How to Maximise Margins with Differential Pricing and Client Clustering

Picture this: you're managing a fleet of trucks, ready to haul cargo nationwide. You offer a standard rate for every shipment, aiming to keep things simple. But soon, you notice some clients are hesitant to book while others have specialised needs that command a premium. You're caught in a pricing gridlock, losing out on potential business and leaving valuable opportunities on the table. The solution? Differential pricing.

The above scenario illustrates the challenge of a one-size-fits-all pricing model. The reality is that the client base of any given Logistics Service Provider (LSP) is very diverse, with varying shipment sizes, urgency levels and service expectations. Differentiated pricing allows sales departments to customise rates based on these distinct needs, optimising revenue and fostering stronger client relationships.

In this article, we'll explore differential pricing's advantages and how to implement it strategically within the logistics industry. We'll also showcase a real-world success story from Ontruck, demonstrating how they harnessed this strategy to drive growth and profitability.

What is differential pricing?

Differential pricing is a strategy in which a business charges different prices for the same product or service to different subsets or segments of its customers. The segments represent different groups of customers united based on specific characteristics. A segment can be as small as one individual customer and as large as, for example, 50% of the customer base. With this method, an organisation can set individual prices for each segment, considering their unique differences. 

The main benefit of differential pricing is margin maximisation due to sales volume. However, it can also fulfil other strategic objectives, such as entering a segment of especially price-sensitive clients, maintaining happy customers who don’t like to see price fluctuations of any kind, or realising other types of deals in high season. 

In the transport industry, differential pricing makes sense because of the heterogeneity among clients. Indeed, all companies producing goods require transportation. These industries span a wide spectrum, from those dealing in low-value, high-volume goods (like hygienic paper producers), where transportation costs are a major concern, to those handling high-value goods (like automotive or fashion) that demand exceptional customer service and on-time delivery.

Differential pricing in action at Ontruck 

Recognising the diversity of our clients at Ontruck, we implemented a clustering strategy to group them based on distinct characteristics and behaviours.

To define the clusters, we thoroughly analysed massive amounts of client data. Our analysts drew the following conclusions:

• Company “demographics”: Industry, size, type of product, countries of operation
• Commercial behaviour: We analysed each client's interaction patterns with our product, including quoting frequency and conversion rates (i.e., the percentage of website visits that result in a client placing an order and contracting our service).
• Price sensitivity: We determined this based on their conversion rate and general relationship with the company. For example, a customer who comes from a specific industry and expresses many concerns about our pricing is determined to be price-sensitive.
• Constancy of our clients: Are they working with us throughout the year, or do they exhibit more opportunistic behaviour by only coming to us during high season?

Based on this analysis, we defined the following customer clusters, each with a unique pricing strategy. 

• Price-sensitive customers are those whose business could be lost due to high or changing prices. Many of them have an agreement related to volume; in return, they get a guarantee of price stability or discounts. 
• High-willingness to pay customers are those who value our service level and are happy with the price point. They usually don’t represent a significant volume. 
• Seasonal pricing involves a cluster of customers who significantly change their demand across the seasons. Their demand in the high season increases significantly, and so does the price, and vice versa in the low season. 

The differential pricing allows Ontruck to significantly increase its overall revenue and margin, as illustrated in the following charts.

How to implement differential pricing 

While the concept of differential pricing is powerful, its successful execution requires a systematic approach. Let's break down the key steps involved.

1. Data collection & analysis 

The journey begins with gathering comprehensive data about your customers. This encompasses demographic details like industry, size, and location, as well as commercial behaviour, including purchase history, quoting frequency, and promotion responses. It's also essential to consider broader industry trends that may impact your pricing strategy. Once collected, dive deep into this data to uncover patterns and identify distinct customer segments, looking for similarities in behaviour, needs and price sensitivity.

2. Clustering & segmentation: 

Armed with insights from data analysis, employ clustering analysis techniques to group customers with similar characteristics into distinct segments. These clusters will serve as the foundation for differentiated pricing strategies. Next, develop detailed profiles for each segment, outlining their key attributes, pain points, and willingness to pay.

3. Pricing strategy development 

Now comes the creative part: tailoring pricing strategies to each segment. Consider factors like value perception, price elasticity and the competitive landscape. Explore various pricing structures, such as tiered pricing, volume discounts, or subscription models. Additionally, experiment with pricing tactics like promotional offers and dynamic pricing to optimise revenue for each segment.

4. Testing & refinement 

Once various strategies have been developed, implement them in a controlled environment to test their effectiveness. Monitor KPIs for transport and logistics, like conversion rates, customer satisfaction and overall revenue. Analyse the test results and make data-driven adjustments to the pricing strategies. Continuous refinement based on real-world feedback is key to maximising performance.

5. Automation & machine learning

To stay ahead in today's dynamic market, leverage technology. Machine learning algorithms can automate pricing adjustments based on real-time data and market fluctuations, enabling dynamic pricing. Continuously monitor and analyse performance data to identify further refinement and optimisation opportunities.

Your partner in differential pricing

At Ontruck, we offer extensive expertise to guide businesses through every stage of differential pricing implementation. From data collection and analysis to clustering, testing and machine learning automation, we enable clients to unlock the full potential of their differential pricing strategy.

Our hands-on understanding of the logistics industry and advanced data analytics capabilities enable us to develop tailored solutions that drive revenue growth and customer satisfaction. 

Partner with us to embark on a journey toward pricing excellence and achieve sustainable business success. Reach out to us here to discuss your ambitions for automation.

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References:

• Hunter, R. (2021, October 10). Differential Pricing: What Is It and How to Use This Pricing Strategy Effectively. Differential Pricing: What Is It and How to Use This Pricing Strategy Effectively.