Mining for pricing gold
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. During a recent email purge, however, 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 study by Simon-Kucher & Partners 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 latest 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? Here are some things to consider:
It’s not about price
A recent Nulogx survey of nearly 2,000 shippers shows that price is not their number one priority. It’s 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
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 there will be no pricing power without great service.
90% rule: 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. The fact that customers don’t really want to change is an important source of pricing power. If you think your customer might switch, lay out why you’re worth the increase.
Don’t be a doormat
You’re not the only one getting pounded daily for lower prices. Your customers prey on every weak supplier they have. 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 there’s also a great chance (90%) that you’ll win it.
C-suite commitment
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 boost pricing power in my December column.
