Dynamic Freight Pricing. How Freight Forwarders Can Benefit From Dynamic Pricing Strategies

Dynamic Freight Pricing. How Freight Forwarders Can Benefit From Dynamic Pricing Strategies

Dorota Owczarek - November 17, 2022

In the freight forwarding industry, dynamic pricing is becoming an increasingly popular way to price shipments. Dynamic pricing engines can produce instant freight quotes and leverage insights on supply and demand. This will help you get the best rates for your orders and ensure that you are always able to meet customer demands.

As a freight forwarder, it is important to be aware of dynamic pricing strategies and how they can be applied to your business. In this article, we will discuss what dynamic freight pricing is and how freight forwarders can benefit from using it.

What Is Dynamic Pricing, and How Does It Work?

Dynamic pricing is a strategy that enables businesses to maximize their profit. As opposed to a traditional static pricing model in which the prices are set up manually every once in a while, dynamic pricing algorithms constantly reevaluate and reestablish the final price. The goal is to keep it the most profitable for the seller based on the current market conditions while keeping it likely for the customer to finalize the purchase.

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)

Finding this sweet spot may not be easy, but as artificial intelligence is involved, every finalized transaction and every abandoned cart teaches the algorithm a lesson. Gradually it builds up a knowledge base that allows it to suggest the most optimized prices while enhancing the profit margin. With a traditional approach, it is not possible. There are so many factors impacting the sales levels and so much data to process that drawing relevant conclusions without automation is a real challenge.

Dynamic pricing takes all the factors that impact the product’s or service’s value into account, suggesting the price that is relevant at the moment. Such a time-opportunity-based strategy reflects the current realities of the market more than the traditional approach, particularly when it comes to freight forwarding, which we discuss today.

dynamic pricing model how it works

dynamic pricing model how it works

That’s because the geopolitical situation and the global economy are changing dynamically, impacting fuel prices and the stability of the supply chains. In such market reality, the traditional pricing model exposes the product and service providers to the risk of financial loss unless they inflate their prices upfront. And that, on the other hand, can put their margins down. Dynamic pricing is a remedy for that issue, working in both the businesses’ and customers’ best interests if only they are conscious of the mechanisms behind it.

The Different Angles of a Dynamic Freight Pricing Strategy

As consumers, we mainly know dynamic pricing from the experience of online shopping and apps. The ridesharing applications and booking portals made us accustomed to the changing prices and helped us learn the dynamics of this strategy, impacted mainly by demand and service providers’ availability. However, dynamic pricing is becoming increasingly common outside the apps and e-commerce platforms.

The logistics industry has adapted to it relatively late, but it is starting to dominate among the companies involved in the supply chain, both in B2C and B2B transactions. It reflects the dynamics of these services better and opens a handful of possibilities for their providers. Why is it worth considering this model as a freight forwarder? Let’s take a look at different ways you can implement dynamic pricing in your business strategy. We also listed some key aspects you should not forget about.

Instantly Notice Changes in Market Conditions and Carriers’ Supply

As we have mentioned, dynamic pricing is the only strategy that makes your rates reflect the market conditions to such an extent. The algorithm adjusts the price to various factors, including the demand. Putting it simply - when the demand surges, the rates go up, and when it’s low, they go down.

However, in fact, the price estimation process is much more complex and involves various factors. Most algorithms treat demand as the most significant variable, but the final outcome depends on various others. However, in order to make the machine learning model estimate as accurately as possible, it is worth understanding the importance of particular factors and the way they impact the final price. Not every case is the same! In freight pricing, such aspects as the ports’ capacity, carrier’s current availability (that could be impacted, for instance, by a route blockage), or the traffic on a particular lane are also essential.

For this mechanism to work well, you should feed the model with real-time and historical data to adjust the estimations and learn from past cases. It should be integrated with various data sources - from the port systems and stock market reports to carrier platforms.

Shippers Segmentation

In order to make the dynamic pricing model provide more accurate estimations and maximize their margins, the freight forwarders can segment the shippers based on what they are willing to pay. Relying on the detected patterns in the previous behaviors of a particular shipper and the companies that share similar characteristics, the algorithm will classify them and adjust a price range accordingly.

What factors can determine a segment? It could be, for instance, a willingness to negotiate or the anticipation of the bookings. Customers who tend to book last minute and accept the initial quotes will see a different price than those willing to wait for affordable rates.

The segmentation can also rely on the lanes the shippers tend to choose. Those who pick the more frequented routes may accept higher rates as they fear the demand surges that could leave them without a carrier.

Adjusting Prices to Reduce Empty Miles

Empty miles are problematic for freight forwarders for both reasons. The first, and most significant issue is financial loss. Transporting goods without full capacity, they lose an opportunity to earn more. Another issue is the carbon footprint of such practices. Nowadays, with the increasing regulatory pressure on sustainability, freight forwarding companies aim to reduce empty miles because of environmental reasons. Dynamic pricing increases their chances of achieving that.

Using this strategy, they can easily fill the empty spots, even if they are released last minute. The algorithm establishes the rates that increase the probability of booking while still keeping it profitable for the freight forwarder. You can automatize the whole empty spots quoting process since the last-minute sellouts require quick actions. Such support empowers freight forwarders to introduce more groupage transport lanes as they can dynamize the consolidation of shipments without risking empty miles.

Automate Pricing Strategy to Instantly Produce Shipping Quotes and Reduce Backoffice Work

Before the automation era, freight forwarders would have to update their rates on digital platforms regularly. That would require resources and time while being error-prone at the same time. An automated pricing strategy minimizes the demand for resources while reducing the probability of errors to zero. Dynamic pricing models take over the time-consuming work of analysts and other back-office employees that would take care of updating the prices.

Benefits of Dynamic Pricing for Freight Forwarders

Based on the points described above, you likely already have a notion of the benefits freight forwarders can count on. Let’s articulate them to leave no room for doubt.

React to Changing Market Demand

With the current fluctuations in demand, freight forwarders have to stay flexible and modify their pricing strategy accordingly instead of relying on stable rates. Using dynamic pricing, they can maximize their profit by raising their rate instantly when the demand is high. Analogically, when the demand’s low, they can keep the prices low to keep the sales going, still segmenting it to put the prices as high as a particular customer is willing to pay. This flexibility grants them more chances of surviving in the unstable market and keeps their offer more competitive.

Aside from maximizing profit, this mechanism plays a significant regulatory role - those searching for the fastest service pay more, and those who are more price-oriented can wait for a little more and pay less. This way, the demand, and supply get distributed, balancing the overall occupancy.

In the end, such an approach provides the customers with options, while the traditional model leaves them no choice. That’s why an argument about the unethical character of dynamic pricing is not valid, particularly now that we, as customers, get accustomed to it to a certain extent.

Dynamic pricing models in logistics - solid base for automated freight qoute that includes carrier costs, base freight forwarder fees and shipping costs and three key pillars of logistics optizmization and supply / demand forecasting

Dynamic pricing models in logistics - solid base for automated freight qoute that includes carrier costs, base freight forwarder fees and shipping costs and three key pillars of logistics optizmization and supply / demand forecasting

Instant Freight Quotes and Improved Customer Service

Traditionally, freight forwarding is mostly a manual process. When the shipper has a batch to transport, they release a request for proposal – a document (usually email or telephone) 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. Freight forwarder responsibilities in traditional freight bidding process

Freight forwarder responsibilities in traditional freight bidding process
Traditional load to carrier matching and providing an instant shipping quote for the load with dynamic pricing model
Traditional load to carrier matching and providing an instant shipping quote for the load with dynamic pricing model

Automation simplifies quoting and shortens the path the shipper has to pass to get their spots booked. The machine learning model estimates a suitable price and updates it automatically, streamlining the whole process. As a result, both parties have their affairs secured fast. The shippers don’t have to worry whether their load will arrive on time, and the carriers can close the bidding phase faster, dynamizing their services.

Features of AI-Based Digital Freight Transport Markets

Features of AI-Based Digital Freight Transport Markets

Dynamic pricing can instantly suggest pricing for shippers and carriers alike. This way, everyone’s happy - the shippers and carriers appreciate streamlined customer service, and the freight forwarders unlock time and resources to bring it to even next level.

Digital freight matching with dynamic pricing for Freight forwarders

Digital freight matching with dynamic pricing for Freight forwarders

Consolidate Shipments

With increasing fluctuations in demand, the importers have two options - order more in advance or resort to consolidation. The first option is problematic not only for the companies but also for the freight forwarders, carriers, and ports. It may result in port delays and congestion, as we have seen during the Covid-19 outbreak. LTL (less than container load or less than truck load) freight shipping is a solution that prevents these issues while enabling the importers to receive their orders quickly without waiting for their containers or trucks to fill.

The freight forwarders can facilitate consolidation with dynamic pricing by manipulating prices to quickly fill the container and send the shipment to its destination. With machine learning involved, the matching can be done automatically. The algorithm will find the most optimal combination by comparing the cargo sizes to consolidate. delivery time frames, and the routes.

Headhaul and Backhaul Optimization

Headhaul favors carriers since the backhaul trips put them at higher risk of so-called deadheads (trips without load on board). In the first scenario, they can wait to fill the empty spots and choose the most favorable route for the full container load or truck load, while in the other, they have no choice but return. With the dynamic pricing system, they are capable of maximizing the profit from both headhauls and backhauls, raising and lowering the rates while keeping a profitable margin. Dynamic pricing is the best weapon against deadheads.

Ease of Training for New Freight Forwarders

Price estimation is a very complex domain that carries a lot of ambiguity. It takes a lot of expertise and familiarity with the market dynamics and mechanisms to come up with accurate rates that reflect the current conditions but will keep sales ongoing. When this process is automated, new freight forwarders do not have to bother with it, focusing on other areas and processes.

Proactively Test and Adjust Freight Forwarder Fees with Dynamic Pricing Model

Using this strategy, freight forwarders can check how particular prices impact the bidding process and whether they encourage the customers to make faster decisions, which is always a benefit. They can treat it as a playground, trying out different segmentation techniques to check what works best for particular customer groups and which factors are crucial in this context.

The traditional pricing approach does not offer that possibility as it would require tons of manual and data processing work. That limits freight forwarders’ testing capabilities. Meanwhile, machine learning algorithms can test different strategies in a short time, accumulating knowledge without any effort from your side.

Enable the Development of Digital Freight Marketplaces

Semi or fully-automated AI-based digital freight matching solutions are the future of carrier matching marketplaces.

The freight forwarder’s primary role is to link the shippers with the carriers and consolidate the load in order to deliver it as fast as possible. With machine learning algorithms and dynamic pricing strategy, they can dynamize and automate this process, creating digital platforms through which the shippers find the matching transport option in an instant, having access to competitive prices.

The algorithm analyses the details of the shipment and the requirements of the shipper and suggests an optimal carrier and route for it.

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

A freight forwarding 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 spot pricing, 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.

Are There Any Disadvantages to Using Dynamic Pricing Engines for Freight Forwarding Businesses?

By choosing the traditional static approach, freight forwarders keep all the control, which may feel a little more assuring in the unstable economic reality. However, that’s an illusion. Each freight forwarder within your company would still approach the shipping pricing process independently, using their own knowledge and judgment. When times are changing, businesses need to stay flexible to keep up with these changes, and a dynamic pricing strategy makes it easier.

In the end, the ML algorithm always works in their favor, finding the maximum price point the particular customer is ready to pay. It may take a while to gain expected accuracy, but it’s a one-way ticket - it can only get more accurate.

The only disadvantage might be that many customers are still a little skeptical about dynamic pricing, treating it as a form of fraud. However, as this strategy is gaining popularity, this bias is less and less common. It thus should not affect the image of your business anyhow.

How Do You Get Started With Dynamic Freight Pricing for Your Business?

The best - with us! We are an experienced software house with deep expertise in machine learning and dynamic pricing. We have already worked with many companies from the logistics sector, including freight forwarders, so we know your niche quite well.

Dynamic pricing is changing the whole logistics industry with its various applications for airline ticket pricing, container shipping, and land transportation. In order to start working on a dynamic freight pricing strategy, you should start by gathering relevant data on your customers and their habits. But we’ll help you with that as well! Just drop us a line so that we can talk more about your project.

References

Getting the price right in logistics - McKinsey & Company

What really matters in B2B dynamic pricing - McKinsey & Company

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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