In the highly competitive world of parcels and freight transportation, achieving profitable growth is akin to walking a tightrope. This challenge becomes even more pronounced during economic downturns. Where every pricing decision can critically impact the delicate balance between market share, customer loyalty, and volume retention. The temptation to lower prices to attract customers and retain market share is strong, but this approach carries significant risks. How to win market share without starting a Price War? Such event can rapidly erode industry profits and lead to a cycle of unsustainable pricing strategies.
So, when should you consider price incentives, and how should you implement them thoughtfully?
Price reductions can be viable when they serve a clear strategic purpose. Like filling excess capacity or responding to market-driven price realignments. They are also relevant if customers shift to competitors prices aligned to the market. Or if the value of shipped goods is relatively low compared to shipping costs.
But if the issue is a category volume problem affecting all players, price elasticity mechanisms may not work as usual, as the need for shipping services has diminished.
To implement price incentives without compromising long-term growth, companies can adopt several thoughtful strategies:
- Value-Added Services: Enhance the perceived value of your service with free add-ons like faster delivery options or improved tracking systems.
- Targeted Discounts: Implement targeted promotions to foster new business growth where there is low volume. For instance, on specific origins, lanes, or predefined time periods, and limited in quantity. Clearly communicate price change reasons to customers and competitors to prevent misunderstandings and retaliatory price drops.
- Dynamic Pricing for Spot Business: Leverage data analytics to adjust prices in real-time based on demand, seasonality, and capacity, optimizing revenue and maintaining competitiveness.
- Incentive Agreements: Develop conditional discount programs to grow non-exclusive customers’ share of business.
Let’s explore how carriers can implement smart and effective incentive agreements.
What Makes a Good Incentive Agreement and Why Is It Relevant to Parcel Carriers?
An incentive agreement is a pricing scheme designed to change a customer’s purchasing behavior by offering a lower net price in return for higher shipment volume, using more profitable products/services, or decreasing operating costs, which triggers a higher margin for the carrier (the incentive conditions). Note: You can refer to these “Conditional Discounts” as Rebates.
A good incentive scheme should be:
- Relevant to Customer Context: Do not grant growth or exclusivity incentives to customers already growing or exclusive. Unless you identify a threat and need to retain them. In these cases, the discount will not generate additional volume but will dilute revenue through a negative price effect.
- Effective in Changing Customer Behavior: The incentive should achieve the objective set in the condition. It must generate a benefit for the customer if the condition is met: a lower price resulting in savings (which are incentive “costs” from the carrier’s perspective) sufficient to change behavior.
- Profitable: It must generate the highest possible gain for the carrier (in terms of additional contribution margin), considering price elasticity of each type of customer, economies of scale (e.g., densification at pickup), and higher network efficiency (in the case of incentives aimed at improving capacity utilization).
Carriers should consider incentive agreements as they enable balancing the relationship with shippers. They can help carriers limit customer over-promising at quote time. Instead of pricing based on a high target volume declared by the shipper, the carrier pays back a percentage of the invoice after the shipper meets the target. They enable win-win negotiation with non-exclusive customers who might increase their share of wallet: a lower price increase, or a price decrease for higher volumes, a product mix change, or a change in shipping profile generating a lower operating cost for the carrier. People have successfully used incentive agreements in retail for many years. These could also be powerful negotiation tools in logistics.
Conclusion
Downward price adjustments are a tricky maneuver in the parcel and freight industry. By focusing on value, targeted discounts, clear communication, dynamic pricing for spot business, and incentive agreements, carriers can navigate price reductions without inciting a price war.
Open Pricer can provide you with the right tools to implement these strategies safely. Volume Scenarios, for example, is one of the key features in version 10 of the Open Pricer platform. This solution helps carriers rationalize the trade-off between price and volume when submitting a new business offer or negotiating a rate increase.
The Open Pricer platform is the result of 70+ man-years of R&D and capitalizes on improvements from user community feedback. It empowers logistics groups to manage and optimize all their pricing processes: price setting, execution (quote and rating), and monitoring.
Listen to our latest Podcast episode: Costing for Pricing – The Case of Parcel Networks
