Establish your pricing power
The need to fill the widening social media pipeline with “content” has everyone writing studies. As a regular columnist, my inbox is inundated with white papers, surveys, and reports from consultants that almost never get read.
However, during a recent email purge I came across two studies written almost 10 years apart that reveal a lot about transportation pricing.
The first, done in 2003 by McKinsey & Co., revealed that a 1% increase in price will generate a whopping 8% increase in operating profit.
Yep—one stinking percentage point is as valuable as a gold nugget!
Nine years later, a Simon-Kucher study showed that pricing pressure is higher in logistics than in other sectors, and that three quarters of us don’t get the prices we want for our services.
Apparently, protecting us from ourselves is a problem.
Not all is bad. This same Simon-Kucher report also revealed that several logistics companies possess “pricing power”: the ability to increase prices without losing any business to direct competitors. These companies average 17% higher margins than their competitors. Another whopping number!
How do you establish pricing power in your business? Here are some things to consider:
It’s not about price
I can almost guarantee that your sales team won’t agree with the findings of a recent Nulogx report that surveyed close to 2,000 shippers. It shows that price is not their No. 1 priority. It’s still on-time pickup and delivery.
For decades, customers have told me that our industry puts numbers on the table long before they do. Sales reps who think it’s all about price tend to lead with price, giving away their pricing power.
Keep the cut-rate proposals in the briefcase and build systems that get freight delivered on time. Those 1% increases will follow.
It’s about service
What do people say when you leave the room?
As long as rotten service batters your brand, you have zero chance of achieving pricing power. In fact, bad service leaves you with just two options: commit to fixing your problems or ride the “Cheapie Express.”
A low rate may attract business but it won’t help you keep it. There will be no pricing power without great service.
There’s a rule of thumb in this business that the customer will take a rate increase over switching to another carrier 90% of the time. Customers know the cost of change is always greater than any anticipated savings. Seriously, finding another carrier to haul freight is a massive, expensive pain in the ass.
The fact that customers don’t really want to change is an important source of pricing power. If you think your customer might actually switch, lay out why you’re worth the increase—and remind him of the expense and hassle of moving to another carrier.
Surprisingly, the odds are in your favour.
Don’t be a doormat
Pricing complexity is a fact of life in any business, not just ours. You’re not the only one getting pounded daily for lower prices. Your customers prey on every weak supplier they have. They’re smart and know from experience who will cave. Threatening to take their business elsewhere is simply a ploy to cut back their costs and your gold. If you can’t hold your ground with your customer, you’ll be a doormat in his eyes. Once a doormat, always a doormat!
Stand up for yourself. Yes, a customer will gripe about even the most well-reasoned price increase, and yes, you risk losing the deal.
But don’t be afraid to lose. There’s a great chance (90%!) that you’ll win. If you can earn the customer’s respect in the process, you’ll establish pricing power and seed the type of long-term business relationship everyone wants.
When the three-piece suits are active in pricing, companies have a 29% higher EBIDTA margin, according to Simon-Kucher. Yet only 28% of logistics companies say C-level involvement is common.
When it’s your job to produce gold, you need to go upstairs to the mine. I’ll talk about how your C-suite can help boost pricing power in my next column.
Mike McCarron was one of the founding “M”s in MSM Transportation before the company was purchased by the Wheels Group. Based in Toronto, he currently works for Wheels in mergers and acquisitions and can be reached at email@example.com. Follow Mike on Twitter @AceMcC.
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In our freight brokerage business it is almost impossible to raise prices. The only time when shippers understand the need to pay more per mile is when gas prices going up, than it is easier for them to pay more. Logistics managers at the shipping companies, are in a constant search for better prices, there for raising prices is a bit complicated, but we will definitely take under consideration your advice.