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Your Approach to Spot Freight Rates Could Be What’s Denting Your Profits

Spot freight is a significant, yet often under-leveraged, aspect of the logistics industry. The current global landscape, characterised by increasing volatility and disruptions in the supply chain, necessitates smaller inventories, shorter production cycles and greater agility. In this scenario, correctly pitching spot freight rates becomes crucial for Logistics Service Providers (LSPs). Rather than avoiding complexity, they must transform it into a source of competitive advantage.

Advanced approaches to spot freight rate management are key to achieving this goal. The traditional approach to spot pricing often harbours significant flaws that need to be addressed directly to find effective solutions and propel us forward. However, a 2022 survey conducted by McKinsey revealed that over 60% of supply chain transformations face greater challenges or achieve less success than anticipated.

Therefore, how can LSPs move forward from traditional price and revenue management strategies without implementing redundant or counterproductive transformations? The key is to know the common pitfalls. Here, we outline the five most common missteps in spot price management.

5 common missteps LSPs make when calculating spot freight rates

1. Cost-plus could lead to a minus margin

Traditionally, spot freight rates have been calculated with cost-plus, where the mindset is to add a certain margin to fulfil obligations. This often leads to pricing not reflecting the value provided to the customer but rather focusing solely on our perceived costs. However, situations arise where the same transportation service, simply by having unused capacity versus being fully utilised, can cost up to five times less for a customer who might be willing to pay a higher price.

According to the recent study conducted by Simon-Kucher, there's a notable shift in attitudes, with 95% of respondents indicating an adaptation of their commercial operating models for the future. One critical aspect of this adaptation is moving away from the cost-plus pricing approach. For LSPs, this shift means several things: 87% of respondents aim to mitigate the impact of economic downturns while safeguarding margins, 57% focus on mitigating supply chain disruptions, 66% utilise digital analytics to enhance sales efficiency, and 35% are considering the introduction of dynamic pricing and offers.

2. Pricing with your heart, not with your head (or data)

In many LSPs, spot freight rates are determined by individuals who negotiate directly with customers and potentially with spot capacity providers as well. Without proper processes or tools in place, these individuals often resort to what's known as “emotional pricing”. This means that pricing decisions are influenced by personal judgments rather than objective factors. An illustrative example is imagining that two different individuals would assign different prices for the same job.

“Emotional pricing” is a common occurrence in transportation, largely due to the sector's reliance on seasonality. Depending on the daily operations and the perceived capacity available, prices can fluctuate. However, this approach carries a high risk of setting spot freight rates arbitrarily, leading to margin erosion. Digitisation is the clear solution to the problem, as highlighted by the results yielded by automation in the spot quotation workflow.

3. Price as a qualitative, not quantitative negotiation element

The third issue is intertwined with emotional pricing, where spot freight rates become a negotiable factor among individuals. This leads to unpredictability and short-term decision-making, where logistics operators who rely on uncertain and qualitative negotiations often find themselves at a disadvantage in terms of conversion rates and margins.

This challenge is particularly prevalent among global LSPs with fleet operations, as it undermines the relationship between sales and operations. Internal misunderstandings result in friction, leading to poorer service for clients, lower Net Promoter Scores (NPS), and heightened volatility in margins, sometimes resulting in losses.

4. Not all orders are created equal

When every order is handled in the same manner, regardless of its urgency or value, the pricing strategy inevitably falls short, particularly in more valuable and time-sensitive instances. This approach often results in delayed deliveries or subpar service quality. 

The impact of slowness on conversion rates and margins cannot be overstated. In industries where time-sensitive decisions are crucial, such as logistics, delays in providing quotes can result in missed opportunities. Customers may opt for faster alternatives, even if they come at a higher cost, simply because they cannot afford to wait for a slow response. By failing to differentiate spot freight rates based on urgency or value, companies miss out on opportunities to maximise revenue and profit margins. 

Moreover, the process of prioritising costs first and then adding an "emotional" margin, negotiated qualitatively on both the customer and supply sides, ultimately backfires. It not only results in delays in fulfilling high-value orders but also frustrates less price-sensitive customers who receive inferior and uncertain service. This lack of differentiation in pricing strategies not only impacts immediate revenue but also erodes customer satisfaction and long-term profitability.

Image source: Boston Consulting Group

5. Doing calculations the old-fashioned way

A manual approach to the quoting process adds complexity and inefficiency to the workflow. Without automated support or streamlined processes, each step requires significant time and effort from personnel. Agents must navigate through various systems and databases to gather the necessary information, leading to delays and potential inaccuracies in pricing.

Moreover, the reliance on manual processes increases the likelihood of errors creeping into the quoting process. Typos, miscalculations, or oversight of critical details can result in incorrect spot freight rates, leading to dissatisfaction among customers and potential financial losses for the company.

Furthermore, the lack of clear tools or standardised processes exacerbates the challenges faced by employees. Without established guidelines or frameworks to follow, there's a higher chance of inconsistency in how quotes are prepared and communicated to customers. This inconsistency can erode trust and credibility with clients, hindering long-term relationships and potential business opportunities.

Technology can help make sure your spot freight rates are right on the money

We've identified the five obstacles that hinder turning spot freight rates into a competitive advantage. Now, let's talk about the light at the end of the tunnel: technology. With the rise of AI, we can begin to make pricing decisions based on value, objectively assess their impact, and offer immediate pricing where we anticipate meeting service requirements.

By integrating AI with automated order processing systems, connecting with spot suppliers, or replacing manual negotiations with automatic bidding platforms, we can move away from the manual, inefficient practices of the past. This shift can transform our spot operations into a competitive edge, driving revenue growth.

It's time for the logistics sector to embrace dynamic pricing, automatic bidding, and instant pricing as standard practices. And why not consider letting AI algorithms guide pricing strategies, learning and adapting to market dynamics over time? The possibilities are endless – check out this article to find out more about 3 practical pricing optimisation use cases.

I'm happy to discuss further, comment, or connect on LinkedIn to explore these ideas together. Ontruck AI Tech is shaping the future of logistics pricing – let me run you through how. 

References:

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