Price Matters

Dec. 11, 2006
As important as service is in transportation, it is still price that dominates shippers' buying decisions. Approximately 70% of the transportation purchasing

As important as service is in transportation, it is still price that dominates shippers' buying decisions. Approximately 70% of the transportation purchasing decision is based on price, says a recent Customer Value Study by market research firm Mastiogale. But despite that fact, shippers aren't willing to roll over on service. In fact, the bar is set pretty high.

Examining the less-than-truckload (LTL) segment, Mastiogale (Houston, first established what was important to measure and what was not. Shippers indicated how significant a list of service attributes were, including pricing. With the shippers' input on service criteria incorporated into its benchmarking tool, Mastiogale then interviewed nearly 3,000 shippers to determine how individual carriers measured up. The results allowed Mastiogale to set industry benchmark values and rank carrier performance. A total of 17 carriers were recognized for exceeding the industry benchmark and received awards from Mastiogale.

What does the study actually say about service vs. price? After accounting for the 70% price bias, top service concerns focus on on-time performance. This includes not only having shipments delivered when promised but also having them picked up when promised.

Geoffrey Muessig, v.p. of sales for Pitt Ohio (Pittsburgh, Pa. offers a carrier perspective that may be one reason why Pitt Ohio is among the carriers recognized for providing above-average performance. Shippers' definitions of "on time" vary, he says. For one shipper, on-time pick up may be by a certain hour of the day, for another, it may be within a narrow window, say 30 minutes either side of a specified time. Recognizing that it is the shipper who determines the standard, Muessig says carriers need to tailor their offerings to fit shippers' needs more closely. And, to Muessig, that applies to both pick up and delivery.

Making this all work at a price point that makes sense for the shipper and the carrier is a delicate balancing act. Both AAA Cooper (Dothan, Ala. and Peninsula Truck Lines (Auburn, Wa. executives attending the National Industrial Transportation League (NITL) annual meeting said carriers have to know their limits and look for shippers that are a fit. In the case of Peninsula, a Northwest regional carrier, that means not stretching beyond the region it can service at the level it has established. AAA Cooper representatives add that it's also important to have the right shippers.

Over the past year or two carriers have had an opportunity to clean house because of high demand and limited capacity. Where it was difficult to perform at the service levels shippers wanted or where pricing was out of balance with carrier costs and service levels, many carriers started using price as a tool to press shippers to improve or move.

Even without a nudge towards the door, many shippers report working closely with carriers to improve efficiency at their docks and find other operational improvements that benefit both parties.

Many of those shippers appear to value quality carriers and are willing to work to improve their relationships.

Carriers respond the same way to select shippers. Many of the companies talk about shipper customers who have been with them for a long time. Both shipper and carrier seem to view the other as almost a part of their organization, making information sharing and cooperation on efficiency improvements that much easier.

But as well as some of the relationships appear to operate, shippers lodge one of their biggest complaints when it comes to proactive communications. The issue is straightforward: Let me know when there are problems, and let's get them solved.

If shippers are putting pressure on carriers for service, it is partly because their own network dynamics demand it. With that said, shippers today appear to put less stock in carriers' financial strength or whether they offer a broad menu of services. Along with corporate image, these less tangible benefits don't appear to influence shipper decisions as much as actual performance. The reward for top performance, aside from actual freight, is a willingness to recommend select carriers to others.

Mastiogale compiles a Net Promoter score that indicates shippers' willingness to recommend specific carriers. Scores run from highs over 60% down into the teens, single digits and even negative scores. Bart Thedinger, president of Mastiogale, sees a strong relationship between how well carriers meet shippers' needs, their net promoter score and their financial performance. Those carriers who manage to do well in the most critical areas see the biggest gains in freight volumes and, between the revenue growth and ability to improve efficiency through joint efforts with key customers, hold onto more of that revenue.

Thedinger has observed an interesting development in the net promoter scores in the two years that Mastiogale has conducted the study. Different regions are more or less inclined to recommend carriers. The Mastiogale Mid-Atlantic region, with top-ranked Ward Trucking (Altoona, Pa. and Pitt-Ohio among the best-in-class carriers, sees a higher incidence of carrier recommendations—an average net promoter score of 41%. The West, on the other hand, has the lowest percentage of recommendations at an average of 20%. It isn't clear whether this means shippers in the West are less pleased with their carriers or if, as a group, they tend to be less open about sharing the information.

A number of market dynamics come into play. Thedinger explains Mastiogale's Customer Value Map plotting price and performance. The center point on each axis is indexed to 100—the industry average score. With a vertical Y axis measuring cost and the horizontal X axis reflecting benefit, Thedinger describes a diagonal line that passes directly through the point where the averages meet in the center of the grid. This, he says, is the fair value line.

Carriers that score to the right on benefit and below the fair value line are perceived to have high value for their price. One carrier in this position had scored equally well on benefit in 2005 but was above the fair value line on price. A couple of its competitors were in a similar position on price but well to the left of the industry average on service. In the 2006 study, the high-benefit carrier dropped to a much more competitive level on price. That carrier had stated it was seeking to grow its market share, says Thedinger, and it clearly did so by dropping its price. Shipper perceptions of value did not change substantially for any of the three carriers, but price became the weapon the high-benefit carrier used to win customers from the low-benefit/high-price carriers.

Questions shippers ask include, "Is high-benefit, low-cost sustainable?" Clearly, the opposite is true, low-benefit, high-cost is not a sustainable market position for a carrier. Thedinger describes an area parallel to and just above and below the fair value line that represents a reasonable target area balancing the benefit and price equation. Some shippers will elect to sacrifice a little benefit for price, others will give more on price to avoid losing anything on the benefit side.

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