Exploring Dynamic Pricing for 3PL - Efficiency Meets Profitability in Third-Party Logistics Operations

The world of logistics is ever-evolving, and third-party logistics (3PL) providers are at the forefront of adapting to the changing market dynamics. To remain competitive and drive profitability, 3PLs must continuously innovate and leverage cutting-edge solutions that cater to the complex demands of modern supply chains. Enter dynamic pricing—a game-changing strategy that promises to revolutionize the way 3PLs operate, driving efficiency and cost savings while offering unparalleled flexibility to customers.

In this in-depth exploration of dynamic pricing for third-party logistics operations, we’ll dive into the key aspects of this transformative pricing model, from the advantages it offers over traditional static, fixed pricing strategies to the incredible potential unlocked by machine learning and predictive analytics. We’ll also examine how dynamic pricing methods are reshaping the landscape of transportation and warehousing services, with a special focus on the role of technology in optimizing these essential 3PL services.

Stay with us as we uncover the compelling intersection of efficiency and profitability in the realm of dynamic pricing, shedding light on the transformative potential it holds for the future of third-party logistics operations.

TL;DR

• Third-party logistics (3PL) providers are integral to the supply chain, providing a range of services from warehousing and packaging to distribution. They often provide custom, tailor-made logistics operations for their clients.
• The demand for fulfillment services is rising dramatically with the growth of e-commerce, and dynamic pricing models are increasingly being adopted by 3PL providers. This strategy considers real-time demand and allows flexibility in managing orders.
• Dynamic pricing strategy provides several advantages for 3PL providers, including cost savings, meeting customer expectations, timely deliveries, and improved use of warehousing and transportation capacity. It’s a model where prices are adjusted based on market conditions, ensuring profitability and sustainability.
• Machine learning is shaping the future of dynamic pricing solutions in logistics. It allows for precise demand forecasting, optimal shipper and carrier segmentation, automated carrier-matching solutions, and efficient shipment consolidation.
• Dynamic pricing revolutionizes warehousing and storage services, pick and pack fees, and transportation services in the 3PL industry. It allows for a more efficient and flexible pricing model that takes into account current demand and capacity, resulting in improved profitability.
• If you’re interested in harnessing the power of machine learning for dynamic pricing in your 3PL operations, contact the AI experts at nexocode. With their extensive experience in the logistics sector, they can assist in the effective implementation of AI solutions to boost your efficiency and profitability. Reach out to nexocode today!

Services Covered by Third-Party Logistics Providers

Third-party logistics providers are an essential element of the supply chain, integrating and combining warehousing and transportation services to streamline the flow of goods. The spectrum of their services varies from general warehousing activities through packaging, to distribution. 

3PL providers may either provide complementary services for their clients or act as customer developers who integrate with them entirely, complementing their activity with tailor-made logistics operations. The first model is more common across sectors, being cheaper and more flexible, however, the second one provides the companies with more control and allows them to adjust the logistics model to their individual needs.

Among the services covered by 3PL providers, you can point out:

• packaging
• package completion
• pick and pack
• warehousing
• distribution
• track and trace
• cross docking
• port operations
• shipping
• spot bidding

Many of these services can be customized depending on the customers’ needs. The company may, for instance, outsource specific packaging services that match the requirements of its products (extra fragility, unconventional shape, etc.).

How to Calculate Fulfillment Cost?

The recent radical growth of e-commerce has elevated the demand for fulfillment services and propelled its evolution toward a more dynamic, integrated, and diverse service suite. Third-party logistics providers are converting to the dynamic pricing model, which is more in line with the way their customers function. 

Fulfillment cost is usually calculated per order. Companies can predict their fulfillment expenses, taking into account their net sales, annual shipment rate, and total order lines. Switching to dynamic budgeting may be challenging, but it also creates new opportunities. Instead of relying on pre-established conditions with fixed prices, companies can manage their orders in a way that reflects the real-time demand and take advantage of the fluctuations in rates offered by third-party logistics providers. 

The Power of Dynamic Pricing Strategy in 3PL

The world of logistics revolves around demand and is inseparable from the sales factor. In order to stay financially efficient, 3PL companies have to adjust their strategies to market fluctuations. When integrating a large spectrum of logistics services as do the 3PL providers, a dynamic pricing model comes as a perfect solution, differentiating rates for every particular service depending on its current demand, warehouse space, level of difficulty, etc., instead of taking service as a whole, which inevitably leads to financial loss. Pricing in 3PL is dependent on various providers, so a dynamic strategy empowers 3PL companies to maximize their margins.

Comparing Static Pricing Strategy vs. Dynamic Pricing Strategy

As the name suggests, dynamic pricing replaces fixed prices with dynamically changing ones, constantly recalculated based on the relevant factors. Depending on the specifics of their niche and objective, the companies may pick different dynamic pricing strategies, for instance, cost-plus or inventory-based pricing, particularly popular in e-commerce. 

For the third-party logistic services providers, essential variables revolve around demand, as well as space availability and LTT (load-to-truck ratio). Including the complexity of a request and its timeliness, they can find the most effective price points. As they deliver B2B services, 3PL companies should remember their customers need a certain level of stability, so their pricing strategy cannot be as extreme as, for instance, in the case of B2C-oriented retailers. 

The price per order, estimated based on the number and type of logistic services involved, is often dynamic per se because the carriers and other service providers involved in the supply chain establish their rates dynamically (based on various factors, from demand to fuel price). The 3PL, who integrate these services into order fulfillment themselves, may use the delivery date to determine the final rate, relying on customers delivery date preferences and putting a dynamic markup on top based on their current workload.

Advantages of Adopting a Dynamic Pricing Model

The advantages of using a dynamic pricing model in third-party logistics are similar to other niches, boosting margins and providing clients with more flexibility. Here are some top benefits you can count on when implementing such a 3pl pricing strategy.

Cost Savings

The dynamic pricing strategies open saving opportunities in front of the logistic service providers, allowing them to make the offered rates as relevant to their real-time and future expenses as possible. As a result, they can balance the costs and earnings, maximizing the margins by finding the highest price points the customer is willing to pay. Their financial efficiency as the third parties strongly depend on accurate predictions - they have to understand both the shippers and the carriers and their changing needs to make informed decisions regarding the capacity purchase, etc. Machine learning algorithms are unbeatable in this field, helping them find prices that will keep the flow of goods going and include the hidden costs in their rates.

Meet Customers Expectations

With dynamic pricing, third-party logistics companies can adjust their prices to customers’ expectations, keeping the sales going and providing all the entities involved - from the carriers to warehouse owners - with an uninterrupted cash flow.

With the increasing competitiveness of the e-commerce market, retailers want to provide their audience (particularly the delivery date-sensitive customers) with access to affordable delivery services in order to increase their competitive edge, and dynamic pricing enables that. Customers gain flexibility, having access to a varied price range, depending on their priorities. 

Timely Deliveries

With dynamic pricing, third-party logistic companies can easily handle a wide spectrum of expected delivery dates and times, adjusting a price offered to the carrier and shipper to the urgency of the order. Throughout demand peaks or low-availability periods, they can manipulate their rates in a way that maintains the continuity of the supply chain, guaranteeing timely deliveries. A standard customer expects their item to be shipped in 24-48 hours.

Utilizing Warehousing Capacity

3PL providers link the retailers and e-commerce businesses with the clients, providing them with warehouse spots and all the services included. The companies deposit the shipment at the warehouse for it to then start its journey all the way from the factory to the customer’s home. With fixed prices, the risk of reaching the maximum capacity and getting stuck with the services is much higher. Pricing dynamically, the 3PL companies can regulate the demand for warehousing services to keep the warehouse availability steady. Having the changing price in mind, the retailers will be more thoughtful about their shipment’s journey instead of treating the warehouse as a waiting room. For 3PL providers, that means more stability and predictability in planning their operations and distributing the shipments along the lanes.

Increasing Transportation Capacity

With dynamic pricing, the 3PL companies can also regulate another aspect of the supply chain, which is transportation. Acting as a bridge between retailers and carriers, they are in charge of buying the capacity they react to the changes in demand for transportation services and preventing themselves from undercharging that expense\

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.

Revolutionizing the Pricing Structure for Transportation and Warehousing Services

Based on the list of benefits above, it’s needless to say dynamic pricing strategies have a revolutionizing potential for logistics. We gathered the most captivating examples of how it can impact different services within the 3PL sector.

Flexible Pricing for Warehousing and Storage Services

Warehousing and storage services are a pillar of the 3PL sector, and they are strongly subjected to seasonal fluctuations in demand. Flexible pricing allows third-party logistics companies to optimize warehouse management and extract maximum margins from this branch of their services. Throughout the sales peaks, they price their warehouse spots higher, and in the low season - discount them to keep the shipment flow going. They can also adjust their estimations using the segmentation technique, making the final rate depends on the volume, type, and frequency of orders their customers are likely to pick.

Dynamic pricing also helps them distribute demand for the warehousing and storage industry services, minimizing the risk of running out of spots or, contrarily, having too little movement. At the same time, the 3PL companies can include the services within the warehousing service in their pricing to be more financially sustainable - for instance, if the product has special storage requirements, the price will include it.

Dynamic Pick and Pack Fees

The pick-and-pack model allows small suppliers to distribute their products around the globe without shipping the whole pallets. In this case, the workers find individual items in a master carton and ship them as a package or in an envelope. 

While beneficial due to no minimum order requirements and simplified packing and labeling process, the pick and pack model requires much more coordination from the 3PL companies, as they don’t just buy the capacity for one provider but need to consolidate orders on different lanes. For it to be financially sustainable, the price should be constantly recalculated based on the delivery dates incorporating the current warehouse capacity and the picking strategy the 3PL company relies on (with piece picking being the most time-consuming and zone-picking - being the most efficient).

Dynamic Pricing Method for Transportation Services

Third-party logistics companies integrate warehousing and transportation operations, cooperating with carriers to provide coverage for shipping lanes. With dynamic pricing, they can estimate the freight rates based on real-time factors, adjusting the prices to different factors, including:

• drivers’ availability
• load to truck ratio
• occupancy of the shipment lanes
• predicted demand
• weather conditions

Related case study: Implementing AI model to optimize routes and timelines of deliveries

A company from the logistics sector approached us to create a custom AI model that optimizes routes and the scheduling of deliveries.

Our challenge? The key challenge here was to prepare a dedicated AI-based system designed for carriers to optimize delivery time depending on the destination address. Thanks to the model we managed to reduce failed and late delivery rates by 30%. Read our detailed case study of this project.

Here you can read more about pros and cons od dynamic pricing.

Machine Learning: The Future of Dynamic Pricing Solutions

With machine learning, the predictions get better with every estimation, constantly improving the accuracy and enabling the companies to reach their full potential. Instead of being programmed manually, the model itself makes sense out of the input data to understand how different price points impact the target groups and in which context, finding correlations between variables that are often difficult to link. How can that influence the logistics?

Harnessing Predictive Analytics for Demand Forecasting

Accurate demand predictions are essential for every company involved in the supply chain, from the manufacturers, through the 3PL service providers, to carriers and logistic centers. Machine-learning-powered predictive models can provide them with reliable estimations, drawing insights from historical data to understand how market trends, macroeconomic and seasonal factors, demographics, and prices influence demand. In order to streamline the prediction process and improve the accuracy of the predictions, all the parties can integrate their systems and share datasets, joining forces to create a new, analytics-powered supply chain management.

Machine Learning-Driven Insights on Shipper and Carrier Segmentation for Pricing Adjustments

As we already mentioned, third-party logistics service providers can segment their prices to increase their margins, understanding what drives the purchasing decisions of their particular target groups. The 3PL companies can gather insights to differentiate different segments among the carriers and shippers (based on what motivates them, what are their preferences regarding the price and delivery date option, do they tend to wait for a better offer, do they tend to bid last minute, etc.). The model can segment them through clustering analysis, finding variations within a customer group. With every purchase, it analyses the relevant variables to then categorize the customer and adjust the price range to their segment.

Automated Carrier-Matching Solutions and Route Optimization

3PL providers link carriers with the shippers, ensuring the shipment will be delivered the safest and fastest way possible and fulfilling its journey with additional services. ML algorithms can automate the matching process the 3PL companies are in charge of, creating quotes with a consideration of the target group and relying on changing variables. The bidding process is time-consuming and error-prone, and machine learning can change that. 

Shipments Consolidation for LTL Transportation Services

Third-party logistic services providers work with different companies, from huge manufacturers to limited suppliers who often prefer the pick-and-pack model, distributing small shipments by batch or even by item. 3PL can help smaller businesses deliver their products in a short time, consolidating the shipments with the help of machine learning algorithms. Having access to data on LTL carriers’ capacity, destinations, expected delivery times, and the specifics of the items (weight, size, format, special requirements), the ML model is capable of finding the most efficient combination, helping the 3PL provider meet their customers needs and working in favor of the environment (minimizing the empty miles). Here’s how it looks like in practice.

Implementing Dynamic Pricing Solutions for Third-Party Logistics

We have helped various logistic companies create dedicated systems involving ML and dynamic pricing models or include these features in the existing ones. We would love to help you too! Let us know about your vision and we will help you find the right angle. Meanwhile, get inspired with our step-by-step dynamic pricing implementation guide!