Historically, the logistics industry as a whole has relied on rigid, inflexible, and often inefficient pricing strategies.
In a 2020 whitepaper titled Getting the price right in logistics, McKinsey & Company took a critical look at the current logistics pricing cycle. The authors proposed that it may be time to “reimagine” the pricing cycle and provided five steps for doing just that.
Additionally, the authors provided some noteworthy statistics regarding improved pricing and its impact on a logistics company’s bottom line.
Specifically, they stated that more efficient pricing models could boost revenue by two to four percent. According to McKinsey, this could increase a logistics company’s operating revenue by a jaw-dropping 30 to 60 percent.
In this informal review, we explore the steps to logistics pricing cycle reform outlined in the McKinsey whitepaper. Thanks to significant advancements in logistics technologies, the solutions needed to implement these strategies are more accessible than ever before.
Virtually any logistics service provider can take advantage of better pricing strategies with access to the right platform, but that’s a conversation for another time. Organizations that are interested in reimagining their pricing cycle should leverage the following tactics:
Make the Most out of Digitization Investments
After years of lagging behind, the logistics industry finally seems to be joining the rest of the global industries by investing in digital transformation. Broadly speaking, the term “digital transformation” refers to the adoption of various digital assets in order to drive value, fuel innovation, and improve the efficiency of operations.
In particular, companies operating within the logistics sector have been proactively working to eliminate data silos and transitioning to cloud-based technologies.
Data silos are created when legacy systems collect data but do not efficiently communicate in order to share this information. Removing data silos allows logistics companies to improve organizational transparency and make better use of the information that they collect.
Despite the fact that the majority of logistics companies have started investing in modern technologies, many of these businesses are still on the fence. They have implemented many of the solutions they need to reevaluate the ineffective logistics pricing model but remain hesitant to break away from their comfort zone.
However, the latest generation of business leaders seems primed to leave the “this is how we’ve always done it” approach behind them in order to make their organizations more competitive.
Create a Better Pricing Strategy
It is no secret that the pandemic had a profound impact on the logistics and supply chain sector. While the industry has begun to rebound since the writing of the 2020 whitepaper, logistics companies are still feeling the effects of the pandemic. As the authors noted, it will likely take as long as five years for the industry to recover.
However, creating a better pricing strategy by utilizing modern technologies can allow logistics providers to improve their margins. In turn, this improvement in profitability will fuel their recovery and help them return revenue to pre-pandemic levels.
Specifically, businesses should explore nimble pricing strategies that incorporate real-time data. Dynamic pricing can allow logistics providers to capitalize on unexpected dips, which have become more common in the highly volatile shipping industry.
Conversely, holding fast to static pricing strategies may cause logistics providers to inadvertently erode their operating margins if they lock in rates at the peak of a major fluctuation.
Real-time pricing strategies will also be invaluable during the inevitable surges in demand for products. In the two years since the whitepaper was published, the logistics sector has experienced several such multi-month surges.
If these unpredictable fluctuations have demonstrated anything, it is that agile pricing strategies will yield a competitive advantage to those who adopt them.
Be Willing to Pivot
One of the most significant shortcomings of traditional pricing cycles is that they are extremely rigid. In light of this fact, logistics companies must be careful not to replace their current inflexible approach to pricing with a different one.
Instead, logistics providers must be willing to pivot so that they can apply the best strategy to each length of contract. Since the key considerations for spot, medium-length, and long-term contracts will vary, the pricing strategy should be different as well.
In addition to adopting a different strategy for various types of contracts, logistics providers should use unique tactics based on the type of services that they provide. For instance, trucking firms have different pain points than freight forwarders or ocean carriers.
Fortunately, all of these various entities can effectively address their pricing cycle needs with the right technologies. These organizations should invest in a platform that integrates with existing workflow infrastructure and other software solutions.
Top platforms will interact seamlessly with transportation management systems, customer relationship management software, and freight rate technologies.
Use Data to Negotiate More Effectively
In the whitepaper, the authors recommend that logistics providers use a tactic known as “dynamic deal scoring.” This approach involves leveraging data during contract negotiations to group clients based on the cost of meeting their logistics needs.
Also known as value-based pricing, this approach can help logistics providers optimize revenue by accurately accounting for the high cost of working with smaller accounts.
Dynamic deal scoring is performed using advanced analytics software. These technologies will help sales teams as they determine what pricing to offer less lucrative agreements.
Logistics companies can also use data collection and analysis practices to aid in negotiating large, long-term contracts. They can accurately account for many different variables and risks in order to provide prospective clients with an appealing contract proposition.
The information will also aid decision-makers as they weigh the importance of each contract. When negotiating particularly large or strategically significant deals, decision-makers can use this information to understand what concessions they can offer without exposing the organization to undue risk.
Support Spot-Pricing Decisions with Actionable Intelligence
Real-time pricing data and modern logistics technologies not only improve long-term contract negotiations but will also help businesses more effectively leverage spot pricing opportunities. When used selectively, spot pricing allows logistics providers to capitalize on price fluctuations and widen profit margins.
In order to maximize the efficacy of this approach, businesses should guide any spot pricing decisions using actionable intelligence from their freight rate service workflows.
Leading-edge solutions can use both external and internal information in order to improve the accuracy of pricing data. As pointed out in the whitepaper, improving spot pricing practices may also allow companies to serve “very small contracts” while still maintaining viable profit margins.
Address the Entire Workflow
As a standalone solution, freight rate technologies can provide organizational leaders with access to invaluable pricing data that can be used to drive measurable profitability improvements.
However, a singular approach to reevaluating logistics pricing models will not yield optimal results. Instead, logistics providers must address their entire workflow, including CRM and TMS technologies.
By implementing a dynamic, user-friendly platform that integrates with existing technologies, logistics providers can support a total pricing strategy evolution. Additionally, organizational leaders must facilitate a seamless implementation process in order to maximize employee buy-in.
Together, these efforts will provide logistics companies with a distinct edge over organizations that are still relying on static pricing models and rigid contract management principles.