Automating Spot Quoting with Dynamic Pricing. How AI is Impacting the Spot Market

Automating Spot Quoting with Dynamic Pricing. How AI is Impacting the Spot Market

Dorota Owczarek - September 26, 2022

The freight forwarding industry has always been dynamic, with constantly growing freight volumes and changes in the global economy impacting what and how goods are transported around the world. Now, new technology is shaking up the industry: dynamic pricing.

Traditionally, freight pricing is a manual process. The freight service provider has to call or email carriers to get spot quotes for the shipments they are pricing. This process can be time-consuming and inefficient. Dynamic pricing models can automate this process by producing spot quotes automatically and in a way that optimizes profits and allows businesses to grow. This article will explore dynamic pricing, how it works, and how it is changing the spot market landscape.

The Shape of Logistics Industry and The Evergrowing Freight Volumes

The logistics industry is undergoing a radical metamorphosis as a result of a few factors. First is the sudden rise of e-commerce which started with the pandemic and has been gaining momentum ever since. The second is the gas price rise and the climate-change preventive regulations. Combined, all these elements are putting pressure on the carriers, causing business challenges to emerge, but also driving positive change and technology adoption. Today we will look at the impact of these changes on the spot market.

Price Pressure

It is becoming increasingly challenging to maintain cost-efficiency as oil and gas prices are rising. The vessels are still dependent on fossil fuels, and that will not likely change in the nearest future. The geopolitical destabilization and the threat of the crisis are making the market less predictable than ever, strengthening the fluctuations in prices and demand. That calls for rejecting fixed rates.

The Popularity of eCommerce

The freight volumes have been continuing to grow despite the difficulties the pandemic imposed on shippers and retailers. Most European major ports, for instance, the Port of Gothenburg and the Port of Rotterdam, have noted their rise in 2021. That rise came with congestion issues due to the lack of container storage. Even though the demand for the shipment raised, it would fluctuate intensely, forcing the companies to ship more than they would usually do. That issue proves the need for artificial intelligence applications for predictive and storage optimization purposes.

But, back to the core - now, as the recession looms, the freight volumes are getting a bit lower, but they still pose a challenge to the carriers. At the same time, the shippers are looking for the most cost-efficient shipping options due to market instability and financial pressure. They want to have the flexibility of choosing the most affordable options at the moment and combine the shipping offers with the purpose of generating more savings when their sales rates are spiraling down. As a result, traditional contracting loses all raison d’etre.

Climate Crisis

Last but not least – climate change and its implications also affect the logistics market. First of all, the regulations force carriers to change and invest in different solutions. That equals costs. Pricing flexibility helps them protect themselves against the implications of these investments and optimizations.

Spot Market vs. Contract Market

In order to cover the shipment of their products, the retailers can choose one of the two options - contract bidding and spot bidding. Contract bidding entails signing the contract with the transportation provider for a specified time. In the past, these contracts would involve at least a one-year period, but it has been successively shortened through the years. What’s important, the contracts are not exclusive - they are rather a type of collateral. They secure the capacity and the price, which might be valuable for the shippers in certain situations.

Spot market freight is a more flexible option that enables booking transport per spot and paying for it only without any established contract and predicted capacity. Such a formula works particularly well for companies that sell low amounts of products or those that experience high fluctuations in demand. The logistics service provider can reach out for it to consolidate the shipments and sell out spots last minute, avoiding the dry run.

How Are Freight Forwarders Quoting Shipments?

In logistics, contract and spot bidding do not usually take place directly between the shipper and the carrier. A freight broker is a link between these two instances that acts as an intermediary in contracting and finding the matching offer.

Freight forwarder responsibilities and role in tender management

Freight forwarder responsibilities and role in tender management

When the shipper has a batch to transport, they release a request for proposal – a document that contains details that impact the suggested prices. As a response, the carriers offer their pricing. Freight brokers are supposed to link the shipper with the appropriate carrier. To do so, they extract the relevant information from the shippers and post the requests for proposals so that the carriers can respond to them. They also process the payments between both parties once the deal is made.

Dynamic Pricing for Freight Forwarders to the Rescue

What do the price carriers offer to depend on? There are various factors that impact the quote. The most important ones include the lane, load type, weight, fragility, estimated shipping volume, and expected delivery time.

If it was only those, quoting would be much easier and maybe would not call for new pricing methods to adopt. However, the final quote has to include also such variables as the oil prices. The price is also influenced by the current demand for freight forwarding services, weather conditions, and traffic on a chosen route.

No wonder dynamic pricing is a more suitable model for carriers. It allows them to avoid unfavorable deals and profit loss by constantly adjusting the offered price to all these variables. At the same time, dynamic pricing can also fuel sales during the lower demand periods, helping them maintain financial fluidity and sell out the last-minute free spots.

Dynamic Pricing Models - What They Are?

In a nutshell, dynamic pricing models are artificial intelligence algorithms that maximize the chances of profit. The aim is to estimate the highest price a particular customer is ready to pay at a particular moment.

Static pricing (with single price point) vs. dynamic pricing (with multiple price points)

Static pricing (with single price point) vs. dynamic pricing (with multiple price points)

Dynamic pricing relies on the time-based opportunity, finding the most profit-generating price points after analyzing a set of relevant variables related to the market conditions. It can focus on different variables, depending on the case. Usually, such models take the competition aspect into account to find that sweet pricing spot, but also the demand and user habits, and preferences.

dynamic pricing model how it works

How dynamic pricing models work with external conditions constantly altering the selected pricing strategy

Dynamic pricing algorithms usually involve machine learning as that allows them to maintain their effectiveness through the constant reevaluation of the patterns that determine sales.

Dynamic Freight Pricing for Spot Rates

Spot freight market is dynamic by definition, as it involves selling individual spots, usually last minute, instead of guaranteeing a defined capacity for a defined period. That calls for a dynamic pricing strategy.

The carriers usually want to get rid of the free spots as soon as possible without lowering their margin, and the traditional pricing methods do not necessarily support it. They fail at finding the price that would prevent them from having empty mileage while making maximum profit. Dynamic pricing models, on the other hand, can find it.

Digital Freight Matching with Dynamic Pricing

Digital Freight Matching with Dynamic Pricing

How will the dynamic pricing model estimate your spot rate? Speaking briefly, after extracting patterns related to the dependencies of price and sales rates under different conditions, it suggests optimized prices that should increase your chances of closing the deal.

Benefits of Applying Dynamic Pricing for Spot Rates

Although still met with some criticism, dynamic pricing appears as the most suitable response to unstable business conditions, allowing the buyer and seller to secure the transport in a way that reflects mutual interests. As a pricing model, it reflects the dynamics of the current market landscape and tackles the issues the freight forwarding industry has been struggling with for decades. Dynamic pricing models have some pros and cons, but within the spot market, they do have several significant benefits.

Savings-Generation

Dynamic pricing dynamizes the whole bidding process, helping shippers save money. Depending on their priorities, they can either book spots right away or wait for the last-minute offers. It empowers shippers to grow resistance against the increasing market volatility that the contract bidding does not protect them from. Even if they are on a tight freight budget, they can find a suitable option for themselves.

Flexibility in Emergency Situations

The flexibility of dynamic pricing protects the financial liquidity of the shippers but also helps them handle the shipments on new lanes. In the traditional scenario, they would have to sign a contract and agree to a specified contract rate. But with dynamic pricing, they can find the most affordable offers on the lanes they have not signed with any carrier without wasting time on formalities. That strategy also can help them ship when their contract carriers do not have more capacity or cease to cover a particular lane.

Sustainability

Dynamic pricing for spot rates also contributes to lowering the environmental footprint of the supply chain. It reduces empty miles to the minimum, allowing the carriers to get rid of every single spot available.

At the same time, thanks to dynamic pricing for spot rates, the freight forwarding stream gains momentum, preventing congestion and storage issues. The contract model supports booking high freight volumes and sending excess shipments to ensure there is no delay, particularly in times of high demand and low capacity (as we have seen during the pandemic).

There is a tendency among the largest companies to contract high capacity just in case, and then not fully use it. These no-shows, unfortunately, usually do not have any financial implications. Spot market brings in some balance by neutralizing the effects of this practice, and dynamic pricing makes it more accessible.

Advantages of Dynamic Freight Pricing for Freight Brokers

Some say that dynamic pricing can replace brokers, but their role is still irreplaceable in the logistics chain. With their expertise and connections, they can quickly create the web of dependencies that will allow the shipment to arrive at the final destination in the shortest time, lowest cost, and with the smallest environmental footprint. As an intermediary, they let the carriers focus on their core activity, and the shippers - find the optimal connection in no time.

The dynamic pricing models do, indeed, make their work more efficient. The optimized spot rates equal more successful bids. Both parties between which the freight brokers mediate to get a chance to find the most profitable spot rate for themselves. Dynamic pricing also brings more diversity to the spot market and supports fast-decision making, as the parties are aware of the time opportunity. As a result, freight broker ends up closing more deals. For LTL freight, they also accommodate the opportunities for shipment consolidation, whereas, in LTL transportation, they help optimize the network for headhauls.

Related case study: Delivering a dedicated IT system to manage and sell spot freight deals and plan transportation

A logistics company approached us to create a dedicated IT system to handle their core business process - managing and selling logistics deals.

Our challenge? The key challenge in the logistics sector is cutting the time of concluding deals to an absolute minimum. The tool has to be very responsive and help in the smart matching of carriers and freight, fleet management, and other logistics operations. The platform helps shipping agents minimize fuel consumption, maximize operational efficiency, and optimize fleet performance by matching multiple loadings on a similar route with a single carrier.

Read more about this case study.

Freight forwarding companies that leverage the space of digital freight marketplaces can also apply dynamic pricing models to improve their freight matching solutions and support the freight sales processes on their platforms.

How Dynamic Pricing Benefits Carriers

As you can see, both freight brokers and shippers have opportunities in

Just like the shippers, the carriers can protect themselves from the implications of the increasing market volatility with dynamic pricing. It allows carriers to maximize their margins, particularly in the most challenging periods in terms of demand.

Adjusting Rates to the Current Conditions

With the contract freight rates, the carriers have to think in the long term and operate on existing patterns regarding demand, traffic, prices, etc. Such an approach does not take into account the unexpected events, demand and price fluctuations, or congestion that all impact the final rate. As a result, the carriers may end up carrying out very unfavorable deals. Dynamic pricing helps them update and constantly recalculate the rates according to the current market conditions.

Efficiency by Automation

By using dynamic pricing models, the logistic service providers can also reduce their engagement in the bidding process. Instead of estimating rates as a response to requests for proposals manually, they can fully automate this process with an artificial intelligence-fuelled system that learns and improves its accuracy with every transaction.

No Empty Miles

With dynamic pricing for spot rates, the shippers can make their routes much more sustainable while still making maximum profits. The sustainability, of course, contributes to their image but also helps them adjust to the regulations that will continue to intensify with the progressing climate crisis.

The Future of Transportation Providers Relies on Smart Process Automation

Dynamic pricing is just a fraction of the possibilities the technology provides logistics companies with. It is worth treating it as a part of a larger whole in order to draw its maximum potential. Combined with other artificial intelligence-based elements, like predictive analytics or computer vision, they can protect the members of the logistics chain against increasing market unpredictability and competitiveness.

At the same time, the accuracy of your freight rates, or, in other words, the effectiveness of your dynamic pricing strategy, strongly depends on logistic optimization. The carriers need to first understand the impact of particular factors on their costs and gather relevant data that the model will rely on in its estimations.

Dynamic pricing models for LTL transport - solid base for automated freight qoute and three key pillars of logistics optizmization and supply / demand forecasting

Dynamic pricing models for LTL transport - solid base for automated freight qoute and three key pillars of logistics optizmization and supply / demand forecasting

Thoughtfully applied AI can help the transportation providers:

  • streamline shipment management on board and in the inventory with computer vision, automated vehicles, and drones
  • maximize their capacity with the intelligent distribution of shipment
  • find the most cost-effective freight lanes and plan them according to the real-time conditions
  • improve the communication and data exchange on the back office side
  • consolidate the services and sell spots to make the routes more sustainable and profitable

Many of these applications address the issues the logistics industry is facing right now. The AI-fuelled transformation of the whole sector is just a matter of time. If you feel ready for such a step, we would love to support you in it. Contact us, and let’s discuss your business objectives!

About the author

Dorota Owczarek

Dorota Owczarek

AI Product Lead & Design Thinking Facilitator

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With over ten years of professional experience in designing and developing software, Dorota is quick to recognize the best ways to serve users and stakeholders by shaping strategies and ensuring their execution by working closely with engineering and design teams.
She acts as a Product Leader, covering the ongoing AI agile development processes and operationalizing AI throughout the business.

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This article is a part of

AI in Logistics
25 articles

AI in Logistics

Artificial Intelligence is becoming an essential element of Logistics and Supply Chain Management, where it offers many benefits to companies willing to adopt emerging technologies. AI can change how companies operate by providing applications that streamline planning, procurement, manufacturing, warehousing, distribution, transportation, and sales.

Follow our article series to find out the applications of AI in logistics and how this tech benefits the whole supply chain operations.

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