Pricing from a 4PL perspective

Sammanfattning: Title Pricing from a 4PL perspective
Authors Louise Kjellberg and Maria Björholt, master students at Industrial Engineering and Management, Lund university
Supervisors Jenny Sjöholm, Logistics Developer, Schenker Dedicated Services AB
Dr. Andreas Norrman, Professor in Engineering Logistics, Department of Industrial Management and Logistics, the Faculty of Engineering at Lund University
Problem discussion and purpose
The interest for outsourcing of logistics services has grown in the last decades, and therefore the fourth‐party logistics market (4PL) is expected to grow significantly.
However, although the market is expanding, the 4PL provider faces competition, not only from other third‐ or fourth‐party logistics providers, but also from companies that provide substitutes to some extent, e.g. IT, supply chain consulting, freight‐bill auditing and freight procurement. In order to stay competitive, it is therefore important to know how these companies price their services.
The purpose of this study is to create knowledge about different pricing methods for the 4PL industry, and to discuss potential pricing methods for the 4PL provider that is the client of this thesis, Schenker Dedicated Services AB (SDS).
Methodology
The research started with a literature review. Then, six case studies were conducted with the aim of finding convergent patterns of how different industries price their services. All of the cases included in the study offer services that are substitute to SDS. Finally, the findings were applied on SDS’s fourth‐party logistics context, in order to see if there is any indication that SDS should use other pricing methods than the one currently used.
Frame of reference
The frame of reference introduces three main fields. The first field is the most common pricing methods used within either the logistics services industry or by companies that offer services that are substitutes to SDS’s services. The second area of interest is service classification. This part introduces a number of service characteristics that will be used in the cross‐case analysis. The third part investigates the third‐ and fourth‐party logistics market. The intersection of the three fields respectively is discussed in pricing of services and pricing of logistics services.
Conclusion
The findings of how different substitutes to SDS price their services are presented below. In general, cost‐plus contracts transfer the risk to the customer while a fixedprice or an outcome‐based agreement transfers the risk to the provider. The provider’s motivation to perform is high for outcome‐based contracts, whereas no such incentives are created for a fixed price or cost‐plus.
Supply Chain Consulting
Cost‐based pricing or customer perceived value pricing is used within consulting, however, the latter is believed to be the ideal pricing method. Cost‐plus pricing is, nevertheless, industry standard. Both companies charge for consulting either with a fixed price or with a running cost per hour.
Information & Technology
One of the case companies prices its services based on the customer perceived value, whereas the other company uses a market‐based pricing method. The difference can be explained by the cross‐case analysis that shows that services that are more customized and complex tend to favour customer‐perceived value pricing, whereas services that are more standardized and simple are more likely to be priced according to the market. The pricing method that is industry standard seems to vary depending on how complex and customized the service is. A transaction‐based payment principle is preferred, since it is more profitable than a yearly fixed price.
Freight‐Bill Auditing
The freight‐bill auditing company that participated in the case study uses cost‐plus to price its services. For low volume customers or standardized services, however, the price level is partly influenced by the market. The customers are charged based on the number of transactions that they execute per month. Overall, the pricing within the industry is ad‐hoc.
Tendering and Freight Procurement
The service is very straightforward and the savings can easily be measured, which allows for gain‐sharing contracts. According to the freight procurement company that participated in the case study, gain‐sharing is thus considered to be industry standard for freight procurement projects.
General patterns across industries
The cross‐case analysis shows that services that have a high degree of complexity and customization either use a customer perceived value pricing, increasingly want to do so or indicated that it would be the ideal pricing method.
Indications for SDS
Based on the cross‐case analysis, and the fact that SDS offers services that are complex and customized in nature, we suggest that SDS should investigate whether customer perceived value pricing could be used for SDS’s services.
We also suggest that SDS must be better at communicating the value that they create as a 4PL provider. One way of doing so is through the pricing method used. We believe that customer perceived value pricing would fulfil that purpose. However, if SDS finds that customer perceived value is a difficult approach to pursue since it often is difficult to estimate and quantify, we suggest that SDS should consider other value‐based pricing methods that are more established within the logistics industry, such as gain‐sharing or performance‐based pricing. We believe that the incorporation of such pricing methods in the all‐in price would allow for SDS to better communicate the value that is created and, hence, would distinguish SDS from the 3PL providers on the market.