how much of the rate increase "stuck". Analyze your gross margin reports for the 6 months prior to the rate increase and then the 6 months after the rate increase. What was the actual rate/mile increase percentage?
- Remember that you can always selectively reduce rates in the future if needed. Reducing rates is always easy to do and customers never complain about reduced rates. So if the economy goes into the tank in the future, you will have more room to adjust rates down if you take a rate increase now.
Rate increases are always touchy subjects. But the responsibility of good management is to ensure your business survives and is profitable.
Finally, I want to stress that Full Circle TMS and the Full Circle Network cannot and will not dictate rate structures. Rates cannot be standardized by anyone. Thankfully, we live in a free market economy and the market dictates rates, not any individual, company or group. If anyone in the Full Circle TMS Network asks for the "network rate", there is no such thing.