Logistics might not be a commodity, but it sure feels like it.
Anybody selling transportation and logistics services will tell you, that many if not most customers buy based on price alone. I wonâ€™t argue that point â€“ I have definitely experienced it firsthand.
So What is a Commodity?
Commodity Definition: a commodity is a product or service that is indistinguishable from ones manufactured or provided by competing companies and that therefore sells primarily on the basis of price rather than quality or style.
So if logistics is a commodity, then shippers see logistics services as indistinguishable from each other? Yep. Shippers also buy logistics services based primarily on price? Yep again.
Then, the 3PLs and carriers providing logistics services must not be differentiated in terms of quality or style? Ouch! If this is true, then it means that those of us who market and sell these services, have some work to do.
The First Rule of Selling a Commodity
The first rule of selling a commodity, is stop selling a commodity! In other words do the things that differentiate your service from everyone elseâ€™s service.
Many industries that were once considered commodity markets, are now ruled by companies that sell a premium priced product.
Back in the late 70â€™s and early 80â€™s, coffee was considered a commodity â€“ nobody would pay a premium price for coffee. Today, Starbucks and other coffee peddlers charge $5 for a fancy cup of joe from Sumatra.
Not so long ago, we all used boring phones from companies that donâ€™t exist anymore. Now, people camp out over night to buy the latest Apple phone. It doesnâ€™t do anything different from my Android, but Apple has built a fantastic following that will pay a premium price for their product.
Why Not Logistics?
So if the traffic manager is willing to pay a premium price for his coffee, phone and most likely many other products, why not logistics and transportation?
Shippers will pay a premium price for a logistics service, when the logistics service provider builds a service that commands that premium price. Of course, some logistics service providers are already getting premium prices for their service.
Building a premium price service isnâ€™t easy and it certainly wonâ€™t happen overnight, but some of the ideas below will get you started.
1. Build a Brand Name
There is a reason, that big companies spend so much money, time and effort on building their brand â€“ Itâ€™s helps them sell! Customers respond to brands that they trust â€“ it is a shortcut to the sale. There is much written about brand building, but the first step is identifying what makes your company different and better than the competition.
2. Bundle Services
By bundling services with a differentiated ancillary service, a logistics service provider can win business with shippers who are willing to pay a premium for the convenience. Many 3PLs used this strategy in recent years, by adding TMS and freight bill auditing to their brokerage business. Predictably, the market followed and now you typically canâ€™t charge extra for those extra services.
Specialization is a sure fire way to avoid commoditization. In recent years, I have noticed more companies in the logistics business taking this route. By specializing, a company offers a unique service offering to a narrow market. By focusing on a very targeted market, the logistics service provider should be able to develop expert knowledge and a superior service to their customers.
4. Develop Relationships
Actively develop relationships with your customers. Customers are more likely to pay a little extra to companies where there are personal relationships between the two companies. Logistics services providers, who are able to develop good relationships should use the opportunity to learn more about the customer and their problems. Hopefully, this leads to better service to the customer. Taking an extra visit, an occasional lunch or phone call with a customer will pay dividends.
Develop a new service that better meets your customerâ€™s needs, even an upgrade of an existing service offering can give your company an edge. What other problems do your customers have that your company can solve?
6. Compensation Structure
From my experience, most salespeople in the logistics and transportation business are paid based on profit margins, which is really important in a commodity market. Paying on the top line, will encourage salesmen to bring on customers regardless of profitability. Encourage your sales team to pursue higher margin business and find innovative ways to reward them. Instead of just setting sales goals, set profit margin goals too.
Review your current customer list, and determine which type of customers are less price sensitive. Focus your sales and marketing efforts on getting similar customers. Example: if you have higher profits and lower price sensitivity with electronic manufacturers, target those companies. Consider adding services that appeal to that target industry group.
None of these changes are easy, but the alternative is staying stuck in the commodity space. As the logistics industry matures, once innovative, premium price services will become commoditized. This is the natural order of things, only the leaders in a space will fight their way back to premium pricing.