The Direct Buying Savings Myth: How Buying Direct Concedes Control and Wastes Resources
In our culture, it is always assumed that buying directly from the source is the most cost-effective way to buy products. This comes from the move away from a traditional tiered “Manufacturer to Distributor to Store to Customer” model that has largely remained intact since at least the early 20th century. Read below for thoughts on how to control LTL costs.
However, when original product manufacturers began relationships with their end customers, Direct Buying was born. This omni-channel distribution model has blossomed with the emergence of online shopping and the “retailing” of small package shippers.
“In short, if best pricing
and optimal control are critical,
Direct Buying doesn’t work well
for freight.”
So buying direct from the source, popularized by retail buyers in the last three decades has now filtered to the B2B arena, where the never-ending need to cut unnecessary expense is paramount.
But moving freight is a complex service, and still favors partnering with a “shipping bundler”—an intermediary who is able to buy large-quantity shipping services on behalf of customers to secure the best pricing. In short, if best pricing and optimal control are critical, Direct Buying doesn’t work well for freight.
Direct Buying is Nothing Like Control (But Everybody Thinks It Is).
It is widely believed that maintaining control over the buying process is best found by eliminating all layers between buyer and seller. Largely true for most industries, but not at all true with freight.
Shipping is a perfect example of limited savings for manufacturers in a direct buy model. Because the industry itself is shrouded in layers of data and complexity, those savings—and the control felt by buying direct—are largely illusion. There are far greater ways of gaining control over shipping than buying direct.
Direct Buying = Carrier Control. Nothing Changes.
Unlike traditional direct buying where a physical product is exchanged for money, the services offered by carriers have a multitude of layers made up of countless variables, unlimited options and endless computations that make up a price for a given load. All these factors can change several times on any given day so there is really no real normalcy to pricing from day to day, let alone month to month.
And because carriers cannot possibly provide real-time pricing directly to the marketplace, they willingly negotiate general pricing (Routing Guides, anyone?) with the caveat that their pricing will shift from time to time, and often without warning for a variety of reasons. Shipping hub changes. Driver shortages. Contractual obligations. Demand for space. All can change the price of a shipment.
Carriers know that their customers don’t have the time or insider knowledge to keep up with every change from every input, so they work on “averages”. They set a price—usually higher than it needs to be— that will cover all their variables and enable them to still make a handsome profit. They employ sophisticated algorithms and estimate a price that will keep their operations as profitable as possible. Essentially, they guess. But their guess always favors the “house”.
And the carriers maintain control over the entire process, particularly when it comes to direct buyers who are satisfied with getting a better price, thinking that eliminating any layers between them has given them the best price. Simply not true. In freight, there is a vast difference between better pricing and best pricing.
When a Discount isn’t Really a Discount.
Offering a 50% discount in some industries is fantastic! But not in shipping. Not 60% or even 65% is even close to fantastic. Again, carriers rely on a retail mindset hoping the buyer will accept a 60 or 65% discount equating it to buying a car at 65% off. Who wouldn’t take that deal?!
“…a 60-65% discount off MSRP still gives the carrier
a considerably greater profit on that load
than what another manufacturer negotiated
through a good intermediary.”
Yes, it’s psychology, but it works. And most buyers book the load thinking the “control” they gained by buying direct has given then a rock-bottom price. The salesperson wipes the sweat off their forehead and tells the manufacturer what tough negotiators they are. Then on the way out, calls the boss to proclaim victory once again. Why? Because a 60-65% discount off MSRP still gives the carrier a considerably greater profit on that load than what another manufacturer negotiated through a skilled intermediary.
What if the biggest freight buyer is regularly getting a 75% discount? 80%? What if your company could tap into the same pricing level of your much larger competitor? Would using an intermediary make sense at that point? Truth is, often the “eliminate the middleman” mindset actually costs buyers more money than it should.
Buying Better Beats Buying Direct.
The real truth is that a true shipping partner (we don’t like being called a “middleman”, even though that’s what we are in practice) has industry knowledge that most just don’t possess. A great shipping partner should be bringing discounts and services to the table that are out of reach of most direct buyers. The ideal shipping partner is one who knows the tips and tricks of the industry, who has actual industry experience beyond just booking freight, and who has access to industry connections that make a real difference for the bottom line.
In short, the best shipping partner is one who gives you the services that only the biggest manufacturers can access without wasting your time on sales calls.
That partner is Customodal.