Competing on Price and Service

Q: We’re a motor carrier that finds your recent article about maritime shippers as a group that, to a large degree, is choosing price over service (“Price Trumps Service When Shipping Cargo, Analyst Says,” Oct. 10) to be true in our industry as well, especially over the last few years.

We’re fortunate enough to have a very high on-time delivery rate, extremely low loss-and-damage claims ratios, a top-level safety rating, etc., yet we regularly lose traffic to competitors with much poorer rankings in all of these categories.

I frankly don’t understand why this should be so. But more important, I have no idea what to do about it. How do I compete in a marketplace that seems to favor cut-rate carriers that offer only minimal service over the premium service on which we pride ourselves? Do you have any insights to offer?

 

A: You face, I acknowledge, a conundrum, and although I can offer a suggestion or two, I have no complete answer to it.

Let’s start with the reality that, in the price-service spectrum, there will always be areas in which the market is so heavily skewed toward price as a selection criterion that you shouldn’t even be competing in it.

Consider, for example, a load of low-value fungible goods — oh, say raw lumber, bagged concrete or fertilizer, that sort of thing. Any problems if the shipment’s late, sustains in-transit damage or is even lost, etc., are going to be pretty minimal for the shipper and consignee, because most folks have plenty on hand, there’s always a fresh load in the pipeline, and even brief shortages won’t cost much.

At the other end are high-value specialized types of freight — special-order machinery, raw materials shipped for just-in-time arrival, drugs and foodstuffs with an abbreviated shelf life, some seasonal merchandise, etc. A damaged, lost or even late shipment can result in a lot of economic injury, so that’s where service is (or ought to be) at a premium and worth paying a bit more to ship.

It’s obviously the second category of freight toward which your marketing efforts should focus. But here’s where you run into a combination of organizational realpolitik and human psychology that can undercut such a strategy.

A low price has two big features: It’s an immediate and certain reward, and that reward centers on an area in which corporate managers are judged heavily. By contrast, good service offers no direct reward at all, and failures are generally sporadic enough that there’s a low tendency to assign lasting blame for them within the corporate structure.

In other words, the transportation manager looks good to the boss by getting the lowest price. When service occasionally goes bad, he or she can rush about industriously to make situational fixes, grumble loudly that it’s all somebody else’s fault, and usually escape most or all of the personal consequences.

There is, accordingly, a natural human tendency to go, as it were, for the gusto — to take the low bid and look good right now, and worry about service failures only as and when they arise. If you’re good enough at double-talk, you can make a pretty successful career that way.

I say “double-talk” because the fact is that your end-of-the-year bottom line if you take this path may not be nearly as good as if you’d paid a bit more for superior service. Total transportation cost is only partly measured in how much you spend; it also must include the outlay resulting from service deficiencies — claims, customer dissatisfaction, lost sales, all that.

Trouble is, the latter elements are often harder to measure and harder yet to assign specifically to the shipping function. I’ve heard of transportation managers getting fired for agreeing to pay high rates; I’ve rarely encountered the same result stemming from poor carrier service.

This is the problem your salespeople confront when they’re out there competing with your lower-cost competitors. To the typical manager, the amount he or she spends today represents cold, hard cash; the greater likelihood of service failures that result from buying cheap is funny money, pie in the sky, speculative.

The problem isn’t insurmountable. But you do have to face the reality that in today’s marketplace you need to be economically competitive as well as offer good service. You can get away with small pricing differentials; big ones will be a harder sell.

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.

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