I just saw results from a study that might give you cause to pity your logistics service providers. Or, it might give you a twinge of glee knowing they’re in the same pitiful position you are when it comes to getting a raise.
The study asserts that many transportation and logistics firms have no idea how to effectively raise their prices. The problem seems to be that they don’t know how to value their services.
Many of the managers at these companies cite their price-aggressive competitive environment and the prevalence of standardized products among transportation and logistics providers.These were the findings of a 2012 Global Pricing Study conducted by the global strategy and marketing consultancy Simon-Kucher & Partners. These consultants don’t have much pity for the logistics service providers who answered this way. In fact, they say logistics companies are often the source of their own misery.
This assessment is based on the responses of 151 respondents from the transportation and logistics sectors throughout Europe, Asia, Northern and Southern America. By the way, "Transport & Logistics" was one of 24 industries studied, representing a subset of the 2,700 responses received. The study concludes that successful companies in any industry must have pricing power, or “the ability to charge prices that reflect the value of their products and services.”
“Logistics companies with strong pricing power achieve on average 17 percent higher margins than their competitors,” stated Dr. Philipp Biermann, one of the partners at Simon-Kucher. “A strong market positioning and selling premium products greatly improve a company's pricing power—which also guarantees international business success."
He further points out that although 77 percent of the international respondents to his study tried to raise prices in 2011, 20 percent failed completely. Of those that did succeed in raising prices, just two-thirds managed to take the price increase a step further and improve their margins. Biermann explains: "What we are seeing here are only price adjustments. In other words, they are simply passing on higher costs. These aren’t true price increases that will lead to higher profits."
Before you do a superiority dance at the expense of your company’s logistics service providers, Biermann gave me a bit of news about the customer-facing side of this relationship. I asked him how the internal logistics operations of a typical manufacturer affect the pricing that company can present to their customers.
“Unfortunately, except in sectors such as consumer electronics, too many shippers or manufacturers fail to pass on logistics costs to their end customers—mainly because they don’t even try to,” he said.
Couldn’t they make the case that their own logistics capabilities are more than just costs, but part of the value adding process?
“I don’t think that we can expect manufacturers to literally sell logistics to their end customers if their own logistics people fail to do so themselves,” he continued. “It’s mostly the logistics folks who have to learn to do ‘value selling’ and emphasize their fantastic and incredibly cheap services in the first place. But if so many trucking or shipping companies don’t have the courage to escape the commoditization trap,’ how can they expect their customers to consider logistics services as something unique?”
Biermann feels that, depending on the industry, logistics services costs don’t account for a major part of most companies’ expenses, which tells him why he hasn’t seen a trend towards logistics excellence in manufacturing. In fact he sees more companies shifting that responsibility from the production environment to the procurement department.
In turn, external logistics costs have decreased due to an increased use of professional procurement—at the expense of logistics providers. He said his firm has seen various cases in which logistics service providers needed to be saved from bankruptcy as a result.
Has logistics excellence become a “me too” commodity in your environment? If logistics or supply chain is in your title, you may be in a similar position to the logistics service providers Biermann is referring to. How long has it been since your last raise? If you can’t remember, maybe the problem is you. In that case you’re also the solution.
Biermann’s study cites three reasons for high pricing power among service providers: the brand is well known, they sell a premium product and the sales team knows how to sell it. In your case, you are the brand, the product and the sales team. Look in the mirror. Can you sell what you see?