How to Calculate Trucking Price: Cost-Based Method + Bonus Excel Model
FEBRUARY 24TH, 2022
Shippers who are newly established or expanding to new routes can benchmark transportation prices across various types of trucks and regions. Truck owners can grow their fleet more sustainably with better pricing tools that break down the financing components which are often overlooked in cost calculation.
Short Haul vs Long Haul Operators
There are different types of trucks in Vietnam ranging from <1T to 30T containers, you can find out more about truck types for different cargo types here. The trucking company’ cost structure varies a lot depending on whether they operate short haul or long haul routes.
Some larger fleet contains both small (<10T), medium (10–18T) and big trucks (20T — 30T). However according to the Directorate for Roads of Vietnam — DRVN Statistics 2017, most trucking companies in Vietnam are small-scaled, with the average number of trucks owned is five trucks, hence most are focused on either short haul or long haul routes as profitability varies significantly between them.
Cost Components Breakdown
There are variable and fixed costs to operate a fleet before interests, depreciation, opportunity costs and taxes (financial costs) as broken down below:
A. Variable Costs
A1. Fuel
The bigger the truck, the more fuel it consumes per 100km. For long haul operators, thus fuel makes up a larger proportion of the cost compared to short haul, averaging 26% versus 38% respectively. Smaller trucking vendors also purchase older second-hand trucks, thus are even more fuel inefficient. In most transportation contracts, pricing will be revised once diesel price fluctuates more than 10%, increasing or decreasing a few percent.
A2. Toll
Toll fees are directly proportional to the truck size. Some trucking companies even reduce their legal payload on the truck registration to reduce toll charge they have to pay. More commonly, truck drivers avoid expressways and highways to skip toll. Long routes have more toll stations thus when viewed as percentage, toll accounts for nearly 20% versus short routes of 10%.
A3. Informal fees
These are fees related to traffic or border police to prevent trip delays. Most often in the case of overloading trucks, however some truck operators pay it to avoid delays. These payments are independent of truck size and paid when entering a new province. Thus longer trips also incur more informal fees.
A4. Driver salary
Driver salaries have both fixed and variable components to incentivise drivers to take more trips. Long haul drivers salaries are 1.5–3x higher than short haul drivers: 25–40 million per month compared to 10–12 million VND per month. This is to compensate for the increase in stress, risks and time away from family that long haul drivers typically face.
For short trips, only one driver is needed, however for long trips, two drivers are usually required to shorten the trip: 48 hours to drive 1600km between HN and HCM with two drivers driving for 20 hours per day, versus 60+ hours with only one driver driving 15 hours* per day. The speed of driving is approximately 40–50km/hour on national highways due to high traffic flow.
*This is more than the government mandate of less than 10 hours of driving per day, but most drivers would drive more to earn more money.
B. Fixed Costs
B1. Insurance & Cargo Damage
There are two main types of insurances: a mandatory civil insurance to cover third-party damage (around 1–2% of the truck cost) and an optional vehicle insurance to cover the damage to the truck itself (roughly 3% of the truck costs).
Trucking companies often opt to buy the optional truck damage insurance and not cargo insurance. Thus when there’s cargo damage/theft and it’s the driver’s fault, the truck owner will pay the customer on a case by case basis, often by buying the damaged cargo at a price indicated on the invoice attached with the shipment. The market rate for general cargo insurance is around 0.1% cargo value. For a shipment with FMCG cargo worth approximately 300 million vnd, the cargo insurance will cost 300,000 vnd. The risk of cargo damaged due to driving and accidents is a very small probability, especially for short haul routes, even when it happens it is usually in the range of a few million vnd. Thus it is proven to be more economical than buying cargo insurance premium upfront.
For expensive cargo, customers (shippers) will opt to buy the insurance themselves.
B2. Maintenance
Trucks are sent to maintenance garages annually, the fees depend on truck size, not the truck age: from 4 million for a <5T truck to 40 million for a 30T trailer.
Additionally, truck tires also represent a major cost component for long haul operators, as bigger trucks require more tires and also leaning towards more expensive tires. Each tire last around 60,000km so long haul truck vendors will also need to replace them more often. A trailer needs 18 tires *5 million per tire = 90 million, which can last for 6 months if driving long distance (10,000km travelled per month) and 12 months if driving short distance (5,000km travelled per month).
B3. Inspection
This is a fixed cost to the government and not dependent on distance travelled. It is charged annually per truck via inspection centres belonging to Vietnam Register (VR). Traffic police can check for registrations at any time. The fees are reasonable (230K- 460K depending on truck size) to encourage truck vendors to return to inspection centres every year which is currently only at 90%.
Road user fees, on the other hand, are paid based on the use of roads length (in months) and also dependent on truck size. There are small discounts from the government from 2020 to 2022 due to Covid pandemic to support transportation companies.
B4. Administrative costs and office rents
These are fixed administrative staff salaries such as accountants, sales admin, and operators as well as office rents and utilities. The more trucks a company own, the smaller the admin/office cost as a percentage of total cost (aka economy of scale).
C. Truck depreciation, interest, opportunity costs & tax
Those fixed and variable costs above can give us the gross margin level, to come to the net margin level of an operator, we need to deduct a few more financial costs.
Interest cost refers to the financing costs for the purchase of the trucks. Trucks are most often purchased on loans with a 10–12% interest rate. Truck operator interviews indicate that getting a loan is easy, but the interest costs are quite high. In general, truck purchases require, on average, a 40% down payment, though this ratio varies according to the size of the company. Large companies often have enough cash reserves to make a higher down payment than small truck operators (as high as 70%). The interest costs depend on the price of the truck, and thus are usually higher for a larger truck.
Truck asset depreciation is an important component used to calculate the return on capital employed of the trucks. Based on truck operator interviews as well as other similar studies, the depreciated truck value is calculated by decreasing 10% from the last year’s value. The average value of the asset (truck value) at the beginning and end of the year contributes to the capital employment of the company.
Opportunity cost — The down payment discussed above could be used by the operator to invest back into the business, and thus accounts for the opportunity cost of the operator. The cost of capital is generally estimated at 15%— the average return on equity in Vietnam — and this amount is used to calculate the opportunity cost of the operator.
Tax — The standard corporate tax rate (20%) is used for the truck operator.
Operator’s Profitability varies greatly based on Truck Utilization Rate and Economy of Scale
An operator with more trucks will have their overhead fixed costs (such as administrative salaries and office rents) spread across more trucks, thus making fixed cost per trip smaller. This is the economy of scale and it is more noticeable for short haul vendors, net margin goes from 3% (<10 trucks) to 11% (20–30 trucks). For long haul vendors, having less than 10 trucks only yield a net margin of 5%. Given that the majority of trucking companies in Vietnam have an average of 5 trucks, we see low margins for these companies which can affect sector’s sustainability.
Other factors affecting pricing
Waiting time & Truck Utilization Rate
If a truck has to wait a long time to load/unload or running empty miles to pick up cargo then its utilisation rate is reduced, and either the operator will make loss or they will charge higher prices per trip to cover the lost time (and thus lost revenue). The table below is derived from our cost model. For big trucks, the target revenue for each one must be more than 100 million vnd. For 2.5T trucks, the target revenue is more than 30 million vnd.
Supply — Demand & Seasonality
Vietnam is a heavily agricultural country with main exports including coffee, rice, nuts, fruits,… thus the different seasons of various types of vegetables, fruits and agricultural produce can swing the market price of transport significantly.
An example is lychee season in the middle of the year, lychees are grown in Bac Giang & Hai Duong and usually exported to China and to domestic consumers in the south. This creates a lack of cold containers in the North — South direction and thus increases its price sharply while also reducing the price for cold containers going South — North. In June 2021, there was a severe COVID outbreak in Bac Giang, in addition to closure of some China border gates leading to cutthroat prices for cold containers to deliver lychees from Bac Giang to Central and Southern regions, as much as 65 million vnd per 45ft container was recorded as opposed to 30 million normally (note that for deliveries from Bac Giang to Northern regions, we can use dry trucks as the lead time is within the day and thus would not affect the lychee quality stored in ice boxes).
Similarly, during the dragon fruit season in Binh Thuan and Long An, the price for South — North containers could reach up to 120 million vnd, while the normal price is around 55-65 million.
The seasonality not only affects the pricing for the fruits and agricultural produce itself, but also causes disruptions and unavailability of containers for normal goods such as FMCG. Third-party logistics providers (3PLs) often leverage empty-returning cold containers as dry containers to carry dry goods when there’s an imbalance between supply & demand in either the North — South or South — North direction. This is particularly true during the cold winter of the North when there’s not much fruits harvested. Therefore cold containers carrying fruits from the South to the North ended up carrying normal cargo back to the South at a reduced rate, with the goal of arriving back to the South as fast as possible to get another cold shipment at a higher price.
Cargo Types
Bulky cargo takes up more space so on a per trip basis, a lighter truck consumes less fuel compared to a heavy truck. The difference is more pronounced as the distance is longer such as North — South routes, or when travelling hilly regions such as Highlands (Gia Lai, Kon Tum,..) or Northwestern (Son La, Dien Bien,..). The difference for North — South line haul between light and heavy cargo is around 2–3 million vnd per trip.
Apart from the light/heavy cargo classification, some types of cargo are more prone to breakage and damage, thus increasing the price of trucking. And as we have shown above, most truck operators do not buy cargo insurance but compensate customers on a case-by-case basis. Thus more expensive FMCG cargo requires a higher trucking price per ton than that of pure agriculture products such as coffee or rice.
How to use our Excel Model* to calculate your Trucking Costs
Example: Route Hai Duong —> Tien Yen, Quang Ninh, 5T truck
Start by inputting the routes you want to calculate, as well as the distance in km and truck type, the model will calculate the price alongside the cost components.
Input Distance, Origin, Destination and Truck Type in the orange boxes.
In this example, the basic cost (fuel, toll, driver salary, maintenance…) will be computed to 2.7 million. Then the administrative/office, loading and unloading fees will be added next. The final price will be the output in the yellow box, expressed as per ton or per trip. In the final price, the truck owner will have a 10% net margin to take home after paying for all expenses.
The final output price is in the yellow box.
You can go one step further in tab Drivers & Trucks to adjust the cost of the truck you bought (interests included), the fuel consumption efficiency to reflect how old the truck is in your fleet, or even driver salaries.
Tab Drivers & Trucks: further adjustments are available to make the model match your business more accurately.
*All manually formulated models will have simplification as it cannot take into account supply & demand, seasonality or utilisation of truck backhauls. This Excel model, was built for heavy/regular cargo, not lightweight cargo (which is often calculated per CBM) and not including the optional cargo insurance.
Download our Excel Model here.
In the next part of this Transportation Pricing Series, we will use AI algorithms to build a more comprehensive model that takes seasonality, supply & demand, and other complex market data gathered from several business cycles into consideration.
