How do you set contract and spot rates today? If your pricing is based largely on personal experience, gut instinct or manual/non-integrated processes, chances are it is making your margins inconsistent and more likely, it is hurting your bottom line. Today, smart transportation and logistics companies are taking a better approach. They are utilizing analytics to uncover revenue leaks and using the power of data science to determine the prices that should be set. By implementing dynamic price optimization, cargo and freight companies can drive a 2-5% increase in revenue which is significant growth in an industry ripe with competition and complexity.
Are You Equipped to Respond to Day-to-Day Changes?
There are many factors that impact rates in the cargo space – everything from capacity to network utilization to fuel and competitor rates. One thing that’s constant, however, is that these factors can and will change, often quickly and drastically. Juggling these considerations daily and putting weight on the ones that are most financially impactful on each and every transaction is impossible for a person to do.
For example, when it comes to network capacity, cargo and freight companies can use spot rates to strategically reposition assets across their network. For instance, discounting prices in the South during the winter months can help you move assets North via paying customers, rather than deadheading those assets back North at a cost to your business. The struggle is to have these insights available at time of quote – without disrupting the sales process.
Moving forward with this example, if your business starts to see excess capacity in routes that were dense six months or a year ago, you need to be able to move from an aggressive revenue-driven strategy to a strategy of maintaining market share while making every shipment count.
The problem for most transportation and logistics companies is that all these strategies can be too much to manage effectively with traditional tools and instinct they have relied on for years. There are too many lanes, too much data and too much variability across the network to manage rates, quotes, and margin impact. The end result? Revenue leakage.
Are You Equipped to Respond to Day-to-Day Changes?
Before you can learn how to prevent revenue leakage, you need to understand what’s causing it. In years of working with transportation and logistics companies, we have found six common drivers. Do any of these sound like your business?
1. It Is Difficult to Determine What the Right Rate Should Be
Typically, rates are set in two different ways in the transportation and logistics business: via contract or spot quotes. In the contracted business, negotiations take place during a bid season or through a proposal response (RFP) that may take several weeks with multiple rounds of discussions. Lanes are won and lost with agreed upon rates for the lanes that are won. In some contracts, volume or revenue commitments are included, where a better price is given with the expectation of a specified revenue or volume from the customer over the life of the contract. It is important to ask if the won the lanes were at the right rate and that the business was strategically able to lose the ones that would add operational difficulty to the business. For example:
- What was the probability of winning at that offer rate and was that risk acceptable to your business?
- Did you have the appropriate rate approvals without overburdening the process?
- Did you have the data visible and accessible to help you make those decisions?
Not having insight into these questions can lead to revenue leakage.
In the spot or ad hoc business, it is all about speed. The first acceptable price will typically win the business. Here, you want to price quickly but also reflect the customer’s willingness to pay. To do that successfully, you need to have data on what the customer wants and is willing to pay for, capturing attributes that determine willingness to pay. The bottom line: If you don’t factor in the right movement and service attributes into your pricing, you can lose your pricing advantage
2. Lack of Visibility and Accuracy in Reporting
Most transportation and logistics companies have tons of data, but they may not be using the past transaction experience to influence future business decisions. In the contract business, if customers aren’t keeping their commitments to buy the volume they promised, does your business even know? Furthermore, can you negotiate what the new price should be based on the volume they are actually buying? The difficulty tracking performance against commitments or identifying the lanes deserving the most focus means lost opportunity.
This also applies to the visibility across the entire business. Most companies focus attention on a few key accounts and the small percentage of lanes that are capacity constrained. However, it’s likely the business will have thousands of other customers and tens of thousands of other lanes that are not getting the same level of scrutiny. If you do not have visibility into data, it will be virtually impossible to tell if you are leaking revenue across the 95% of your business that isn’t under intense scrutiny, let alone take action or prioritize additional revenue opportunities across the network. Applying a more holistic view of revenue leakage analytics is crucial in achieving proper visibility of the business.
3. Undisciplined Rate Variability
Pricing on gut instinct and experience quickly leads to extreme variance in revenue and margin. In fact, undisciplined pricing drives accelerated price erosion. Customers should not be priced without an understanding of all the factors that are most important in determining their willingness
4. Rates Do Not Reflect Reality
Strategies need to change when the market changes. Customers understand this and expect cargo and freight companies to price according to capacity, directional imbalance, or market conditions. For example, when capacity is tight, customers don’t have as many options, and you can charge a premium to ensure you achieve as much revenue as possible with every shipment. When you have overcapacity, however, you need to price smart to be sure you are not lowering the price of the market and to maintain overall market share.
5. Error-Prone, Time-Consuming Rate Updates
If you are difficult to do business with, customers will go elsewhere. Rates should be dynamic, but as often is the case of for contract rates, incorrect rates entered in the system may last months or years. Rates also need to be accessible and consistent through every channel your customers use – their account representative, an inside sales rep, a partner, or website. Customers will shop for the lowest price, so your business needs to ensure that each price presented to the customer is consistent and strategic. If not, it can lead to revenue leakage.
6. Disparate Tools and Processes
Price strategy can only extend as far as your pricing platform. Transportation and logistics companies use a vast ecosystem of tools and analytics for managing rates and for creating air-rate bills or bills of lading – ERP systems, revenue management systems, supply management systems, warehouse management systems, and more. Whether or not your business has a rate management tool, it is important to know which rates are populating all the tools in the ecosystem and to ensure strategic, consistent rates across all of them. For example, in the quoting process:
Where do you manage the rates for all the different options a customer may suggest?
In some cases, pricing may be set based on a contract, but what if there is a promotion running to take advantage of sparse lane allocation?
Do you have options that enable you to fulfill demand and maximize overall margins and revenue?
Your sales and deal desk teams need to make fast, smart decisions and they need to have accurate information at hand that enables – not slows down – your business.
Grow Revenue with Analytics and Price Guidance
You can stop revenue leaks at the source with a decision-making and selling process that is easier, faster, and smarter which uses data science and analytics:
Determine what the right rate should be - When you understand the shipment attributes that are important to customers, you can determine their willingness to pay.
Empower sales teams with data-science driven insights - With insight, you can create pricing guidance that sets floor, target, and expert pricing to help reps negotiate faster and more confidently.
Institute rate discipline - Not only are prices and quotes faster and easier, discipline and consistency become routine when it is easy to identify outliers that are costing you profitability.
Gain visibility into performance against commitments - Identify and take action when contract commitments are not being met or where there are opportunities for improvement.
Update rates quickly and get the quote out the door - Automatically update rates across thousands of routes and customers in a fraction of the time of manual processes.
Drive consistency across pricing and sales channels - Make sure that customers see the same price no matter what channel they prefer to do business with by making sure all the tools in your ecosystem are integrated and have the same strategic, consistent rates.
PROS’ dynamic rate management, optimization, and quoting solutions ensure your customers have a personalized, frictionless experience every time. Explore the PROS Platform to learn how you can make every buying experience more personalized and every transaction more profitable.