The top three commercial issues facing shipping and transportation companies today are continued excess capacity, rising fuel costs, and “irrational” rate competition behavior, according to Michael Bentley, partner at Revenue Analytics.
The past couple of years haven’t been easy for the shipping and logistics industry. The pricing landscape has become increasingly competitive as companies try to undercut each other in a race to the bottom on rates. It’s apparent that this trajectory is unsustainable and will lead to more companies potentially going out of business if they continue unabated.
Below are some of the top commercial issues facing the industry today and some simple strategies to remedy them and drive revenue growth.
Capacity Glut. On a day-to-day basis, shipping and logistics companies find it difficult to predict what kind of capacity shortages or (more likely) surpluses they’ll have. It’s important to identify days, routes, or legs where you are capacity constrained, and make inventory trade-off decisions that will help drive higher yields. However, on days where you are not capacity constrained, inventory management will have little effect, and you’ll want to be less selective in the business that you take. On those days, focusing on pricing is essential. But this begs the question: just how low should you go?
In excess capacity situations, companies should determine where they can incentivize additional demand with pricing actions. Are there price-sensitive customers that will respond to a discount with increased volumes? Can you capture incremental demand by being more aggressive on rates? And which are the customers that will not respond to pricing actions? In those cases, you’re likely better off taking what you can get at a higher rate, maintaining margins and preserving a higher market price for the long term.
If the distinction between these two customer segments is not made, companies could establish a precedent of being willing to accept bad deals and see a downward spiral that will soon become unmanageable. Of course, accepting lower prices is unavoidable during high-capacity times. But continuing to “buy the market” by constantly filling capacity, will ultimately find carriers backed into a corner of low revenue and low market demand, thus creating a dangerous “new normal.”
Rising Fuel Costs. Although the global market has gone through a recent period of low fuel costs, the U.S. Energy Information Administration (EIA) predicts prices will increase from $52 per barrel in 2017 to $55 per barrel in 2018. This puts pressure on shipping and logistics companies, as they will want to increase rates to cover those additional costs despite a continuation of current downward pricing pressure.
In order to combat this, companies must reevaluate how they calculate pricing standards in order to ensure they cover these additional costs. While in the past some contracts may have yielded small, if still significant profits, those same contracts may actually be unprofitable when oil prices rise. Companies should look to airlines as a model example, as they continually adjust ticket prices based on their own internal data as well as external macroeconomic data, such as the fluctuating cost of fuel.
Shipping and logistics companies have a wealth of internal data they can turn to in order to determine optimal pricing and capacity strategies. These companies need to make pricing decisions that are best for themselves and their own business, rather than solely reacting to competitors’ actions, which will only lead to ill-advised pricing strategies and tactics.
Irrational Competition. Currently, carriers base the majority of their pricing decisions on the going market rate and competitive actions, rather than taking into account their own demand forecasts and available capacity. As much of this internal data isn’t easily accessed or is too vast to leverage manually, many companies enter into price wars driven by irrational competitors.
Freight transportation providers must remember they should not solely be chasing volume and market share. Many shipping and logistics companies are trying to fill excess capacity no matter the cost, and are seeing declining profits as a result.
Firms can (and should) use predictive analytics to scientifically determine where and when volume should be filled and where it should not. Price ratio modeling can explicitly bring in market data to inform these decisions and provide strategic direction on where companies can differentiate themselves and drive pricing premiums when compared to the overall market.
Above all, carriers must remember they are their own unique entities. Just because a larger competitor can afford to sell capacity at ultra-low costs in certain markets does not mean that it is the right decision for you and your business.
When creating a strategy for growth, remember these two essentials:
1) Know whether it’s an inventory or pricing play – don’t focus on one or the other, and keep in mind margin as you pursue both volume and revenue;
2) Look at all the data available to you – make pricing decisions that are best for your company, instead of blindly following an irrational competitor down to the lowest possible rate.
At the end of the day, you don’t always have to match your competition to be competitive.