Here’s Why a Freight Company Should Open a Logistics Platform for All

Over the past few years, logistics platforms have been cropping up. There’s Convoy, Coyote, Next Trucking, and now Uber Freight.

Yet, none have quite exploded into full-blown market dominance and disruption. The problem for logistic platforms is that they, like the industry more broadly, are supply-side constrained. There’s a long and persistent shortage of truckers and carriers. In addition to that, the industry’s supply is deeply fragmented. As we’ve written about before in our article “Digital Transformation for the Trucking Industry with Platforms”,

“A 2012 report from the American Trucking Association (ATA) reveals the incredibly deep level of fragmentation amongst trucking companies:

  • Less than 6 trucks: 90.2%
  • Between 7-20 trucks: 6.9%
  • More than 20 trucks: 2.8%”

Platforms like Uber Freight will find it difficult to grow supply in a logistics marketplace, because drivers need to attain certain licenses and meet regulatory requirements to professionally ship heavy cargo. In addition, trucks are much more expensive to buy, fuel, and maintain than commercial cars. Exacerbating the problem, long-haul driving is a draining career that fewer drivers opt into. In short, it’s easier for Uber to find drivers for its ride-sharing app – lower barriers to entry, cheaper, and less demanding. But there’s so far been no UberX equivalent for truckers.

Without a reliable way to bring in new sources of supply, the way UberX did in the taxi market, or, similarly, the way Airbnb did in the hospitality market, it will be difficult for any logistics marketplace to achieve dominant market share.

Nonetheless, a well-run logistics platform can increase access to supply by eliminating current bottlenecks and bringing together three types of users: brokers, shippers, and carriers.

3-sided marketplace in logistics

The logistics industry has many brokers or third-party logistics (3PL) operators. By many estimates, there are more than 17,000 different brokers or 3PL’s in the United States. Just like the carriers, this market is also very fragmented. With large 3PL’s and brokers only accounting for a minimal amount of the brokerage market. Many of the 17,000 brokers are smaller firms spread out across the country.

However, each broker’s network is siloed from the rest of the market. And, smaller brokers don’t have the ability to invest large sums of money into technology. Large logistics companies like XPO Logistics, DB Schenker, JB Hunt and others have announced hundreds of millions of dollars to invest in technology and launch marketplaces of their own.

These companies already have 3PL and/or brokerage businesses and one could argue that they have a platform business connecting truckers with shippers. However, for the reasons mentioned above, despite these massive investments in technology, none of these companies will supercharge their marketplace to capture a winner-take-all dynamic.

So, what’s the missing link? The thousands of small brokers. By opening up the marketplace technology to smaller brokers, a 3-sided marketplace has the ability to capture network effects that can scale. A dominant marketplace for shippers to find a mixture of brokers and/or carriers would prove to be a winning combination.

Brokers would want to join the platform because they can A) find new customers, B) become more efficient in their management of carriers (truckers) and C) the platform can provide more benefits for the brokers’ carriers like payments.

Scaling with network effects and offering new services

Typically the idea of opening up a platform to the entire market – including current competitors – can be a hard pill for traditional enterprises to swallow. However, what traditional enterprises rarely see, at first, is that a well-managed platform will scale quickly due to platform network effects.

Thus, the company will reach more carriers and shippers than it could have ever dreamed of before, and is poised to offer new services that create new revenue streams. For example, truckers often contend with late payments and unpredictable cash flows. Uber Freight has scored points with truckers by delivering payment within a week of a job being completed.  If the core transaction flows through the platform, the platform can set itself up to be the escrow service provider for the broker and the brokers’ truckers.

Notably, that’s just one of many services that can be offered and streamlined through a platform business that serves three user types: brokers, shippers, and carriers.

A logistics platform must be built soon to capitalize on winner take all dynamics

As logistics platforms crop up, incumbents need to move fast to stay ahead of would-be tech disruptors. Platform economics rewards first movers with winner-takes-all dynamics. Google won search, Facebook won social media, Twitter won microblogging, Amazon won eCommerce, and so on. Who will be the dominant 3-sided logistics marketplace?

Filed under: Platform Innovation | Topics: freight platform, industry collaboration, network effects, platform business, platform innovation, platform thinking

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