It’s safe to say that those of us in the freight transportation industry are familiar with the concept of dynamic pricing. But do we really understand the pros and cons of the dynamic pricing model? In this post, we’re diving into the basics and examining why this strategy has been in play for as long as it has been.
What is Dynamic Pricing?
Dynamic pricing refers to pricing that changes automatically as market conditions drive change in supply and demand. It is present in a variety of industries, such as hospitality, tourism, entertainment, electricity, and passenger transportation. A perfect example of dynamic pricing is Uber—during special events, like New Year’s Eve, or around a stadium on game day, Uber will charge, 1, 2, or even 4 times their normal prices. As you can imagine, not all consumers are thrilled with the model.
Dynamic Pricing in Freight
Over the last few years, dynamic pricing has been touted as a solution to volatility in freight markets, protecting shippers from cost overruns. Many digital freight brokers and solution providers have been offering their own versions of dynamic pricing approaches. Fundamentally, these solutions utilize a combination of rate benchmarks and pricing algorithms to bring carrier capacity to shippers at point-in-time prices by lane, based on the supply and demand at the time of shippers’ capacity needs to move freight.
These approaches are driven by the fundamental economic concept – the law of supply and demand, though freight is more complex than just a simple demand and supply equation, because on any given day the capacity available in a given lane can increase or decrease as the demand slides up and down based on market conditions. The dynamics of any freight lane within any given day is what causes the rates to swing dramatically from hour-to-hour, day-to-day, week-to-week etc.
Shippers, digital freight brokers, and carriers operating in this dynamic environment often perpetuate the volatility – as market demand goes up, carriers move their equipment to lanes where they are likely to get higher prices, which creates capacity scarcity in other lanes causing prices to go up. Similarly, as the demand goes down, excess capacity leads to downward pressure on prices leading to carriers not being able to sustain their operations.
Dynamic Pricing: Yey or Ney?
So, do shippers really benefit from dynamic pricing in the end? We think not. In our opinion, dynamic pricing further fuels market volatility and leads to cost overruns in the long-term, it forces shippers to work with unknown capacity through riskier relationships that are not well managed in terms of insurance, safety, or service levels. The model is broken.
Today, shippers can no longer simply focus on lower rates, they must prioritize having access to dependable, high quality capacity while managing their transportation budgets. And the way to do that is by joining a Collaborative Transportation Network that offers reliable capacity at stable, predictable, and competitive prices.
Learn more, watch our Webinar!
Access a recording of our webinar: Virtual Dedicated Capacity: The Antidote to Freight Capacity Volatility. We discussed the benefit of Collaborative Transportation Networks, how they provide Virtual Dedicated Capacity, and what we believe is the solution to freight marketplace volatility. We were joined by:
Jagan Reddy—SemiCab Co-Founder
David Thomas—Global Supply Chain Network Design & Optimization, HP
ElMarie Hugo—Supply Chain Industry Strategist
Chris Russell—Blue Yonder Customer Success Executive
Enjoy the recording!