How to achieve higher prices in the logistics industry

May 03, 2017

logistics - simon-kucher

The key is to be well prepared and know your customers

Discussions about prices are a perennial issue in logistics, particularly in transportation over land. The industry’s margins are far lower than in other industries, and current trends and forecasts are suggesting some more difficult times to come. Despite the industry desperately needing to adjust prices to at least compensate the annual cost increases (for instance for drivers or rent) and ideally also succeed in finally raising margins to an acceptable level, many customers can look forward to another year without the fear of a (significant) price increase. It is not uncommon to see a sales rep visiting a customer for the annual price renegotiation and instead of implementing their desired price increase, returning home having agreed to a price cut. Nevertheless, it is possible to implement price increases even in difficult market conditions. This, however, requires careful preparation and the ability to apply psychological pricing principles. When discussing prices, a salesperson's negotiation skill is only one of many elements ‒ but what it really boils down to is carefully planning such an initiative. Price increases are not simply a part of daily business. The optimal price increase process should have three phases and consider nine aspects, which should be used as a checklist.

Phase 1: Set targets for the price increase

1. Set overall targets

Make sure your overall target is a monetary sum that is realistically achievable or is a fixed percentage value that can be used to determine what target has to be achieved: What is the minimum we need to achieve (in order to become/remain profitable and cover cost increases)? What is realistically achievable (for instance due to expected stronger market growth or due to competitors already having announced price increases)? How extensively can we adjust prices? How many spot deals or long-term contracts are there for which price adjustments are not possible? Moreover, it is important already at this point to consider specific negative effects due to volume decrease.

2. Set goals for each product area

Assess which products have more flexibility in terms of price, and differentiate the price increase targets accordingly. Typically, customers are less aware of premium and additional services than standard products (LTL or TL). Therefore, it might be possible to increase prices for value-added services such as early delivery, late pickup, or transport of hazardous materials.

3. Set customer-specific targets

Having the same expectation and price increase targets for all customers is not the wisest approach. It is certainly possible to implement a justified price increase for a long-standing, satisfied customer that you have a good relationship with and for whom close collaboration is important. In contrast, more moderate goals need to be set if a shipper has a sophisticated purchasing system and their service providers are changed regularly. Therefore, try to reliably assess the extent of the potential price increase for each customer. To do so, you should systematically evaluate it using certain indicators. Possible indicators can include "customer satisfaction with our service" or "professionalism of the purchasing process." These indicators can be evaluated to help determine how easy or difficult it will be to implement a price increase. Accordingly, individual targets may be varied. When applying this approach, a customer's current margin should only play a secondary role.

Phase 2: Ensure organizational preparation

4. Define escalation guidelines

Even if the seller needs a certain amount of room to maneuver in negotiations with customers, this room should not be too big, especially if maneuvering downward. Set a clear lower limit, a walk-away price if you will, for example 20 percent below the actual price increase target. This way you not only underpin your expectations toward sales, but also send the customer a clear signal: The company does not make provisions for concessions below the walk-away price.

5. Create incentives

For the majority of sales employees, a price increase is an enormous stress factor. Its preparation and the process of the renegotiation are not only linked to additional effort, but many sales employees also dislike the idea of preparing for a negotiation. Furthermore, sales employees also find it difficult to risk a positive and constructive business relationship with a customer by breaking the news of a possible price increase. Therefore, additional rewards for a salesperson successfully increasing prices with their customer can bring about real success. Use this as a motivational tool ‒ it's worth the investment!

6. Strengthen your negotiation skills

Buyers are professional, well-trained negotiators. The sales reps of many logistics companies, on the other hand, are typically insufficiently prepared to handle price discussions. Often they don't possess the necessary negotiation tactics and tools. Regular training seminars including negotiation practice help sales reps more easily find and apply the right arguments to achieve their targets.

Phase 3: Implement the price increase

7. Make material available

Help the sales team prepare for price talks by putting together the most important information and documents. This material should include the core arguments, but also concrete customer-specific data such as past price increases, as well as sales and cost development. With this material, it is far easier to prepare efficiently and concentrate on the essentials before a conversation.

8. Share the negotiation results

Do not gamble away the possibility to react quickly by only sharing the success of the price increase at the end of the negotiation phase. Weekly reports on the state of negotiations generate an additional effort for the staff involved, nevertheless, these reports offer a possibility to react swiftly and take immediate measures to improve the final results.

9. Steer behavior

Motivate your sales reps to perform to the best of their ability ‒ for instance by identifying and publicly acknowledging top performers. You can also send a text message to management naming the sales rep responsible for each successful price increase they implement (i.e., x percent above the price increase target). This is extremely effective as it constitutes a tool that appeals to the sales rep on a personal level. On the other hand, less successful sales employees should also be identified and offered the appropriate support.

Of course, it is not always possible to implement all nine of these aspects with every company one-to-one. Furthermore, the respective details will differ for each carrier. Overall, however, it is possible to see that companies that have such a structure in place and that implement regular recurring price increase processes have a greater market success. Imagine this: With a gross margin of approximately ten percent and an effectively implemented price increase of two percent, you could concede up to one-third of the volume and would still have an overall positive effect on margins. However, by thoroughly preparing for price increases as discussed herein, such a mass exodus of customers is virtually impossible.

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