Are You Ready For a Move to Dynamic Pricing?

by LJM Group

As we’ve learned these past 18 months, parcel pricing is highly volatile and can sometimes even scale up overnight. In fact, shipping rates are increasing faster than they have in a decade given the rise in delivery volumes, the natural growth of eCommerce, and the shift from large-pallet deliveries to small deliveries in order to accommodate employees working from home, due to the pandemic.

Considering pricing structures, delivery prices are based on four criteria – distance of delivery; the size of package; time in which it must be delivered; and market influences. The first three factors reflect the operational cost of transporting a parcel from point A to B. The fourth aspect considers the current supply/demand climate of the market. To recap where the market currently is, we’ve seen the following affect parcel shipping rates:

  • Carrier capacity, covid-19, and the labor market
  • Service issues
  • Billing issues
  • Pricing and fuel surcharge changes
  • Peak season planning and pricing for enterprise accounts
  • Carrier general rate increases (GRI)

Given the current state of the shipping industry, Parcel Carriers are in a prime position to change the rules of the game by moving from static to dynamic pricing. With dynamic pricing, rates are variable instead of fixed and change based on current demand and available capacity on any given route at any given time. This strategy lets the Carriers capitalize on updating their prices multiple times per day instead of a set price for a season. FedEx and UPS have already taken steps towards the road of dynamic pricing with recent initiatives.

In 2020, FedEx introduced a new organization, FedEx Dataworks within FedEx Services, focused on harnessing the power of the rich FedEx data ecosystem to transform the digital and physical customer experience. FedEx Dataworks will create solutions that build the network for what’s next by collaborating across the enterprise to integrate the technology and services customers expect and deserve. This includes capturing information at every stage of delivery a package passes through, from creating a label and scanning it through to its last-mile delivery. Algorithms are developed from this data and build the best possible routes.

UPS’s approach to implementing a dynamic pricing strategy is based on enhancing its On-Road Integrated Optimization and Navigation (ORION) platform with Dynamic Optimization. ORION with Dynamic Optimization updates routes throughout the day, based on traffic, delivery and pickup commitments.  The ability to optimize routes in real-time leaves an open door for easily adjusting pricing, also in real-time, based on these routes. During a recent UPS investor and analyst virtual conference, UPS executives discussed the company’s Next Generation Profit initiative. This cross-functional program allows UPS to “optimize pricing for each customer and better align our cost to serve with the value we create.” During the discussion, UPS CFO Brian Newman said, “We are continuing to evolve the platform to leverage technology that will adjust pricing in a more dynamic manner to maximize overall profit in real-time.”

While this responsive pricing method may do away with surcharges, a change of this nature would require monumentally re-educating shippers, emphasizing forecasting capacity needs to be even more critical. If, and more likely when, dynamic pricing becomes standard practice, the best approach to counterbalance unpredictable rate changes is through parcel contract negotiations. LJM Pricing Experts always have a finger on the pulse of the parcel shipping industry and are ready to prepare you for securing the optimal Carrier contract.

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