It’s the end of a complicated era, all thanks to zone-based pricing. It’s impossible to explain the complexity of LTL charging practices before zone-based pricing. This is due to the secrecy of shipping companies. However, shipping to difficult zones (those with challenging terrains or extremely remote locations) often included expensive tariffs and other surprising fees. Basically, the method was zip code to zip code shipping compounded with weight groups and rate cells, and customers would sometimes receive a second invoice depending on how the shipment was delivered.
Zone-based pricing is the future because it streamlines the entire order. The rates presented to customers are all-inclusive. This gives customers a flat rate look at their charges and ensures no surprise charges later on. Because of how straight forward zone-based pricing is, expect all LTL carriers to eventually adopt the method.
How Zone-Based Pricing is Improving LTL Returns
Although the LTL industry is a $35 billion industry, it is suffering. Falling returns are due largely in part to freight pricing that’s based on actual shipment and delivery features (zip-to-zip shipping). Zone-pricing should provide a profit resurgence as was highlighted in an independent study of LTL market revenue conducted by SJ Consulting Group.
Third-quarter results showed a collective operating ratio of two points less than in 2013 (from 94 points in 2013 to 92 in 2014). An operating ratio quantifies efficiency. The smaller the operating ratio, the greater the probability the shipper will generate a profit during times when revenue decreases. Zone-based pricing is a leading factor in increasing the industry’s overall operating margin.
How Zone-Based Pricing Works
Basically, zone-based pricing sets a firm price on various zones across the lower 48 states. The shipper may offer domestic and international shipping, in which case there will be more zones in Canada and Mexico. Each zone is rated on the complexity of its terrain (flat, hilly, mountainous, urban, rural, icy, etc.), and the distance from the shipper’s facilities.
Larger freight companies, such as FedEx Freight, have facilities all over the world. In an effort to increase their incoming business, the mega-shipper introduced zone-based rates on January 4, 2016. A feature of their website is a customized zone locator, which locates shipping rates based on the customer’s unique profile. Also included is access to additional pickup and delivery tier lists. For information offline, customers are given zone-based rates booklets.
A big part of zone-based pricing is its changes to billing practices. Customers will find their bills are far more transparent. The days of multiple invoices are coming to an end, and customers appreciate seeing all their charges bundled into one upfront cost. Customers select their delivery preferences (inside delivery, gate lift, etc.) from a tiered list, and are given a grand total. This has virtually eliminated the need for a second invoice provided to the customer in the days following delivery. That surprise invoice often led to customer discrepancies due to unexpected invoices.
At this point, you may be wondering just how this business model earns additional profits for LTL carriers. It’s simple really: customer satisfaction is more likely with this model due to cost transparency. And, although prices will decrease in certain zones, they increase significantly in those difficult terrains and faraway zones. For those living far away or in dangerous terrains, this isn’t an ideal method, but it does provide a great deal of incentive for LTL carriers to ship to faraway destinations because they’ve paid to make up for high transport costs.
The Best and Worst Zones in the USA
California has the best shipping zone rates in the country. Densely populated and with easy stretches of highway, you’ll find the most competitive rates throughout California. Texas and Florida also lead the country in reasonable rates. Basically, wherever there are flat roads and warm weather, you’re likely to find affordable shipping rates.
Montana, Idaho, and North Dakota are the most expensive zones in the lower 48. Alaska is the most expensive zone in the entire United States, but not all LTL carriers will ship to Alaska. The most rural zones are avoided altogether, but regional carriers will pick up where LTL carriers leave off to deliver goods to extended points and post offices.
Beyond the best and worst zones, there are many middle-of-the-road zones. These are the regions that are sometimes hot and sometimes cold, such as Pennsylvania. Depending on the season, rates will run hot and cold too. New York City, although a bustling metropolitan is considered a cold zone despite its population. This is due to the city’s traffic issues; there’s no place to park and it’s difficult to drive. However, many more parts of New York are middle-of-the-road zones due to their relatively flat terrain and warm springs and summers.
Zone-Based Pricing is the New Industry Standard
Early adopters of zone-based pricing have a huge competitive edge over LTL carriers not yet offering this method. And, with the inclusion of surcharges, tariffs, and delivery extras, customers will be less inclined to dispute billing. By simplifying the billing process, LTL carriers earn more, customers are more satisfied, and additional benefits can be offered, such as bulk/tiered discounts.
Not every LTL carrier has embraced zone-based pricing, but many have and more will. It’s become the national standard because it’s far more efficient than zip-to-zip methods. Customers appreciate that offered rates are accurate at the time of placing an order, and LTL carriers can anticipate more orders and fairer earnings when shipping to faraway locations. Overall, zone-based pricing is a successful method for improving LTL shipping for every party involved, from the customer to the driver and beyond.