Digitalization in the logistics sector

July 18, 2017

Digitalization in the logistics sector

Digital pricing and improved offer designs unleash significant revenue potential

The world of logistics is slowly moving towards digitalization, yet some established companies still seem surprisingly indifferent to the new competitors threatening them left, right, and center. The industry’s heavyweights see the writing on the wall: they are now buying up and cooperating with startups in the hope of creating successful freight booking platforms. But these activities are no guarantee for survival, let alone for growth. There can be only one first mover and only one market leading platform per logistics segment.

Simon-Kucher Insights
Uber is working on a road freight offer; numerous startup online platforms such as Freigthos are applying the booking.com idea for shippers to organize sea and air freight shipments, and Amazon is starting to attack FedEx, UPS, and DHL Express with its own cargo airline. Logistics companies and brokers risk losing their USP, customer relationships, and (in the case of forwarders) even their entire reason to exist. Still, comprehensive digitalization initiatives at traditional logistics firms are few and far between. In fact, right now digitalization hardly goes beyond paperless freight. In Europe, price quotes continue to be created using pocket calculators, and even in North America, where price automation is more advanced, there is plenty of room for improvement.
Meanwhile, the biggest revenue and profit potential for logistics companies in the digital world lies in offer design and pricing. Big data allows for much more powerful and sophisticated yield optimization and revenue management systems than ever before. But most logistics companies have a long way to go. First, they need to acknowledge their current pre-digital stage. Many believe they already use online pricing, but in reality, they are confusing this with their EDI (electronic data interchange), a standardized booking platform, completely unrelated to pricing. Real online pricing uses an algorithm to define the optimal price based on utilization and customer price drivers such as volume, request urgency, industry, and the value of the transported goods. It ensures each customer gets the right quote based on their willingness to pay, and is very efficient as there are no negotiations with smaller customers or for standard requests. While technically nothing new, these pricing mechanisms become much more effective in the digital world where they can be enriched with big data.

At the forefront of digitalization
Airlines in the travel industry recognized that in an evolving digital world, the real beauty lies in combining smart offer design and digital pricing strategies. Their yield management and price differentiation goes way beyond price differentiation based on usage or season. And they successfully seek ways to circumvent pure price competition in a highly transparent world by differentiating their offer by service level: Besides traditional economy, business and first class tariffs, they are now further differentiating economy and business products based on booking/rescheduling/canceling conditions, the amount of luggage, leg room, and food, etc. Logistics companies could apply a similar logic to justify price differences between freight tariffs that come with very different service levels.

Advice from our experts
There’s never been a better time to start digitalizing your channels, product offer, and pricing!

  1. Keep your eyes open for “new” competitors like Uber or Amazon and get a head start on defending your space
  2. Focus your digitalization efforts on pricing and offer design. This is where the revenue and project potential lies. Don’t be fooled by cloud-based booking platforms – the magic is in the smart pricing algorithm
  3. Understand that transforming your company to be digital-ready is a long process. It sounds easy, but implementing a digital pricing system and a well thought-out product portfolio is a major endeavor and cannot be introduced in a “big bang” transformation