Shipping and freight companies have an anxious 2016 ahead, as they try to outperform a choppy 2015 amidst the threat of a worldwide economic slump, particularly in China.
Should it materialize, this downturn will only exacerbate already existing hurdles shippers are facing. Among the pain points – and strategies to combat them – are:
- Overcapacity. At this moment, there is close to twice the capacity in air cargo and ocean freight as there is demand – and capacity keeps growing. This has put shippers in a difficult position, and their survival strategy thus far has amounted to a race to the bottom on pricing. Companies would be wise to utilize data-driven price sensitivity analysis to tell them just how low they should go on pricing. After all, they can’t increase profitability by continuing to lower price, yet pricing seems to be the only Revenue Management lever they are pulling. Rather than these industries yo-yoing between a profitability and market share play, they should strive for both with focused segmented pricing strategies.
- Lack of automation of analysis. This shortcoming means shippers can’t respond to all the Requests For Quote (RFQs) they get, which results in lost business opportunities. In most cases, the process is largely manual with little-to-no pricing governance, and many price quotes end up being exceptions that require senior approval. None of that is good for revenue or profit maximization. As a result, companies are responding to only four in ten RFQs. This isn’t about a lack of data or technology infrastructure, but a missed opportunity to leverage that data with analytical models that can yield incrementally better pricing decisions and drive organic revenue growth.
- Getting the price wrong. With little analysis as part of their pricing process, shippers are making strategic and tactical errors in their pricing and not winning the business (and profitability) that they should. This becomes even more of a threat with fresh competitors entering the market, including Amazon, which recently won approval to be a freight forwarder from China. The last thing traditional shippers need is for Amazon to become a transnational fulfillment and shipping company – but that’s exactly what’s happening. And Amazon has shown they approach every decision with data and sophisticated analytics. Their approach to logistics will be no different.
These pain points demand that shippers institute predictive analytics to drive more targeted pricing strategies. Those in wholesale container shipping should focus on further measuring and understanding the price-demand relationship and setting prices that can drive volume at profitable rates. Those selling big negotiated contracts should focus on win probability models and bid price optimization to determine the price point that results in the highest probability of winning a specific piece of business at an acceptable profit.
This approach will allow shippers to capture demand at the highest profit point, which will be critical as they struggle to navigate the ongoing challenges within the industry.