This speculative post explores the difference between B2B and B2C freight pricing. Are B2B freight providers falling behind? Should they offer tiered freight-price options like those enjoyed by consumers, and what stops them from doing so? Can the good, better, best, principle work in B2B markets?
Should B2B Freight Providers Offer B2C-Style Shipping Rates?
In my various articles covering the topic of cost-to-serve, I’ve often mentioned the importance of segregating customers into tiers, with the gold standard of service reserved for the most profitable customers, and progressively lower levels for those in the middle and the bottom echelons of profitability.
After all, if your business has customers that provide you with a minimal profit margin once you take the cost of serving them into account, the last thing you want to do is erode the margin even further.
That’s just what happens though when you provide them with the same service standard as your most profitable customers receive—yet it’s a practice that B2B logistics providers often follow, especially when it comes to factoring freight costs into pricing agreements.
Tiered Freight Pricing in B2C Markets
The last time you ordered a product online as a consumer, did you find a choice of shipping options on offer? The likelihood is that you did.
In consumer ecommerce, it’s common for retailers to offer free shipping as standard, with lead times of three days or more, faster shipping at a small premium, with a delivery promise of two to three days, and next-day or even same-day deliveries available for customers who care more about speed than cost.
If you’re wondering why retailers structure their pricing in this way, it’s primarily to ensure a customer experience that’s as personalised as possible.
For example, some consumers will want to save money above all else, either generally or in a specific shopping scenario.
They are the ones who won’t mind waiting a few days to receive their purchases, as long as the price is right.
Others want to receive their goods as early as possible, and don’t care too much about paying a premium for next-day or same-day delivery.
Again, it may be that they make a specific purchase which for one reason or another, they need to receive quickly (perhaps a birthday gift remembered at the last minute?). However, an increasing number of online shoppers have come to expect an experience that’s as close to shopping in a traditional store as possible, meaning they don’t want to wait for delivery—ever!
The third category of shopper sits somewhere in the middle, and while not wanting to wait several days to receive her purchases, is averse to paying a high delivery charge.
This type of customer will hence settle for paying a moderate fee to receive her purchases within three days.
Of course, the tiers might be structured differently to those suggested above, and as time goes on, retailers and their freight providers are coming up with ever-more-inventive ways to differentiate their fulfillment service offerings. However, the principle of good, better, and best typically applies to retail shipping structures, regardless of how tiers are organized, and how many options are offered.
What’s Different in B2B Freight?
In the business-to-business world, freight pricing tends to be complicated, with a range of factors affecting the rates offered by providers. Pricing calculations can be based on:
- Distance traveled
- Trucking lanes used
- Market capacity
- Shipper flexibility and required delivery day/time
- Fuel surcharges
The above elements are for full-truckload shipping (FTL). Pricing gets even more convoluted for less-than-truckload shipments, as weight, volume, density, and several other cargo-related factors join the equation.
Then there is the fact that B2B freight providers are deeply indoctrinated into a sales culture based on solid customer relationships. Every B2B customer expects to be able to negotiate freight rates, with outcomes tailored to the needs of the business.
That’s an entirely different environment to consumer retail, where business is more transactional than in B2B. Consumers want to know, pretty much at a glance, what type of delivery services are available and how much they will cost.
One Size Does Not Fit All
Despite the issues mentioned above, I still find it surprising that companies running in-house fulfillment operations, seem determined to stick to a one-size-fits-all approach to freight pricing. Of course, in many cases, vendors factor freight costs into product pricing, so the customers don’t get to see what proportion of their remittance covers the cost of transportation.
Nevertheless, a blanket policy for B2B freight transportation often introduces problems into a company’s fulfilment process. I already mentioned the cost-to-serve issue, but in reality, there is a broader range of concerns to consider.
The Problem of Fixed Delivery Days
Let’s take the example of a company that allocates fixed delivery days to specific geographical areas. What tends to happen is that over time, some days fill up with work to the point of saturation, while on other days, the workload declines to the point where vehicles sit idle in the transport yard.
Not only that, expedited deliveries can quickly become a problem in this type of operation.
Customers’ businesses are unpredictable, and when trade picks up, nobody wants to find themselves short of inventory because they didn’t order enough. When it happens, the first reaction is to contact the supplier and place an emergency order. What happens then is that these emergency orders must be integrated with the scheduled deliveries, leading to routing inefficiencies and an even more significant imbalance of work across the week.
Could Freight Providers Benefit from Good, Better, Best?
It’s conceivable that a tiered pricing structure for freight transportation could benefit B2B providers in several ways. Firstly, it could help to improve cost-to-serve.
For instance, if your company has customers that regularly place “emergency” orders for delivery, you could offer them the option of free delivery on the next day that you typically serve their locality.
If that might be several days, you could offer a next-day service for a premium, or a same-day, express-delivery option for at a cost that makes it worthwhile for your business, and provides the customer with an ultra-rapid response.
While this approach won’t reduce cost-to-serve, it will help to improve margins, discourage unreasonable requests for emergency deliveries, and ensure a fast resolution for customers with genuinely urgent needs.
Can Tiered Freight Pricing Smooth Demand?
It might also be possible to apply the good, better, best, approach more generally, perhaps as an alternative to using fixed delivery days.
B2B Vendors could allow customers to opt for free deliveries with a longer lead time, faster deliveries for a modest shipping fee, and next-day deliveries with a higher price tag. Such an approach could contribute to a smoother demand profile and make sales more profitable.
Of course, given the pricing complexity mentioned earlier in this article, it may not be possible to introduce a simple tiered service in the B2C style, but the principle could perhaps be applied to freight tariffs, creating similar opportunities for demand-smoothing and profitability.
What Do You Think About Tiered B2B Freight Pricing?
Unlike many of my posts here on the Logistics Bureau Blog, this one is more speculative than informative. That’s no accident, but a result of my interest (and those of my colleagues) in the question of tiered B2B freight pricing.
Since we always like to receive the views and comments of our site visitors, I thought I’d throw this question out there and ask you to weigh in with your thoughts and opinions.
Why do you think B2B freight providers seldom offer a range of freight options?
Is it time to approach business-class freight differently, and take some lessons from the B2C market?
If you have views or ideas on the topic, please do share them in a comment or two below. Sometimes the best innovations emerge from a healthy discourse among professionals in our industry, but in any case, it never hurts to get a few different perspectives on a particular problem or solution.