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Let’s Talk Insurance: Hauling in Higher Profits

Most of you know this statistic: Canadian carriers have averaged only a two to three cent profit margin on each dollar of revenue since 1997. For a select few, maybe as much as four per cent in a real...



Most of you know this statistic: Canadian carriers have averaged only a two to three cent profit margin on each dollar of revenue since 1997. For a select few, maybe as much as four per cent in a really good year.

Now, that’s hardly enough to offset your own rising monthly expenses – let alone help you build that nest egg to retire comfortably to your dream house in the Bahamas.

It’s easy to point a finger at such costs as fuel, insurance and wages, but that’s not where the true problem lies. The real issue is how much you’re actually charging your shippers.

Trucking and insurance both under-priced

Unfortunately, there’s not a great deal anyone can do about fuel, wages or overall insurance rates. In terms of insurance, the reality is that it’s been priced below cost for years.

Throughout the competitive or “soft” insurance market when there were more trucking insurers in Canada than ever before, insurance rates were so irrationally competitive that trucking operations were essentially being subsidized by their below-cost insurance.

Insurance prices went down year after year, even though the cost of claims (injuries, vehicles, etc.) went up dramatically.

The net result was that a lot of insurers went belly up or left the market as the hard facts of reality set in. OK, so insurance has been undervalued for years…who cares about the insurers and their issues, right?

That’s fine, but the interesting problem is that the trucking industry has been on a parallel course for years.

Shipping rates have come down while costs have gone way up. Bottom line: the trucking industry itself is under-priced and truckers must start pricing more realistically to stay in business.

Many of you, I’m sure, know your services are worth more. But some truckers still say: “What’s wrong with throwing in an extra dollar or two of services here and there if it pleases a regular customer?”

What’s wrong? Plenty. While that extra dollar off your bottom line may sound low, it could actually account for more than 50 per cent of your profit margin…There’s a solution, and it’s very simple: Get paid for what you do.

When you don’t charge one customer for legitimate services you’ve provided, you have to ask yourself: will you recover this amount on a future job from this customer, will you charge someone else extra, or will you simply forget about it?

If you choose to forget about it, you’re on the road to a dangerous downward spiral.

Estimate based on experience

Quoting on business can be thought of as budgeting, haul by haul – you’re properly determining the costs you’ll incur on a job before you actually perform the service. The obvious place to start is with the typical costs you’ve experienced over time within your operations.

For example, over a one year period, your company’s cost of tires might be $0.01/km in the first quarter, $0.02/km in the second quarter, $0.02/km in the third quarter, and $0.01/km in the fourth quarter.

Given this experience, you should arrive at a standard cost of $0.015/km for the cost of tires. This example may sound basic, but it’s an effective formula to use with more complex costs.

Basing an estimate on actual experience means just that – using your company’s accounting books rather than just going with your gut feel.

Fuel, fines, maintenance, tolls, extra labour from re-weighs, and tagging/marking are just a few of the variable costs that you should be passing on to your customers. Examples of fixed costs would include licensing fees, taxes, downtime and insurance costs, driver’s wages, salaries, benefits and equipment depreciation.

Charge for extra services

Beyond these costs, there are also additional services that shippers have come to expect from carriers. If you aren’t already, you should be collecting added fees for the following services, beyond the base price of the haul:

a) Detention/Delays (extra waiting time for a given job, such as border delays)

b) Stop-offs (multiple deliveries or pickups)

c) Protective services (providing insulation from extreme temperatures)

d) Excess Valuation (assuming a risk beyond a declared value per pound/kilogram)

e) Hauling Dangerous Goods (taking on higher risk commodities)

f) Liftgate services (when a customer ships large items but provides no dock at their facility)

g) Loading/Unloading (extra labour required to load/unload goods)

On average, at least five per cent of your revenue should be coming from charges such as these … 15 per cent if you’re really cautious. Whether you build these fees into the base price or show them separately is up to you.

Remember, as difficult as it is to achieve, when your loads are properly priced and all your costs are covered, you’ll be able to provide better, safer service to your shippers…and most importantly, you’ll be safeguarding your business for tomorrow.

– Mark J. Ram is president and CEO of Markel Insurance Company of Canada. Please send your questions, feedback and commentary about this column to letstalk@markel.ca. For more information about Markel visit www.markel.ca.


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