Myth of Market Pricing Contributes to $250M Air and $1B Ocean Loss

Whether you got into the international freight business yesterday or have been around to watch the dawn of containerization, you’re probably familiar with the fact that Air and Ocean freight rates are driven by “market pricing” for carriers, 3PL’s and shippers alike.

This is absolutely true…but only to a degree.

In the real world, I can’t change supply and demand any more than I can change gravity. Therefore, it’s a given that we must ultimately find the balance and the ‘happy medium’ price upon which both buyer and seller agree. But is there only one true ‘happy’ price?

Technically, market pricing is not a ‘Point’ but a ‘Range of Reason.’

We witness this in RFPs constantly. If market pricing was a magic number, that magic number would win the RFP every time – but in practice, everything is relative.

When one carrier is able to provide a distinct service, network or other competitive advantage over another, they are easily able to increase margin per kilo, cbm or container on the same, identical freight and transit.

Here are 3 of the most common reasons customers happily pay more for the exact same shipment:

  1. This Sales Executive offers better insight on how to improve my supply chain
  2. This Brand offers reduced errors, value adds, or the network is flexible
  3. No one gets fired for choosing the ‘Big Name on the Block’

In each of the above scenarios, I’ve seen that an additional 5 to 35% margin can be created based on value contributed beyond the physical arrival of the goods on time. Now I can only speak for myself, but I imagine that most Sales, Operations, Finance and Product, owners would love to pick up an extra 5 to 35% margin across the board – and it may even break their sales goals for the year!

Okay, but how do you get from Market Pricing to Differentiated Value?

Unfortunately, it’s well known that our industry is historically and to date plagued with a standard range of 10 to 30% incorrect invoices. This is a far cry from zero, and I’ve detailed these this in a previous article – but let’s quickly review for posterity:

  • Customers are angry about overbillings and don’t even report under-billings
  • Sales receives every angry response, or worse is uninformed
  • Customer service & accounting have double work, processing invoice adjustments
  • Finance can’t see the missing/late data, and forecasts are incorrect by whole %’s
  • Over-billings are often not accounted for in a timely manner for New or Renewed Contracts
  • Under-billings remain completely invisible
  • Pricing teams work from incomplete and incorrect data
  • And Sales is left less competitive on rates, meanwhile taking the relationship heat

But if one option presents that they can pre-adjust and eliminate 95% of invoice discrepancies for no additional cost, I’d wager that with all other perspectives being equal most customers will choose you. The pot gets even sweeter when the sales exec or account manager can also commit to review and quantify the benefits of these improvements quarterly, continually justifying improved margin and yield over the previously known ‘market rate’.

How the next-gen carriers Flexport and Shippabo are growing so quickly:

Are you keeping up with these guys?
While they’re not yet at center stage, new generation tech firms like Flexport and Shippabo are certainly taking the scene by storm and in only a few short years have captured their share of multi-million-dollar air & ocean supply chains. One is ‘flexing’ their way into new stations with a $100M investment, and the other is reportedly generating $500k per customer service agent thanks to improved workflow tech.

However, customers only care about technology if it’s going to do something for them….and here’s what it’s doing: these companies can, have and will 100% guarantee against invoice discrepancies. Their clients like world-famous production and animation studios out of northern Los Angeles have reported how under-billings and even late charges are immediately zero’d without question.

They’re winning because they have an improved client experience, and they can easily quantify it by showing where they positively impact their client’s customers, employees, and leadership in areas other than price and transit. As overheard at TPM, perhaps this is why some accounts are paying a few hundred per container more than previous contracts with traditional carriers.

This is why I say we need to protect our customers and employees.

Over the past 5 years, what I’ve learned is that the upper echelons of the forwarder and carrier hierarchy are heavily focused on reducing both customer and sales churn by improving customer experience. But without ground-up pricing automation like the new players, the technology bolt-on and spot-check task forces are unable to produce invoices at 95%+ accuracy the way that modern bench marking tools and processes can easily accomplish after only 5 hours of set-up.

Your next steps…

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