May 04, 2017
Freight rate pricing, public or private?
New tech start-ups are pouring into the container shipping industry with the goal of transforming the industry.
Sometimes it seems like this is a new idea but actually tech companies, like INTTRA and CargoWise, have been working for many years to streamline and standardize the common processes and transactions of container shipping.
The heightened tech focus and momentum is certainly good for an industry that has been struggling with low margins and negative bottom-lines. And, let’s face it, there are still many inefficiencies in the way people work including the use of manual processes - email, phone and fax for basic freight transactions.
Digital freight rate framework – Public or private
One of the areas of container shipping that we have been working to systematize is freight rate management and distribution to promote seamless, confidential rate collaboration.
There are tech newcomers that are promoting the idea of rate transparency through public marketplaces. Their goal is to have freight forwarders post their rates on these sites for easy and immediate access, so there’s no delay in waiting for a quote. But, can this be good for the industry and does it align with how the industry prices freight? Is it a realistic model?
A public marketplace model has clear rate commoditization implications. Let’s be honest, if forwarders are competing based on price alone it’s going to commoditize this segment and repel the forwarding community.
We all know that Forwarders work in an arbitrage model so their job is to maximize the spread between their buy and sell rates. A marketplace for price discovery, as a starting point, can exist and may be useful. But, even if sellers want to get noticed, public rates can’t be real and final. The price of ocean freight is only part of the freight forwarder ‘product’. A private negotiation that contemplates the entire scope of a shipment and all of its associated costs is still required.
Don’t insult value of service
Clearly, forwarding is also a service business and forwarders differentiate themselves greatly in that regard. Show me a forwarder and I will show you a group of people who offer differentiated services in their markets and are passionate about ‘why’ they are different. This is a group who doesn’t want to be undercut by a few dollars in a public rates space when they offer premium service in their markets.
To achieve the perception of transparency, forwarders may post a generous sell rate as a high-level estimate on a public site; this is like today’s public tariff. This supports the price discovery phase that has always been around and is the starting point for discussion. Only after a specific shipment is designated by commodity, pieces, dimensions and weight and includes other services like pick-up, packing services, brokerage, warehousing, etc. is the real pricing going to happen. That’s where the confidential service offering and pricing negotiation occurs.
Moreover, confidential rates and interactions support strong partnership building. The reason a public web-based portal isn’t realistic is due to the importance of the business relationship, which of course the sales process is part of this. Supply chains are complex and unexpected events due to weather, labor issues, infrastructure, as well as other factors, can severely impact supply chain integrity. The relationship is where shippers and logistics providers gain the knowledge and understanding of the other’s capabilities and business needs. Logistics providers have the shipper’s back when disruptions occur and are ready to jump in to resolve issues to keep their customers’ supply chains running as planned. Why would they want to put a digital interface in the middle of that? Simply making price the basis of the relationship isn’t realistic.
I have little doubt that carriers will continue to incentivize freight buyers based on market conditions, relative purchasing power, loyalty, and the carrier’s needs in any given moment in any given trade lane. These are the drivers that impact pricing.
At CargoSphere, we constantly innovate to create freight rate technology that provides efficiency improvements and enhances the prosperity of industry players - rather than disintermediating them strictly for the benefit of the technology “enabler”. The real goal and payoff for the industry is confidential freight rate visibility for all parties on a transaction from procure to pay – a single source of truth.
by Neil Barni, president of CargoSphere