Pricing Theory

A long established economic principle is that the price of any good or service is a function of the supply and demand for it. I have included a simple real-life example to illustrate:

Like many children, my daughters collected Beanie Babies. Beanies became so popular that stores could not keep up with the demand for them. Frequently you could not find the latest and greatest Beanie in stores, and like many parents, I resorted to purchasing the toys from scalpers at very high prices. During the craze, I can remember my daughters excitedly calculating their fortune in Beanies on Internet auction sites. After a while, people began losing interest in Beanies, and you could buy them anywhere at suggested retail. The manufacturer, however, kept producing the toys after the frenzy was over, and the supply began to exceed the demand, forcing stores to sell Beanies at a discount. I ended up selling part of our collection really cheap, at a garage sale. The way in which the price of Beanies reacted to changes in supply and demand, is illustrative of a complex economic principal that can be applied to any service or commodity, including freight.

Freight rates are a function of the demand for trucks in a particular area versus the supply of trucks in that area. Geographic areas with high volume shippers have a higher demand for trucks to haul their freight. Shippers are willing to pay a premium because there are not enough trucks available to cover all of the loads. Headhauls = Demand for trucks > Supply of trucks, Rates are at a premium.

On the other hand, some geographic areas are made up of consumers rather than producers. Shippers need to deliver a lot of freight to these areas to keep up with consumer demand. There are a lot of inbound trucks, but not enough freight to load them all. The demand for trucks in these areas is less than the supply of trucks, so carriers are willing to haul freight at a discount. Backhauls = Demand for trucks < Supply of trucks, Rates are discounted.

In some geographic areas there are both producers and consumers, causing the inbound and outbound alternatives to be about equal. In these areas, referred to as intermediate hauls the supply and the demand for trucks are equal and carrier's can expect to receive an average rate. Intermediate Haul = Demand for trucks = Supply of trucks.

The following diagram illustrates how the outbound alternatives affect truckload pricing:

I hope this explanation helps. Please feel free to email us with comments or suggestions. We know how valuable your time is and appreciate any feed back.