Monday, June 27, 2016

Online pricing is coming, and it will challenge the logistics industry

The logistics industry is characterized by features typical of business-to-business outfits: fragmented customer segments, high fixed costs, and complex production processes paired with predominantly manual sales processes, for instance, in the form of personal negotiations.
While in terms of order processing digitalization is slowly making headway, pricing is still firmly rooted in a tried and tested approach: the customer sends an order enquiry and the sales or pricing department of the logistics company calculates a price or tariff and then sends it to the customer. Generally speaking, with smaller customers, this process is essentially standardized within only a few days but mid-sized and large customers sometimes have to wait up to one week.
Digitalization and online pricing, however, are already being applied successfully in numerous comparable industries. Besides a faster tendering process for the customer, digitalization offers logistics companies the possibility to generate better margins in their troubled industry through intelligent, automated pricing.
The term online pricing is widespread but the meaning is not always clear. Some logistics companies are under the false impression that they have already implemented online pricing. In reality, however, what most of these companies actually have in place is an electronic data interchange, which is really a standardized booking process.
Figure 1 shows the difference between alternative versions of internet-based pricing. With EDI, prices are calculated and negotiated in advance, not online, so it’s only a booking platform that is completely unrelated to pricing.
True online pricing includes an intelligent, automated pricing approach that fulfills a number of criteria. First, pricing is not done manually, but using an algorithm. This allows identical enquiries to be responded to with identical price offers. This price is determined by the current utilization (similar to yield management), but also by price drivers such as volume, industry or the urgency of the request, and they ideally reflect the customer’s willingness to pay.
Simon-Kucher & Partners conducted a global study over the course of a year from September 2014 to November 2015 that found five key recommendations for utilizing online pricing in the transportation and logistics industry.
The transformation to online pricing is unavoidable
Examples from other industries show how transformative online pricing really is and why it is here to stay
The “first-movers” have a significant competitive advantage and in some industries have managed to substantially increase their market share and profits as a result. In some cases, previously strong players were driven out of the market.
A good example of this is video/DVD rentals, where the former market leader went bankrupt a few years ago. Furthermore, expert discussions have revealed that most B2B industries are actively working to implement an online pricing strategy, albeit with varying degrees of ambition.
In the logistics industry, many signs are already pointing toward online pricing. Interviews with experts from leading global logistics companies revealed that the industry (land, air, and sea transport) is preparing for online pricing. Online offers are being initiated by internationally established market players such as Kuehne+Nagel as well as start-ups such as Freightos. Many large logistics companies are already strongly investing in platforms and IT processes, making online pricing a real possibility for them in the future.
Logistics companies must work to become first-movers in this realm as online platforms are attempting to become the booking.com or Expedia of the logistics industry, thus bundling a large part of the market online. This is a serious threat for logistics companies because such a platform would narrow margins — similar to what happened with hotels and travel agencies — and in extreme cases, leave them standing there as pure asset providers.
This point has not yet been reached, but the operators of such online platforms for logistics services believe that it is only a matter of time until someone discovers the right formula.
Customers are a further factor showing the need for online pricing. Although many customers value the personal contact to the logistics company they trust, today, more and more favor speed, comfort, and transparency.
Introduce online pricing step by step
Introducing a true online pricing strategy with an intelligent automated pricing algorithm takes several years and companies that want to go down this path have to be aware of this. A half-baked solution not only gets in the way of success, but could also end up costing a company quite a lot of money.
Online pricing solutions have failed for numerous reasons: not enough data points for calibration, no payment obligations for booking and therefore no reliable utilization data, etc.
A gradual implementation according to customer group, region, and product (spot rate) is advisable. In this way, sales as well as customers are given the amount of time necessary to get used to the new system, which is key for success.
Refine product definitions mid- to long-term
From the perspective of logistics companies, the big advantage of online pricing is not found in the speed or simplification of the pricing process, but the pricing strategy itself.
The vast majority of logistics providers still use classic cost-plus pricing approaches or base their prices on those of their main competitors. Our experience shows that only very few logistics specialists implement a true value-based pricing approach that integrates customer willingness to pay.
Of course, this is also possible without online pricing, but online pricing gives a company far more possibilities to differentiate prices and therefore maximize profit.
Although price differentiation in the logistics industry is nothing new — prices of freight carries for truckload services in many countries greatly vary depending on usage and the season — implementing an online pricing strategy could help to further systemize and optimize price differentiation.
The biggest opportunity for price differentiation for logistics specialists lies in differentiating offers. Similar to the air transport industry, where tariffs for economy, business and first class, have existed for years, logistics specialists can best appeal to their customers through differentiated offers to maximize profit. Some logistics providers such as in the air freight or the express business, already do this. Most forwarding companies, however, really struggle with standardized products.
It is particularly important to have a clearly defined product portfolio using effective “fencing.” Specifically, price differences between product variations need to be justified through differences in service that are equally as big. Otherwise, customers might simply choose the cheapest product variation, a clear risk that could cause a company to sacrifice profits or possibly earn less than before.
The combination of a differentiated product portfolio with an intelligent pricing algorithm is, therefore, the best prerequisite to utilize the potential of online pricing. A key challenge for logistics specialists with capacity bottlenecks is introducing mandatory booking payments, or rather an alternative “no-show” penalty fee. This is important as a company has no way of setting capacity-based prices if they don't how many containers, pallets or packages are actually delivered. Such "no-show fees" or similar terms as part of the product concept have not been implemented comprehensively in the logistics industry yet, but they are hygiene factors for successful online pricing.
Do not make prices accessible for everyone
A clear disadvantage of online pricing is the increased transparency, which allows customers and competitors to use their knowledge of prices against a company. This is a particularly important aspect in the logistics industry since up to now, due to the current processes, it is relatively difficult to determine the exact prices of competitors.
Other industries have highlighted this problem: For example, a public stock exchange was introduced in the steel industry over 10 years ago, but was replaced with an encrypted online platform shortly thereafter due to a lack of success and too much price transparency.
Price transparency can be reduced by using an encrypted online platform with a log-in, which makes it possible to address customers individually and utilize the advantages of online pricing. An encrypted platform also reduces the risk of future online players/comparison portals (aggregators) gaining access to price information.
Be prepared for new online players
The greatest risk when it comes to online pricing is the emergence of a future aggregator modeled after booking.com. Of course, an encrypted online pricing platform can reduce this risk, but it cannot be completely excluded.
These portals have gained market power and reduced margins for established players beyond the hotel and airline industries and can be found in the energy, insurance and financial services markets.
It is nearly impossible to react to a successful aggregator ex post and there are no relevant examples of a case where this was done successfully. The flight platform Orbitz, which was founded as a reaction of five large U.S. airlines to an aggregator, has had little sustainable success.
Digitalization and online pricing will not simply pass over the logistics industry. Whether this leads primarily to higher added value within existing providers or the emergence of new players, however, is uncertain. Perhaps in the end, the consumers will be the winners.
Therefore, all logistics companies should now give this topic some thought so that they are not left on the losing side.

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