Does approaching your carrier for contract negotiations make you feel like you are stepping into the ring with a 500-pound gorilla? If you feel outmatched, chances are, you're probably right. The solution? Learn to think like a carrier.
If there is one thing I have learned in over a decade in the shipping consulting space, it’s that the majority of shippers fear making a carrier change. They’re scared that if they push too hard, they’ll get dropped. So how do you, as a shipper, approach your carrier with confidence that you will get a better agreement?
Simply put, you need to be as prepared as the carrier is. You need to know what they know. They want your business, provided that they can capture it at the right price. So you need to know which details their pricing executives care about as they assess your characteristics. You can negotiate with confidence when you understand exactly how the carriers see you as they try to win your business.
When the carrier evaluates a current or potential customer, they see you through four filters: first, by your small parcel spend; second, by your alignment with the carrier network; third, by an evaluation of the competitive environment; and fourth, by the value of your brand. Allow me to elaborate:
#1 – SMALL PARCEL SPEND
Under $100,000 Annual Ship Spend
One of the first ways the carrier looks at you is through your small parcel spend. This factor determines how to proceed in pricing decisions. If you’re a small- to medium-sized shipper, the process is straightforward. The carrier profiles your unique shipping characteristics, including product mix (air vs ground service levels), commercial versus residential percentages, weight and zone distributions, and delivery density. Then, based on those thresholds, the carrier will proceed with the finer details of the negotiation.
More Than $100,000 Annual Ship Spend
Things start to get interesting for medium- to large-sized shippers because carriers look at more than the company itself — they examine your alignment with their network as well as with your industry vertical. UPS and FedEx undergo intense competitive analysis to see how the competition plays in a vertical, and they make their pricing decisions based on that knowledge. The non-incumbent carrier will do a lot of homework to analyze the landscape and answer questions about how the incumbent prices, wins, and retains that industry vertical. With these answers, the non-incumbent can look at ways to enter that space and gain traction to compete in the field.
#2 – ALIGNMENT WITH THE CARRIER NETWORK
Carriers really work to create value-added solutions that are meaningful to your business as well as to your specific vertical. Their goal is to improve margin and to make their solution sticky. While the carriers’ cost to ship is always a component, their pricing decisions aren’t limited to costs alone. At this point, the science of negotiation transforms to an art, and they look to provide you greater value and to make themselves attractive to your industry.
One example of carrier network alignment would be an “end of runway” solution, where a distribution center is built close to a carrier’s major shipping hub. This relationship undercuts the carrier’s immediate profitability, but it provides a long-term win by securing business, making it hard for the customer to switch to another carrier. Companies and customers in that industry get faster service at a lower cost, while the carrier gains reliable business from the stickiness of the value-added service.
#3 – COMPETITION AND CREDIBILITY
Next, carriers evaluate the competitive risk of losing your business or engaging with you as a potential client. That evaluation is dependent on whether the carrier is an incumbent or non-incumbent:
The incumbent carrier carefully evaluates the risk of losing you. It wants to retain your business and will make sure the services it offers you go above and beyond competitive rates. Pricing executives analyze your rate structure, contract, and terms and conditions. Then they evaluate your negotiation history with the company. Have you been with them for many years? Do you have a record of threatening to leave but never following through? In addition, your incumbent carrier looks at how effectively it has been integrated with you as a customer. The more ingrained your business is, the harder it will be for you switch to a competitor, and the risk of losing you goes down.
Conversely, non-incumbent carriers care about the likelihood of gaining your business. When you approach the non-incumbent as a potential customer, the organization sees how ingrained you are with your incumbent carrier as a measure of your credibility. The non-incumbent takes a risk by engaging with you. In fact, when I hear a client say, “At the end of the day, we want to stay with our incumbent,” I never advocate that they actively engage the non-incumbent. The move would likely do more harm than good because the non-incumbent carrier will sense they have no chance of winning the business. If you have any history of approaching the non-incumbent carrier with a promise to sign a deal, then backing out, executives will take that into consideration. That’s why their analysis of you includes careful consideration of your sincerity as well as the credibility of the opportunity.
#4 – BRAND
With the very large clients, brand matters. Alignment with a strong brand-name shipper can be seen as a strategic win or a crown jewel in a carrier’s list of clients. Will your brand add value to theirs if they work with you? If so, this could be the final droplet that tips the scales in your favor. Additionally, there is often a synergistic relationship between the brand and the carrier, becoming vendors to one another. Synergy weighs heavily into the strategic decisions made by the carriers. So there is certainly some qualitative value in a relationship with a strong brand, even above and beyond the direct value of the brand.
THE ART AND SCIENCE OF CARRIER CONTRACTS
Negotiating with the carriers in this competitive marketplace really is a blend of art and science. Be assured the carriers are strong on both fronts. As far as shipping is concerned, they know your business better than you do. They understand their cost to serve you, and they have done their homework to understand your small parcel spend, profile, carrier and industry alignments, credibility, sincerity, and brand strength. The carriers know how you think and will come to the table ready. But with the proper approach, so can you. It starts with thinking like a carrier.
Glenn Gooding is Executive Vice President of iDrive Logistics and an industry-leading cost model expert. He spent more than two decades at UPS, where he engineered the cost and pricing models for the world’s largest enterprise shippers. Glenn now leverages his knowledge of carrier cost-model methodologies to help shippers of all sizes optimize and reduce shipping costs. Glenn can be reached at firstname.lastname@example.org or 678.567.6847.