Proportional Rate
A proportional rate is a rate that is lower than the regular rate for shipments that have prior or subsequent moves. This type of rate is used to overcome combination rates’ competitive disadvantages.
When two or more different transportation modes are used to move freight from origin to destination, a combination rate may be applied. A combination rate is a single rate that applies to the entire movement, regardless of the number of different modes used.
However, because each mode has its own unique characteristics, there can often be a disparity between the actual cost of moving the freight and the combination rate. For example, one mode may have a higher operating cost but a lower capital cost, while another mode may have the opposite characteristics. This can put the carriers that use the higher-cost mode at a competitive disadvantage.
- A proportional rate is a way to level the playing field by giving a discount to the carriers that use the more expensive mode.
- This type of rate is typically used when there is a significant difference in the cost of operating the different modes.
- For example, consider a situation where Mode A has an operating cost of $100 per hour and a capital cost of $10,000, while Mode B has an operating cost of $200 per hour and a capital cost of $20,000.
- If the combination rate is $150 per hour, then Mode A would be at a competitive disadvantage. However, if a proportional rate of $125 per hour were used, then both modes would have the same effective rate.
The proportional rate is calculated by taking the difference between the regular rate and the combination rate and dividing it by the number of modes used. In the example above, the proportional rate would be $25 ($150 – $125) divided by 2 (the number of modes).
Proportional rates are just one way to level the playing field for different transportation modes. Other options include using a two-part tariff or giving a discount to the more expensive mode. Ultimately, the decision of how to deal with this issue will depend on the specific situation and the preferences of the parties involved.