According to a new study conducted by the global strategy and marketing consultancy Simon-Kucher & Partners, the logistics industry faces more price pressure than other sectors, regardless of country. As per Simon-Global Kucher’s Pricing Study, only “strong positioning and committed leadership” can assist companies in Europe, Asia, the Americas, and the rest of the world in dealing with the pressure.
The Global Pricing Study 2012 was based on responses from 151 transportation and logistics professionals from Europe, Asia, North and South America. The firm is based in Bonn, Germany.
According to Dr. Philipp Biermann, a partner at the consultancy, the study reveals that logistics companies are frequently the source of their own misery. Three-fourths of logistics firms are unable to obtain the prices they deserve for their services and the price-aggressive competitive environment and the prevalence of standardized products are the causes.
Biermann observed that successful businesses, regardless of industry, have “pricing power” – the ability to charge prices that reflect the value of their goods and services.
“However, its significance in the logistics sector, where margins are significantly lower than in other sectors, should not be underestimated,” he said. According to Biermann, logistics companies with strong pricing power achieve 17 percent higher margins than their competitors. “Strong market positioning and the sale of premium products significantly improve a company’s pricing power – which also ensures international business success,” he added.
This can be well illustrated by the profits earned by the shipping companies in a year – 150 billion dollars. The loss bore by the leaders will surely get compensated as the year 2022 is expected to elevate the shipping rate profits.
Large customers of seaborne cargo, such as Walmart Inc. or Ikea, have the clout to negotiate better terms or absorb the extra cost. Smaller importers and exporters, particularly those in developing countries, who rely on carriers to transport everything from electronics and clothing to grains and chemicals, cannot easily pass those costs on or weather long periods of cash flow constraint. The situation has focused attention on shipping lines’ market concentration and their legal immunity from antitrust laws.
Some solutions to win the price battle:
• Cut down on margin leakage.
Improving implementation and reducing margin leakage hold significant upside potential once companies have the right mix of contracts at the right prices. This final step, in our experience, can yield up to one-third of the total impact of a pricing transformation. As a result, reducing margin leakage typically yields the quickest results because it does not necessitate significant new capabilities or new negotiations. Instead, it focuses on indirectly related price actions such as ensuring appropriate penalties are charged and paid, executing service-level agreements, and recouping rebates when volume minimums are not met, among other things.
• Set contract prices based on value.
Following the identification of the optimal contract mix, businesses must develop value-based pricing guidance that reflects the value that their product or service brings to their customers rather than their own costs and margin expectations. Capturing this value entails charging more for superior performance and highly differentiated routes, adjusting prices for niche customers who purchase specialized or high-value goods, and providing add-on services.
• Enhance spot pricing with decision support systems.
To capitalize on the significant upside potential of pricing fluctuations, businesses should constantly optimize spot prices based on market and product conditions, as well as the likelihood of filling capacity. Furthermore, more digitally enabled pricing reduces costs, potentially allowing companies to serve very small contracts, such as single shipments on a specific lane.
Now is an excellent time for logistics companies to address pricing. Pricing not only has the highest bottom-line potential of any lever, but the cost of a pricing transformation is usually amortized within six months. Many industries best practices have been called into question as a result of COVID-19, and companies that can channel the resulting momentum to reimagine pricing will be well positioned to thrive in the next normal.