Dynamic Pricing for Logistics Service Providers

Introduction

Dynamic pricing is neither a new nor an untested idea. The airline industry is often cited as a dynamic pricing success story. In fact, it employs the technique so artfully that most of the passengers on any given airplane have paid different ticket prices for the same flight.

The concept of Dynamic pricing is however still in the nascent stage for the Logistics Service Provider (LSP) industry. This article examines the relevancy and fitment of the concept to the LSPs.

Relevance to LSPs

The Dynamic pricing model is suitable to two categories of service providers:
 3PLs (Third Party LSPs) that use the so-called "mark-up" model (receiving a price from a trucking carrier and then reselling it to end customers after adding on a margin).
 Trucking companies or pure carriers who actually carry the freight and for whom the 3PLs are the customers.

Currently most LSPs have a pricing mechanism where the prices are fixed on a per lane basis but these remain static over a period of a quarter or month. Based on market demand, these prices are then updated. The problem with this method is that demand and supply are aggregated over a period quarterly/monthly etc. Real time fluctuations in demand are not captured. And hence the opportunity to offer the true price to a shipper is lost.

Lets say a shipper sends a Request for Quote (RFQ) to the LSP for freight to be transported through lane ABC on a particular date. The LSP upon receipt of the RFQ will look into the pricing module of the ERP/TMS (Transport Management System) and offer the rate. This rate is a static rate taken from the pricing table. Of course it may be subjected to negotiation from the shipper and the final rate offered may be different from the one quoted.

But what if the LSP had first hand information on real time demand-supply. If supply was more then it could have offered a spot discount and if demand was more, a premium could have been charged.
Secondly, fuel surcharges are an essential component of any price offered to the shipper. These surcharges are calculated and adjusted by LSPs based on (in the US) Department of Energys price index. But this again is not done daily but weekly or monthly. Moreover the fuel surcharges are not lane specific but aggregated and averaged over regional fuel prices. The result is that the surcharge paid by the shipper will never match the actual fuel cost to the Logistics Service Provider. In times of volatile fuel prices, this can be deadly to the LSP as the fuel surcharges collected cannot keep pace with the rising fuel prices.
A pricing engine which captures fuel surcharges on a transaction basis based on recent data can offer a true price to the shipper as well as save the LSP from potential losses.

Implementing Dynamic Pricing

Two things are of essence while implementing a dynamic pricing solution: Capturing demand & supply information and Integration.

Demand can be captured from:
 existing orders in the ERP/TMS system
 RFQs in the ERP/TMS system
 Call centre order booking system

Supply can be captured from the ERP/TMS/Fleet Management system.

The dynamic pricing engine must be integrated with the LSPs ERP/TMS/CRM applications. The base rate is already fixed in the ERP/TMS based on lane, weight, distance, volume, type of service (regular/expedited), mode etc.

To give a quote to the shipper, the LSP feeds the RFQ data (through an interface) to the pricing engine. This pricing engine considers the base rate (along with accessorials) from the ERP/TMS. Additionally it takes data like customer class/segment (from CRM), total demand on the lane (from ERP/TMS) and total supply (from ERP/TMS/FMS) and calculates an optimized price for that shipment.
Fuel surcharges can be calculated by interfacing with sites like http://www.fuelsurchargeindex.org which calculates the fuel surcharge rate for a load based on the daily fuel prices along a route.

The potential advantages to an LSP implementing dynamic pricing are:
1. Optimized profits as the right price is charged to the right customer at the right time.
2. Real time information about market forces.
3. Better returns on deployed assets.

Conclusion

Dynamic Pricing as a principle is as old as trade itself; since the days of the earliest markets, salespeople have personally assessed the price-sensitivity of customers and adjusted their offers accordingly. In the age of web 2.0 new technologies using the same principles as a base can help companies fine tune their financial performance and win customers.

Dynamic pricing creates a balance between buyers and sellers more attuned to the digital age: customized and just in time. It provides them with a much broader and more value-creating set of pricing options. Logistics companies which already operate on razor thin margins can immensely benefit by deploying a dynamic pricing program.

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Mr. Pradeep Chaudhary works for the Transportation vertical of Tata Consultancy Services, a USD 6 billion + IT company headquartered in India.
He can be contacted at Pradeep.chaudhary@tcs.com