13 Mar Confessions of a Price Hacker
My name is Ryan Keintz, and I built a career, and later a company, around the ability to hack corporate pricing models. Much like a computer hacker would exploit security vulnerabilities, I hacked pricing agreements by identifying and assessing their vulnerabilities, which could then be exploited for increased profits. This hacking is essentially offering an artificially low price during the bid/RFP phase, then charging an inflated price by exploiting loopholes. This ethically shady behavior is actually incentivized by inadequate procurement models. During this confession, I will outline the core areas of corporate RFP vulnerability which can be exploited by price hacking. Although this will be examined in my particular field of international moving services, the procurement insights are applicable to many other industries.
One truth must be first established with regards to price hacking in the moving industry: everyone does it. EVERYONE. Show me a moving company that doesn’t engage in the following practices and I’ll show you a company spiraling the drain of bankruptcy. This is because these practices have become so commonplace that any company which does not engage in these tactics will appear substantially overpriced in the clients’ eyes. Their integrity will exclude them from RFP “best & final” rounds. In international moving RFPs, honest pricing always loses. Winning and losing is instead a matter of who’s better at price hacking. Suppliers are forced to operate in this ethical gray area, which absolves them of this behavior. As Omar from The Wire would say, “All in the game, yo.”
I suppose I was good at price hacking because it suited my analytical personality type. With the strategic guidance of some great mentors, I was able to architect and creatively leverage spreadsheets in sophisticated ways to gain tactical advantages in corporate RFPs. In addition to streamlining the massive admin bid burden of traditional RFPs, I gained the ability to assess a given RFP’s level of vulnerability and translate that into calculations around risk and profit margins. In essence, the more weakly-structured and vulnerable an RFP was, the more risk we could tolerate in the form of bid price deflation, knowing that actual pricing could be inflated later on actual transactions. Even though everyone was forced to play the same game, being able to navigate these variables more analytically, often in live online reverse-auction marketplaces, gave my employers a significant competitive advantage.
Nevertheless, that status quo didn’t sit right with me, even though it served my career well. Frankly, my objections were more in the realm of an annoyance than ethical righteousness. I grew increasingly aware that our industry was devoting tremendous amounts of resources (often my entire job) to a function that had nothing to do with what our core competencies should be. In other words, price hacking became more of a critical success factor than customer service or logistical expertise. Personally, I would much rather compete on a level playing field which rewarded excellence in core competencies rather than excellence in price exploitation. Nonetheless, I recognized that ideal could only be achieved if the vulnerabilities were eliminated – not guarded, not policed, eliminated. Creating a level playing field by eliminating vulnerability exploits became the founding mission of my company and our procurement platform, PricePoint.
That said, our PricePoint solution is not the focus of this article. Rather, in the spirit of “forewarned is forearmed”, the following is an instructive guide on the core vulnerabilities of traditional RFPs which are commonly exploited by price hacking:
The geographic exploit is the most common. Traditional RFP’s are typically structured around spreadsheet-based price matrices, with suppliers having to provide “traffic lane” pricing (e.g. London to Singapore, Sydney to Houston, etc.). In practice, the geographic scope of the RFP typically only covers a minority of actual future transactions. This is because of an overwhelming geographic scope, natural randomness, and that the RFP scope is generally based on past mobility traffic. For example, when a RFP requests pricing from a London origin to 10 different destinations based on past traffic, the bidding suppliers will offer deflated pricing for those lanes, knowing they can inflate pricing and profits when future moves arise from London to any other destination not covered in the RFP.
Supplemental charges (aka “accessorials”) are another key vulnerability. This represents common but non-standard services such as crating, storage-in-transit, long carries, etc. RFPs typically neglect or struggle to account for these ad-hoc services, which are typically 10-20% of final cost, and therefore represents a major price hacking vulnerability. In actual post-RFP transactions, the client typically doesn’t know the reasonable cost for parking permits in Paris, shuttle service in Shanghai, warehouse handling in Warsaw, etc. As these costs pass through multiple admin and profit layers from local Agent, to Forwarder, to RMC, it is not uncommon for profit margins on supplemental services to exceed 100% of the actual true cost.
This is a realm of exploits which can range from ethical shades of gray to outright fraud. Focusing first on the latter extreme, “weight bumping” or “volume inflation” is a tactic of simply overstating the size of the shipment, allowing for higher charges in common weight/volume-based pricing agreements. This includes intentional misrepresentation, which would certainly be categorized as fraud, however I believe this extreme is a relatively infrequent occurrence as most suppliers don’t cross this bright red line.
More common and less unethical is the art of “working the numbers.” For various reasons, there is a lack of global uniformity around how shipment weight and volume is established. Even within the industry, movers squabble and confuse each other over concepts like minimum chargeable density, break-points, and net vs gross basis (such protocol standardization is one of the reasons we created PricePoint). The water is muddied further, and contract loopholes widen, when corporate buyers wade in and struggle to properly establish these terms in their RFPs and agreements. For example, one of my more significant career “accomplishments” on the mover’s side of the table was when I inherited management of a Fortune 100 global account and increased annual profits by seven-figures merely by working the numbers, within ethical bounds (IMO). I merely read the agreement fine print and recognized the client’s procurement department had established a poorly devised chargeable basis which was vague and open to interpretation. We were able to interpret chargeable volumes in a way which was both in accordance with the agreement and favorable to our profit margins.
While I believe the last example was within ethical bounds, I respect that others may disagree, or at least suggest these practices are exploitative of the client. Be that as it may, the point is that such practices are essentially forced upon the supplier by sub-optimal procurement models from the client side. Client procurement departments are often complicit in this ineffective state of affairs if their performance is internally evaluated based on theoretical RFP savings, which does not account for suppliers reclaiming those “savings” through RFP loopholes. It is a practical necessity for suppliers to exploit pricing vulnerabilities as a form of subsidizing the universal RFP loss-leader pricing practice. That paradigm incentivizes an ethical downward spiral in which the companies who win more corporate bids are those who are willing to play the bid-low/invoice-high game more aggressively than others. This downward spiral also eventually puts pricing pressure at odds with service quality, but that’s another topic for another time.
Unfortunately, this article is heavier on warnings than it is with solutions. This is because the ideal solution isn’t based on tactical counter-points to the vulnerabilities above. As Einstein said, “We cannot solve our problems with the same thinking we used when we created them.” On that note, conventional “solutions” such as invoice audits merely create an adversarial cat-and-mouse game, in which ultimately no one wins, but everyone loses time, money, and focus. The solution to price hacking is not to guard vulnerabilities created by the inadequate RFP methodology. The solution is to adopt a better paradigm which eliminates the vulnerabilities altogether, creating an environment in which integrity is not a disadvantage for the suppliers.