Many discussions on the topic of instant versus dynamic ocean freight pricing tend to look at dynamic pricing from a rate procurement perspective — i.e., the ability for a freight forwarder to maximize the margin on a job. But it’s important to consider dynamic pricing from a selling perspective as well.
Although the percentage of volume moving via the spot market varies depending on the trade lane, and whether the cargo sails on a short-sea or mainline trade, Mizzen works with a global average of 40 percent for spot.
Of that, very little moves via true dynamic pricing — defined as a shipping line having the ability to set a rate with a validity for a specific vessel voyage only, rather than one set with a validity by date, and have it move in real time.
While there is some upside in dynamic pricing for the freight forwarder, it is the shipping line where we see the true value, and it is tied to their cost structure and business model.
Today, there is a disconnect between price, supply, and demand in the container spot market. Shipping lines set freight rates with a date validity, which are able to be booked against any vessel sailing within that date range, regardless of the individual vessel’s utilization factor or equipment availability. Dynamic pricing to the individual vessel voyage will mean the spot price can be reflective of the supply and demand for that single vessel at the point of booking.
Compared with static rate quotes, container lines on average improve their revenue via dynamically quoted rates by $110 per FEU, according to an algorithm Mizzen created with the University of Technology Sydney. The algorithm is based on cargo demand and capacity in a given week, according to Mizzen’s initial estimates.
Admittedly, that calculation doesn’t take into effect the factor of downward price movement because of competitor pricing action to gain market share. But it does factor in market-wide effects, such as lower cargo demand for a week.
Not just about filling a ship
The most significant and fluctuating variable cost component for a shipping line is the credit or debit applied to the “equipment size/type charge,” depending on if the container is moving to and from a surplus, balanced, or deficit port. This adds a degree of complexity that is absent in airline and hotel revenue management models, which are often referred to as potential solutions to liner shipping.
It is not just about filling a ship — it is filling it with the best possible port pair and equipment size/type mix to maximize the net contribution level of that sailing.
Dynamic pricing allows carriers to use price as a lever to steer the cargo they want to the optimal vessel voyage at the best price possible. This can optimize container flows and improve a carrier’s trade lane profitability.
Let's take a movement of two 20-foot containers, one between Port A and Port B, and the other between Port C and Port D, both to be loaded on a sailing on the Asia-to-Australia trade lane.
Both shipments could have the same freight rate of $1,100 and therefore, from a revenue analysis, they are of the same value to the shipping line. But they could have a very different net contribution, which is calculated as revenue less variable cost.
Variable cost components for a shipping line are those directly attributable to an individual container move, such as stevedore load/discharge, container lease, repair and maintenance, and empty handling, among others. Those are usually all contract tariff rates with a vendor at a unit level and, therefore, relatively fixed per unit in the short term.
There is also a variable cost component applied to a shipment that is reflective of the repositioning cost at a particular port for a specific container size type. It is driven by the demand for that unit type in that port. If there is less demand than supply, it is repositioned out empty, but if there is greater demand than supply, boxes may be positioned in empty to meet the demand. So, it is a very seasonal cost, linked across a shipping line’s global network and container fleet and stock level.
This repositioning cost is then applied as either a credit or debit, and is applied to the unit for both origin port and destination port. If you move a box out full from a surplus origin, you receive a credit, otherwise it is repositioned out empty at a cost to the line. But if you move one from an area of high demand, you receive a debit.
Let’s say Port A and Port D were in need of empty 20-foot containers and Port B and Port C had surpluses. If a container line received a $50 credit per 20-foot container, the box moving from Port A to Port B would be debited $100 and the other container would get a credit of $100. So the revenue for the two containers may be the same, but the net contribution on the shipment from Port C to Port D is higher by $200.
There are inherent imbalances in a trade lane, but for an individual shipping line with an allocation on a trade lane, they can adjust their cargo mix to minimize the debit and maximize the credit for container imbalance. In the short run, the spot market is the only channel to accomplish this via price change as a lever to induce the cargo they want on the optimal vessel voyage.
This is what shipping line trade managers do; they just have limited tools to do it efficiently and digital delivery of rates opens up this possibility.
Expect the contract market to adapt
Dynamic pricing will never be suitable for every shipment. The notion of a spot and contact rate will continue, but a greater share of the spot market can be priced and sold dynamically.
This will create significant opportunities for shipping lines to combine dynamic pricing with the creation of new digital “contract” products. In the future, we foresee new products with different attributes about load guarantees, prepayment, flexibility on rolling, changes, and cancellations.
However, in the short run, the spot market is the only segment from which shipping lines can improve their profitability and the key to doing this successfully is dynamically delivered rates that take into account the vessel voyage, cargo, and customer.
Jon Charles is managing director of the Mizzen Group, a spot quote technology provider connecting shippers to schedules and rates from 27 shipping lines.