Understanding how the railroads price your commodity is a starting point for determining your ability to negotiate rail freight rates. Railroad pricing has been cyclical over the years, fluctuating between public tariffs and private contracts. With the use of differential pricing, the railroads may provide different rates to different shippers in similar lanes. Regardless of the pricing methodology, the railroads’ goal is always to maximize profits. These tips for negotiating freight rates can help you gain a better picture of the market and lower rates in your industry.
5 Tips for Effectively Negotiating Rail Freight Rates
1. Understand How Freight Rates Are Set
In setting rail rates, the railroads mark up their costs by varying ratios, dependent on commodity. Insight into this pricing behavior provides the framework for analyzing rates – yours or your competitors’.
The most important ratio in understanding how rates are set is the Revenue-to-Variable-Cost ratio. The RVC is simply the railroad’s revenue divided by the operating cost for a lane. This ratio can be considered an inverse Operating Ratio, but for a single lane. Railroads seek to increase their RVCs when negotiating freight rates. Access to this data can give you a starting point and a frame of reference for your own rates. This can show you whether your rates make sense for your commodity, or whether you may have an opportunity to negotiate rail freight rates.
Tariff vs Contract
If you find that your RVC ratio is inordinately high, this doesn’t necessarily mean the railroad will negotiate. There are two other important aspects of rate freight rate structures: tariff vs contract pricing, and competitive vs captive lanes. Tariffs are public rates, so they are easy to compare. Contract rates are confidential, so you’ll need more data to know if your contract rates make sense. While contracts are prevalent for some commodities, the railroads have shifted back to tariffs for others. In 2014, approximately 76% of freight moved under privately negotiated contract rates.
Finally, you have options in competitive lanes, but in a captive lane, the origin and/or destination are served by only one carrier. Obviously, when there is no competition, you are at a disadvantage when negotiating rail freight rates. However, there are some tips that can help, which we will discuss later in the post.
2. Identify Opportunities
With knowledge about how rail freight rate structures work, the next step is finding the best opportunities for improving your rates. In-depth data about rail rates across distances and commodities can help you benchmark your rates. With these estimates, you’ll know where to start negotiating rail freight rates.
Data visibility will not only help to show you where your rates are excessively high, but also where you rank compared to competitors. The following chart shows publicly available market data with rate spreads. Rail Impact software can show you how to interpret that data and compare your rates based on RVC ratios. By evaluating outliers, you may identify opportunities for negotiation.
3. Evaluate Your Options
It’s difficult to negotiate with few options. Having a full understanding of all the options available to you will give you a stronger negotiating position. In many cases, this is easier said than done. Approximately 70% of rail served locations are served by a single carrier. However, even if you are working on a captive route, you do have options. Consider the following:
Alternative routes. If your rates are very high compared to competitors, you may be able to negotiate a lower rate even across longer distances.
Alternative modes. Rail shipping is generally cheaper than shipping by truck, but it can be a good idea to get an estimate. If your rates are very high and your rail carrier won’t negotiate, this can give you more options.
Transloading. Transloading can help you move to other routes and widen your options. Finding transload facilities available to you can give you a negotiating position.
4. Manage Your Operations Efficiently
As you might expect, rail freight rates will be higher for shippers who consistently incur excessive accessorial charges, finance charges, and don’t resolve fleet management issues. When fleet management or payment issues create problems for the rail carrier, the carrier has little incentive to negotiate lower freight rates.
Alternatively, customers who make payments on-time, maintain a high-quality fleet, manage railcars in a timely manner, and conduct operations efficiently, will have a better negotiating position. If you’ve had management problems in the past, consider making storage or capital improvements to improve your process. Use a railcar tracking system, so you know when problems occur, and how to resolve them. If you’ve managed your fleet effectively for a number of years, use this in your negotiations. Highlight your attributes as an ideal railroad customer.
5. Utilize Data
Data is your biggest asset when negotiating rail freight rates. This can help you make a strong, well-supported business case. Pricing data, including tariff rates, contract rate data, and RVCs, will give insight into which of your rail freight rates may be out of line. This will also give you a reasonable starting point for your negotiations. Include data about your operations as well. Showing that you have not incurred excessive charges or fees will remind your carrier that you are a good customer that they want to keep. Finally, if you have data about other options available to you, you can show that you have the power to take your business elsewhere.
RSI’s Rail Impact software makes it easy to understand railroad pricing by commodity, to evaluate the “reasonable rates” in any given lane, as well as to determine your railroad’s market share. In addition, there is access to valuable information, training, and support to enable you to be more effective in your rate negotiations.