The relevance of profitable freight and logistics pricing strategies is highlighted by the combined effects of increasing industry competitiveness and rising transportation costs.
By now the logistics industry is in turmoil for well over a year with no relief in sight as prices for freight continue to rise and capacity issues only seem to get worse. Logistics is an industry that is rather obscure and non-transparent to most people but it has reached the mainstream spotlight as the current problems cause real bottlenecks for manufacturing and for people’s everyday lives.
Logistics Transportation Costs
Basic freight and value-added service costs for freight transportation services make up the bulk of the pricing. The basic freight rate includes a pick-up fee, a transit fee, and a delivery fee, among other things. Insurance, information services, and other value-added services are examples of value-added services that will be selected by default. In addition, personnel expenses, site costs, transportation costs, and other cost elements will be considered by logistics companies when determining price.
Pricing strategy refers to the approach adopted by the seller in determining their market pricing. The simplest pricing strategy is cost-plus pricing, which involves calculating costs and adding on a margin for profit. However, as the identification of product or service costs involves multiple choices, such as the way in which overheads are apportioned, even this approach is not as simple as it may seem.
There are many other pricing strategies, from penetration pricing, loss leader pricing, predatory pricing, target pricing, marginal cost pricing to ‘freemium’ pricing. All these examples are discounted pricing strategies and may be used at different times in the product or service life cycle. Premium pricing strategies may include skimming, value-based pricing, and total absorption pricing.
The Significance of Pricing
A 2012 global pricing strategy study conducted by the strategy and marketing consulting company Simon-Kucher and Partners shows successful freight and logistics businesses share similar pricing-strategy characteristics. Most importantly, successful businesses charge prices that reflect the value of their products and services.
According to study results, logistics companies with reflective pricing strategies achieve profit margins about 17 per cent higher than competing businesses. In addition, successful logistics businesses commit to creating effective pricing strategies while also implementing strict guidelines that ensure salespeople can’t adjust prices to meet sales quotas.
Pricing management is about getting the price right
Logistics pricing strategies are less developed than in other industries. The development of more complicated techniques has been hampered by fragmentation and a historically low level of digitalization. Recent developments in data infrastructure, on the other hand, have created an opportunity for a more thorough price reform.
Rethinking the pricing cycle could be the most profitable lever in the logistics industry.
Logistics companies who modify their pricing could see a 2 to 4% rise in revenue, resulting in a 30 to 60% increase in operational profit. However, reaching this profit potential necessitates a pricing plan that covers the full pricing cycle.
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Digitization in logistics
In the past, logistics has had a low level of digitization. Furthermore, due to industry fragmentation, the complexity of different goods, and the lack of a powerful worldwide industry association to lead standardization and pricing transparency, most businesses consider themselves price-takers. 1 Pricing has historically been done on a “cost plus” basis.
However, logistics firms have recently made major technological and data infrastructure investments. We see leaders upgrading legacy systems (to best-in-class transportation procurement systems, for example), streamlining digital architecture, removing data silos (among their transportation management, inventory management, and enterprise resource planning systems, for example), and adding new business insight capabilities on top of legacy systems.
Companies in the logistics industry now have a good starting point for more complex pricing strategies (see picture below).
Despite the pandemic, disruptors are active in the market: logistics technology has received significant investor interest, and the industry remains strong. Freightos, for example, is an industry disruptor whose application programming interfaces enable a variety of providers to share real-time pricing data, increasing market transparency.
Many companies think that logistics procurement software is not for them and that it takes too much effort and money to implement it, run it and to get decent value out of it. That used to be so indeed when only the large blue chip companies hired consultants or bought expensive “enterprise” software for procurement. But that is no longer the case. Nowadays logistics e-sourcing is much more accessible in terms of technology and price and does the job much more efficient which allows you to always get good value out of itPieter Kinds – CEO of Freightender & TendrX
Long-term contracts and spot cargo require different pricing strategies
When it comes to pricing logistics services, there is no one-size-fits-all solution. Most logistics companies have a combination of contract lengths, and the proportion of each varies by company type . The ideal pricing techniques are influenced by the mix of long-term, medium-term, and spot contracts. Furthermore, each logistical element has its own set of challenges:
- Air carriers frequently transport high-value, time-sensitive, and unexpected cargo. New product introductions or equipment failures can have a significant impact on demand. On the supply side, passenger flights account for around half of overall capacity, which is dependent on passenger routes and flight schedules. Surprisingly, with powerful forecast models and dynamic pricing, uncertainty can actually benefit airlines.
- In their networks, trucking businesses have a large number of transactions and nodes. They have hundreds or thousands of trucks on the road, and less-than-truckload firms must consolidate goods, adding to the complexity. Furthermore, all firms must improve backhaul utilization (i.e., not returning empty whenever possible) and on-time performance. Trucking businesses must continually change their networks and routes while maintaining hundreds of rate cards to manage this granularity. Using strong analytics for such calculations can not only provide more consistent and trustworthy results, but it can also free up the sales team’s time to focus on clients instead of manually managing pricing.
- Ocean carriers allocate ship capacity to various ports, but they must contend with the risk of no-shows, or cargo not arriving at the port when the ship is berthed. Large customers frequently charter ship capacity, with no penalty for no-shows. A customized pricing plan that steers high-volume clients away from these activities could help to level the playing field.
- Unlike ocean carriers, freight forwarders can obtain additional short-term capacity. They must, however, manage a global network of tens of thousands of suppliers, ranging from big ocean carriers to small trucking firms. Forwarders are frequently unaware of the ultimate fee charged to the end client by their source (the carrier) (the shipper). Freight forwarders may benefit the most from interfaces that simplify these complex procedures, both digitally and commercially.
Ocean freight rates cannot be prolonged indefinitely. Sometimes you need to run an RFQ to control the damage. Make sure you get capacity for 2022, shipping lines are not waiting around for you to make up your mind. Get the right platform in place to support you with superior logistics procurement.Pieter Kinds – CEO Freightender & TendrX
Freightender is the only logistics procurement platform that seamlessly integrates shipper sourcing with the internal quotation process of a forwarder.Pieter Kinds – CEO of Freightender & TendrX
E-Tenders and Logistics procurement
Doing a freight tender used to be an annual or irregular event for most companies, well under the radar of company management. Nowadays freight rates are not only much higher, the way freight should be procured also has changed dramatically. You need to be ready to run sourcing events more often, on a smaller scale and much faster. With management now having a big focus on freight costs, capacity and reliability you need to ensure you play your best game in #logistics #procurement.
At Freightender we deeply believe in the automation of forwarder processes, especially around pricing, tenders and quotations. That is why we built the Tender Response Platform, a unique platform that digitises the very manual process of receiving and quoting to RFQ’s.