The logistics industry is still one of the worst performing when it comes to implementing annual price increases with their customers. This is just one of the results of the 2016 Global Pricing Study, conducted by the consulting firm Simon-Kucher & Partners, which surveyed more than 2,100 managers.
Downward pricing pressure in the logistics industry is increasing even further, according to 82 percent of participants. Greater competition, increasing negotiation power on the customer side from weak demand and overcapacity, and the need to pass on cost decreases (e.g., fuel costs) are among the top three reasons behind higher price pressure and the lack of price increases.
Logistics companies achieved on average a price increase of 1.3 percent last year, which was only 59 percent of their actual planned price increase, the study found. In comparison, the average across all other industries surveyed was an achieved price increase of 1.7 percent.
On the bright side, the price increase success rate is higher than in 2014, when Simon-Kucher’s last Global Pricing Study was conducted. However, still more than one out of every three companies failed to improve margin percentages last year.
Unfortunately, the outlook for this year does not look much better either. The average price increase of 1.2 percent that logistics executives expect this year will be offset by an estimated cost increase of the same level.
The study also reveals indications about why some logistics companies are doing significantly better than others. The best logistics companies achieve 42 percent higher earnings before interest, taxes, depreciation, and amortization than the rest of the industry. The key differentiator between “the best” and the rest of the companies is the focus on pricing strategy: 71 percent of the best companies mention pricing strategy as one of their key focuses, while the rest of logistics companies rarely mentioned it as a key focus area. Having a good pricing strategy in place is a prerequisite to achieving pricing excellence. It includes having clear directions, guidelines, and ownership from C-level executives in pricing.
When respondents were asked what helps best to overcome the price pressure in the industry and achieve higher margins, cost reductions only came in third place. Some 52 percent of logistics executives believe that value-based pricing is the right solution to escape oppressive market conditions. Secondly, optimization and better differentiation of your product portfolio helps logistics companies to steer focus away from the price, according to the study.
And 93 percent of logistics executives confirmed that digitalization is important for their business model. Moreover, 85 percent of the respondents see upcoming digitalization as an opportunity rather than as a threat for their business in the future.
The logistics industry has slowly improved their pricing capabilities over the last few years, however it still trails behind most other industries. The strong EBITDA difference between the “best” and the rest of the logistics industry further confirms the impact of good pricing capabilities.
It is especially promising to see most companies looking positively towards digitalization in the logistics industry. However, companies should not only think about the operational perspective but also about the commercial side, e.g., online sales and pricing; otherwise, margin pressure will become even higher in the future.
Brad Soper is a partner at Simon-Kucher & Partners global transportation and logistics competence center. He is based in the consultancy’s Atlanta office.
Sven Wengler is a director at Simon-Kucher & Partners global transportation and logistics competence center. He is based in the consultancy’s Boston office.