Of all segments the price pressure is highest in the logistic industry. As much as three-quarters of logistic service providers believe they are not capable of earning the prices they deserve for delivering their services. Price-aggressive competition and the presence of standardized products are the most important reasons for this. This follows from a study performed by Simon-Kucher & Partners, 151 managers from transport- and logistic sectors in Europe, Asia and the United States were included.
From a global point of view, pressure on prices in the logistic sector is rising. Three reasons led up to this. First of all, customers wish for structural discounts. Furthermore, there is a lot of overcapacity within other sectors causing a shrinking in demand and prices but it also quickly enforces competition on a global and regional scale. Finally, almost two-thirds of the respondents indicate they are currently involved in 'price war' with rivals.
The percentage of respondents indicating that they are in a price war at the moment is remarkably higher than in other segments. Onno Oldeman, Managing Partner at the Dutch office of Simon-Kucher & Partners, declares: ''Only in retail and in consumer electronics respondents point out they are in a price war''. A recent benchmark of the Dutch logistic sector led up to comparable results. “An ever increasing number of parties solely compete on prices, without bringing forward arguments that extinguish them from the rest.” according to Oldeman.
Price rise vs margin
Another striking conclusion is that logistic service providers are not very competent in negotiating favorable price terms. For example, in the year 2011 77% of the organizations tried to heighten their prices, but 20% failed totally. Compared to other sectors, this percentage is a lot higher in this sector. Nonetheless, those organizations that succeeded in heightening their prices, only 65% managed to realize price increases into improved margins. Simon-Kucher partner Philipp Biermann, head of the Competence Center Logistics, explains: ''What we spectate here are only price adjustments. In other words, they only calculate through the costs. These are, however, not pure price risings that lead to higher profits''.
The consultants identify a bad track record in implementing planned price increases as the foremost reason for the poor conversion from price to margin. Over two-thirds of the respondents failed at implementing over 60% of their planned price rises. In other words, the advantages are admittedly finally negotiated with external parties – often the hardest part – but the advantages are insufficiently converted because of internal deficiencies. As a function of the market average, the price implementation results scored lowest in the logistic sector.
Advices to logistic service providers
The strategic advisory firm advocates strongly for logistic service providers to focus on their price strategy and –implementation. “Logistic organizations with a strong pricing power on average reach 17% higher margins than their rivals. Especially in a high volume- and low margin business like logistics, a small change in price causes an exceptionally big impact on results in the end”, says Biermann. The consultant gives two advices. First of all, the price risings have to be managed in an integrated end-to-end manner. In this, all departments in the organization should back the suggested risings up and should make adjustments accordingly (next to sales, also purchasing, supply chain and finance). Secondly, strategic price questions should be managed on director’s room level. “The research shows that when management members take responsibility for pricing, the results in relation to margins and profitability are a lot better”, according to Biermann.