Investigative Report – The Impact of Dimensional Pricing on the Industry

Many carriers in the less than truckload (LTL) sector are adopting dimensional pricing. A volume-based pricing model for shipping freight, dimensional pricing is touted as a more efficient and fair way of charging shippers. The new method of calculating fees, however, isn’t good for everyone. Many LTL freight companies are making more with dimensional pricing — and many of the shippers using them are paying more.

Dimensional Pricing is a Volume-Based Pricing Model

Dimensional pricing departs from traditional LTL pricing models, which have categorized and priced parcels by density, ease of handling, stowability, and value. Instead, dimensional pricing calculates shipping and handling charges according to a product’s volume, or its dimensions. In some cases, the volume of a parcel is the only factor that’s considered. Other times, it’s one factor that’s considered alongside weight or other factors.

The concept behind dimensional pricing is straightforward. Trucks only have so much space, and each parcel takes up spaces. Shippers should pay for the amount of space they take up. Thus, packages that are bulky cost more to ship than those that are compact.

The dimensions of a package are often calculated in transit. When the parcel goes through one of the freight company’s facilities, it’s scanned by a piece of equipment that and quickly and accurately measure the parcel’s length, width, and height. These dimensions are then used to calculate the charges for that parcel.

Dimensional Pricing is Growing in the LTL Sector

Many freight companies in the LTL sector have transitioned to dimensional pricing over the last few years, and the model continues to gain popularity. There are two reasons for the trend towards volume-based charges.

First, it wasn’t until recently that the technology necessary for dimensional pricing was available. Measuring each package that an LTL freight company handles with a tape measure is impractical, so companies primarily relied on scales in the past. Scales could quickly and accurately weigh packages. Now, however, there is equipment that can almost instantly measure a parcel’s dimensions, thus making dimensional pricing a practical option for the first time.

Thus far, the equipment is expensive, which is why dimensional pricing is more common among large carriers than regional and local companies. Large freight companies have the capital to invest in this equipment. The price of the equipment will come down in the future, though, and smaller companies will adopt the new pricing structure.

Second, dimensional-based pricing is making freight companies more money. One company saw a 9.9 percent increase in year-over-year revenue when they implemented dimensional pricing. This increase, of course, came from the pockets of the company’s customers — shippers.

Not every freight company will realize a 9.9-percent increase in revenue when they implement dimensional pricing. Many companies are switching to the pricing model because such increases are common, though.

Dimensional Pricing Costs Shippers More

Dimensional pricing is touted as a way to calculate shipping and handling charges more accurately and fairly, but it doesn’t benefit all businesses. Specifically, shippers that ship light or oversized goods actually usually end up paying more with dimensional pricing than they do when traditional pricing models are used. Because charges are based primarily, if not exclusively, on volume, any package that’s less dense than the average parcel (as determined by the industry or freight company) costs more to ship than it should.

For example, consider a pet bed manufacturer who sells small or medium pet beds that measure 23 x 18 x 3 inches. The stuffing in a pet bed is light, and one this size would likely weigh around 1 pound. With dimensional pricing, though, the dimensional weight could be as much as 8 pounds — much higher than the actual weight of 1 pound. That’s an average weight impact of 40.1 percent, and the resulting shipping charges for a manufacturer would be significant. Such a manufacturer may ship 50 pet beds a day, and under dimensional pricing, they’d have to pay an additional $5,777.14 in shipping fees (not including any surcharges).

It’s not just companies that ship goods made from light materials, like pet bed stuffing, that ends up paying more under dimensional pricing. Companies that ship bulky goods, even if the goods are made from heavy materials, will have to pay more if they can’t find a way to efficiently stack or collapse their products.

Companies that ship heavy, compact items, such as dumbbells or free weights, can be hurt by dimensional pricing, too. Calculating shipping fees on dimensions alone would actually benefit a manufacturer that made dumbbells and free weights. When shipping such heavy products, though, carriers often implement a combination of dimensional pricing and traditional pricing.

Thus, companies that ship light goods often end up paying more, and those that ship dense, heavy parcels often pay just as much as they otherwise would. Sometimes they even pay more as well.

Dimensional Pricing Complicates Calculating Charges

Even if using dimensional pricing doesn’t result in shippers paying more, it still has a significant downside when compared to traditional pricing models. Right now, dimensioners, the machines that measure package’s length, height, and width, are expensive. To save on equipment costs, freight companies usually only install dimensioners in their hubs — and not in every satellite location.

Without dimensioners in every satellite location, freight companies can only provide shipping cost estimates to companies when packages are first dropped off or picked up. It’s only after a parcel goes through a hub where it can be scanned by a dimensioner that final shipping costs for the parcel are calculated. These charges are then submitted to the shipper, with any adjustments that are necessary being made to the estimated charges.

For shippers, this system adds financial complexity and chaos. Because shippers don’t know precisely how much they’ll be charged for shipping a package until it’s en route, they can’t accurately charge customers for shipping when their customers make a purchase. Additionally, shippers need to be prepared to pay any variance in the estimated and final shipping charges. When shipping dozens or hundreds of parcels a day, even small variances can be significant.

Flexible Carriers Offer Practical Solutions

Dimensional pricing is impacting most, if not all, companies that ship less than a truckload full of goods. Small- and medium-businesses are often hurt by this new pricing model, which tends to benefit large freight companies. Of course, companies that have lots of shipments but don’t have truckloads full of goods to ship are also hurt by dimensional pricing, as any increase in cost is multiplied by each shipment that a company sends.

For companies that are paying more under dimensional pricing, flexible carriers are often a more affordable, better option. At Road Scholar Transport, for example, we provide LTL shipping solutions that can be designed around shippers’ needs. These solutions tend to be less expensive and better serve small- and mid-sized shippers.

Shippers that don’t want to be trapped into a dimensional pricing model should begin looking for a flexible shipper now. Not every large freight company is offering dimensional pricing yet, but the pricing model will continue to become more and more common in the coming months and years. Establishing a contract with a flexible carrier that offers shipper-focused solutions will save shippers from being locked into a more expensive dimensional pricing arrangement in the future.

Source

http://www.joc.com/trucking-logistics/ltl-shipping/dimensional-pricing-get-used-it-ltl-ceos-say_20160427.html