Raising profits via optimal pricing in the containerised spot freight market
Mizzen has developed an algorithm in partnership with the University of Technology, Sydney to calculate the optimal price for the container shipping industry
From the 2018 data, the lost opportunity cost equated to US$110 per TEU
Sydney, Australia, 16 October 2019 - Mizzen Group, a data analytics and digital dynamic pricing provider to the shipping industry, has devised a new algorithm for optimal pricing for the container shipping industry.
Application of the algorithm allows shipping lines to maximise profitability through the dynamic and automated setting of freight rates based on cargo demand and capacity in a given week.
Mizzen’s initial estimates suggest a US$110/TEU revenue improvement, which would deliver a significant positive impact to a shipping line’s bottom line.
The algorithm was developed in conjunction with the University of Technology Sydney, who’ve worked alongside Mizzen for some time, developing the company’s digital analytics platform.
Mizzen currently offers digital rate management and pricing software for the container shipping industry and operates mizzenit.com, a spot market rate platform enabling every major shipping line to deliver prices to customers online.
Shipping lines currently using Mizzen’s digital platform to automate and provide an instant rate quote include Maersk, Hamburg Sud, ANL, CMA CGM, APL, HMM, Evergreen and Yang Ming.
There is a huge opportunity for shipping lines to materially improve their efficiency and profitability, and Mizzen is well placed to make that a reality.
Current industry pricing practices and commercial product offerings deliver sub-optimal outcomes for the shipping lines and, indeed, for their customers. The key limiting factors are:
● Prices are set with a date validity, and not by vessel voyage - any vessel can be booked in that date range regardless of the utilisation factor. Therefore, there is a disconnect between price, supply and demand.
● There is very little market-wide data on cargo demand, shipping capacity and price, which results in pricing decisions being based on a shipping line’s internal data only. Pricing is a best estimate only and not driven by broader, real time data (which, until now, has only been available weeks after the given trading period).
● Shipping lines offer limited product choice for a customer. A customer can take the price flexibility of the spot market, but then has no booking certainty in peak season or they can trade off certainty with a contract, but then they forego price flexibility.
These factors all combine to lower efficiency, and ultimately, profitability.
Mizzen sees an opportunity to provide the shipping industry with the digital solution that will improve profitability, as well as greatly improving the freight buyers transactional experience.
We have built a theoretical optimal price algorithm for spot freight rates, in a fully informed market, from which the opportunity cost of current pricing practices can be captured.
The algorithm is based on University of Technology Sydney analysis of the Asia Australia trade lane from 2016 to 2018, using consolidated port authority data, the SeaIntel TCO report, the Shanghai Containerised Freight Index (Australia/New Zealand route) and Mizzen’s own extensive pricing data bank.
On 2018 data, that opportunity cost equates to US$110/TEU, a significant impact to shipping line’s bottom line.
Digital transparency is a big opportunity for the industry. The shipping lines that tackle digital early will get a head start on their competitors.
As the digital channel grows, the need to dynamically calculate the optimal pricing for sea freight rates will be the only way a shipping line can effectively deliver the rate instantly to their customers.
A calculated opportunity cost can start an industry conversation about what is possible with better visibility and new digital pricing practices. You need both the data and the digital solutions to deliver the benefits to both sides.
We shared our optimal pricing method with leading container shipping analyst Lars Jensen of SeaIntelligence Consulting who commented that the optimal price can be impacted by two factors.
1. a market wide effect, for example a week with low cargo demand; and/or
2. competitor(s) lowering price to capture volume and market share
The Mizzen model doesn’t include the effect of factor two, but it does model the market wide effects factors in factor one.
The opportunity cost is deemed as the variance between the SCFI price and calculated Optimal Price multiplied by the percentage of cargo carried on the spot market and therefore open to the levied optimal price. The assumption taken was 30% of cargo carried on the Asia/Australia trade could be charged at the optimal price each week.
From the 2018 data, the opportunity cost equated to US$110 per TEU.
This calculation doesn’t take into effect the above highlighted factor of downward price movement because of competitor pricing action to gain market share.
However, as Lars Jensen observes in a recent commentary on Zim Line results, there is a trend of container lines giving up their chase for market share in favour of profitability with Zim joining other lines that have followed the path of trading lower market share for improved yield.
This could be an early sign of the move to more rational pricing? Would improved data visibility and a digital trading environment accelerate the uptake of more rational pricing?
In the short run, the spot market is the only segment where a shipping line can increase profitability. The window of opportunity for shipping lines to respond to changes in market conditions becomes smaller and virtually impossible for a trade manager to monitor and react to these opportunities in real time without a digital solution.
Getting real time alerts to opportunities and threats and then reacting to these will be a key part of a shipping line’s success. Underpinning the possibility of this is data and our partnership with 1-Stop Connections provides the data capability to realise that element in the Australian market.
The shipping industry is in the early stages of digitalisation. To date, solutions in the market are centred on bringing efficiencies to the current business process, not using the potential of a digital channel to create a new business model.
These new digital models will improve a shipping line’s profitability as the industry move their business to the digital channel.
Digitalisation should be seen as a revenue generating opportunity not just a cost saving exercise. Mizzen is one of the few digital solutions in the market today focused on delivering yield management, unlocking the true potential of a well functioning digital channel.
Mizzen Group (www.mizzengroup.com) is a digital pricing and rate management solution. The Mizzen team combines cutting edge digital capability married with shipping industry understanding. The Company delivers software for freight sellers, shipping lines and freight forwarders to set and distribute prices dynamically and in new ways to their customers in the digital channel. This enables them to deliver new products with a range of value attributes to better serve their customers’ needs and their own guided by data. The company also mizzenit.com, a business-to-business digital rate platform for the container shipping industry.
Managing Director & co-founder
+61 434 3419 824