Carrier Costs 101: The Factors That Raise Your Shipping Rate

Why do shippers find themselves paying more year after year?

Why do the carriers’ policies seem ever more labyrinthine with each passing month?

And why do your peers and competitors seem to be paying vastly different rates from you, even when they’re practically the same company within the same industry?

While not every company’s agreement is equal, what ultimately matters isn’t the pricing you think you deserve, but how much the carriers can profit off your business.  While volume is the core driver in the array of factors your reps and their pricing departments take into consideration, other variables the carriers plug into their cost models will ultimately determine the ceiling of what pricing you’ll be able to get.

Let’s examine some of them:

Service Mix

What kind of transit times do your customers or vendors expect?  Do you need to pay more for premium services such as guaranteed one, two, or three-day delivery, or can you send the majority of your packages via standard Ground or even either UPS or FedEx’s last-mile post office hybrid offerings?  Do you have international customers or suppliers that require you to pay an even higher premium to fulfill your operational requirements?  While shipping parcel via Air whether domestically or internationally does indeed incur more costs for the carriers, have no doubt that they will find a way to charge you back and then some to ensure they are not losing money.

As you can see from the tables below, a Next Day Shipment compared to Ground incurs you a premium of almost 800% based on the weights and zones selected below; other shipments with the same zone and weight might see a premium of almost tenfold between Next Day Air and Ground.

Below you can review the additional premium for a UPS Worldwide Saver shipment to a Western European country such as the UK or Germany compared to an UPS Next Day Air Zone 8 shipment.

As you can tell, when it comes to service mix the more your company prioritizes transit time, the more the carriers will covet your business.  And while the discrepancies in undiscounted rates between transit times presented above may seem startling, it is because the carriers charge such a higher premium that they are often willing to offer deeper discounts on such services, so knowing where to ask and how to ask for it is key to paying proportionately for faster service.

Dimensional Weight

When transporting shipments, the carriers usually run out of space before their freight exceeds weight requirements.  As a result, denser shipments were much more profitable for the carriers, and both FedEx and UPS began cracking down aggressively on their less profitable cargo, adjusting their policies until that was no longer the case.  Before, carriers charged customers by dimensional weight only for shipments that exceeded 3 cubic feet (5184 cubic inches); any shipments greater than that, the carriers took the shipments’ cubic volume (Length x Width x Height) and applied a default divisor (denominator), billing you the higher of this dimensional weight, or your shipments actual weight.  Then, over the years, both UPS and FedEx followed suit in removing the three-foot threshold so that all shipments are subject to dimensional weight.  At the same time, they steadily reduced their default divisor from 194, to 166, to 139.  They have ultimately protected their margins by eliminating low-margin or unprofitable shipments.

Weight and Zone Distribution

When it comes to reviewing your shipping profile, you can’t just rely on averages; after all, a 2-ounce letter and a 40-pound box would result in an average shipment weight of 20 lbs.  Similarly, you cannot look at your average zones and prorate an average cost from it; as you can see from the below table, the increase in spend going from Zone 2 or Zone 8 for, in this example, UPS Ground, is not proportional with Zone 8 over 200% more at heavier weights.  You can conclude, then, that the carrier costs themselves do not always align with what they are charging you.

The line-haul costs we reviewed above are certainly important, but so are administrative costs as well as operational costs that include pickup, sorting, delivery, and other special requirements or activities.  Understanding this as you evaluate your shipment profile is critical in order to have meaningful pricing discussions with your carrier(s).

Shipping Origin Point(s)

Picking up your shipments costs the carriers money.  The more regular pickup locations your carriers are travelling to on your behalf, the more money it is costing them, especially if your pickup sites are in more remote locations where the carriers cannot synergize with other nearby pickup locations.  Some of this cost can be offset if you are providing UPS or FedEx substantial growth in volume, though you should be aware that each carrier incurs costs in different manners.  UPS utilizes a single network, FedEx multiple, and smaller regional carriers would operate differently from their larger competitors as well.

Destination Points

Where your products end up matter as well.  While the carriers will claim publicly that residential and remote shipments eat away at their margins, especially with the ECommerce boom, that simply is not true for many of their clients.  At $3.60 for Ground and $4.15 for Domestic Air residential charges, and up to $4.45 for Delivery Area Surcharges for UPS to remote locations, the carriers are more than making up for their additional costs in servicing your less profitable deliveries.  Even SurePost and SmartPost shipments, where the USPS delivers the “final mile” of your shipment to the end customer, will still see a Delivery Area Surcharge of up to $1.90 depending on carrier and location.

Commodities

Do you ship out products high in value?  Are your shipments often fragile, vulnerable to damages?  Do you often have to call in claims to the carriers?  Do your shipments require additional security, whether it be guard personnel or requirements that your UPS or FedEx truck drive straight to their station or hub from your pickup location?  Everything that was just described above costs the carriers money, so depending on the product you ship, your company’s commodity type may be the single most important cost factor to the carriers.

Carrier Perks

Often the carriers will offer more than just pure pricing to retain you as their customer.  Technology credits, supplies paid for by the carrier, cobranded packaging, etc. will increase carrier costs, but will often create an environment where future negotiations become more challenging.  The more your company’s operations and technology becomes wholly integrated with one carrier, the harder it is to break away from them, and the carriers know full well your lack of flexibility because that was their intent from the beginning.  While upfront cash can be handy at times, be careful about saving a little today and leaving yourself more exposed to the ever-increasing rate of carrier cost increases in the future, or changes to your own business and shipping profile.

Other Factors

While we’ve covered some of the main factors your carrier reps are looking at before they send you a contract, there are of course other factors as well that will affect their calculations, and you should know whether any of the following items are relevant to you.  Shipments that require special packaging, additional handling, oversize and over maximum shipments, declared value, special pickups (Saturday, branded, etc.), hazmat or dangerous goods, seasonality, signature requirements upon delivery, and others.  The carriers will err on the side of caution and charge you more than enough for these requirements, especially now with their recent actions to actively discourage excessively heavy or bulky shipments.  The key is to recognize how the fees you are paying align with the actual costs the carriers are incurring and negotiate accordingly.