Logistics lagging far behind in innovation and price implementation

28th July 2015

Logistics BusinessLogistics lagging far behind in innovation and price implementation

The logistics sector seems to have a hard time when it comes to raising prices in their customer base. Furthermore, compared to other industries, it has an extremely low success rate when introducing new products and services. These are the results of the most recent Global Pricing Study, conducted by the global strategy consulting firm Simon-Kucher & Partners.

The results are based on responses from approximately 1,600 managers from the most important industries. According to the results, logistics firms succeed with only 40 percent of their planned price increases. And almost 80 percent of the companies are experiencing higher price pressure compared to last year. Logistics providers say these poor results are due to fierce competition and the fact that customers have more negotiating power now. As a result, the percentage of logistics companies that only compete on price is twice as high as in other industries.

Dimitris Hiotis, Partner at the London office of Simon-Kucher, comments: “The intense competition in the market has led logistics companies to focus negotiations on price; thus self-fulfilling a prophecy of low prices, which further intensifies competition. However, focusing instead on value and differentiating the product offering accordingly will allow logistics companies to trade-off value versus price and get the right price for the right product to the right customer.

“When a logistics company clearly differentiates their services and products, customers are able to trade off the price they are willing to pay against the level of service they value. This can be a win-win situation for both the logistics company and the customer.”

Blame is quickly placed on the competitors, although the inability to raise prices is generally self-inflicted, says Dr. Philipp Biermann, Partner at the Cologne office of Simon-Kucher: “Logistics firms often lack confidence and negotiation tactics. They are frequently at the mercy of their customers’ professional purchasing departments. Recognising the value of your services, developing a negotiation strategy and turning this into an implementable price – logistics managers must get this into their heads!”

Price pressure and new product flops

The combination of external pressure and low confidence in their own performance has caused almost two-thirds of the respondents, as they report, to suffer from price wars. All of them, however, say that it was the competition, not themselves, who started it. “The phenomenon that companies make concessions to their customers in the heat of the moment that they actually cannot justify is very widespread in the logistics industry. In the process, they often don’t see the signals that their dumping prices give to the competition. They don’t grasp that these ‘isolated cases’ ultimately have a negative impact on the market price level,” explains Kornelia Reifenberg, Senior Director at the Bonn office of Simon-Kucher.

When it comes to launching new products and services, the logistics industry has also been struggling: Only 18 percent of all new products achieve their profit targets, which is the lowest rate that has ever been recorded (considering that in all industries, it’s 28 percent). And 35 percent of logistics companies haven’t even been able to reach the anticipated profit targets for any of their new products (compared to the overall percentage of 24 percent), although these new products and services could well be used to shift the focus of negotiations away from the price and towards value, Reifenberg says.

Know your products, communicate customer value

How can logistics providers successfully compete against low-priced competitors, implement price increases on the market and establish new products? Industry expert Biermann urges them to carefully differentiate customers and services: “One-size-fits-all products are doomed to failure.” It would be better, he says, to proactively offer several service options to make customers recognise the values of the different offerings: “Cheap services are possible, but they require a narrower service breadth – for example when it comes to flexibility, payment terms or goodwill agreements. If customers want these premium services, then they should also pay for them.” This is how to turn a one-size-fits-all commodity into one that is tailor-made to meet a customer’s specific needs.

“It’s a give and take situation”,
says Biermann. “By all means, customers should have the freedom to choose.” And they should get the opportunity to avoid effective price increases, e.g. by accepting alternative loading/delivery times or larger shipment volumes.