It seems that an ocean-going container shipper has collapsed. Korea-based Hanjin, one of the world’s top ten shippers in terms of capacity, has run aground with many of its at-sea container ships unable to dock at their destinations for fear of seizure.
This came to my consciousness for a number of slightly wonkish reasons. First, I’m quite interested in containers, since reading The Box by Marc Levinson. Second, I have a point of view on pricing in a business that is fundamentally capacity constrained (number of containers on a ship vs. number of ships deployed). Third, I want to ship a car across the Atlantic quite soon for personal reasons.
Of course, I’m seeing this through a pricing lens. The entire industry is behaving irrationally by engaging in an active price war while the industry in aggregate is losing money due to excess capacity (i.e. too many ships, not enough containers to keep them at sea). Clearly this is unsustainable, and the only way out is through better pricing by all players.
Hanjin cut prices this year and managed to increase second quarter volumes by more than seven percent over the first quarter. What an unsound thing to do: cutting prices on a business that is already taking losses in order to — excuse the pun — right the sinking ship.
Here at PROS, we know that costs are a reality of doing business. We generally advise against cost-plus pricing, but we do recognize that costs can be a key component in developing a floor price. If Hanjin was able to leverage software such as our Deal Desk tool, they could have made better decisions.
Our patented pricing methodology could have been used by Hanjin strategists to establish moments and opportunities of pricing power — where competitor ships were loaded or at sea, perhaps, or where attributes of a particular shipment would help them better grasp the price sensitivity of the customer. Instead, Hanjin was likely relying on a more elementary pricing strategy that failed to take advantage of these opportunities and was simply reacting to competitors’ pricing moves.
The irony now is with Hanjin’s boats heading for dry dock, resale or scrap, there will finally be some upward pricing pressure placed on shipping customers with reduced capacity heading into a busy holiday season in the West (helped by some likely pricing panic among with Hanjin’s competitors).
The larger point here is that it didn’t have to come to this. More strategic and data-driven pricing decisions can help this stricken industry improve revenue and profitability without putting some shippers out of business. Pricing can — to include one last pun — be the rising tide that lifts all boats.
About the AuthorMore Content by Ben Blaney