Higher Shipping Volumes Should Mean Better Pricing Tiers

In 2020, companies with large shipping volumes may have experienced a drop due to the pandemic. To offer relief to their hardest-hit customers affected by loss of business, FedEx and UPS took action. They offered to freeze customer discounts if their rolling average volume dropped at least a portfolio tier. When the freeze went into effect last April, the assigned rates were based on a 52-week rolling average of volume.

The Carriers offer incentive levels to their customers to encourage larger shipping spend. Tiered or incentive pricing is one type of discount that Carriers offer on their contracts. Unlike guaranteed discount rates that are applied to each shipment automatically, volume-based discounts are calculated based on transportation charges and/or a combination of surcharges.

Post-Freeze Consumer Spending

Now that FedEx and UPS have ended their freezes, some customers have been seeing shipping rates significantly increase. But there’s still hope as we see a break in the clouds.

Experts say the economy is on its way to a major boom that could last through 2022. U.S. households with higher incomes have accumulated significant savings this past year—about $2.8 trillion more in Q1 2021.¹ As a result, we’re seeing the economy enter a period of supercharged growth that’s stronger than predicted, which could remain stronger through 2023 than was even expected pre-pandemic.

Consumers are changing some of their spending habits which resulted in the personal consumption expenditures price (PCE) index to rise 0.5% in June. In the past decade, there have been few calendar quarters where gross domestic product grew at even 3%.²

This growth is in contrast to 2020 when the economy abruptly shut down, employment was down, and the pandemic dictated shopping habits. These are all good signs for the growth of online retail sales, which in turn mean greater shipping volumes.

In prior decades, FedEx and UPS offered discounts that were primarily based on weight, zone, or service. When they realized the disadvantages of this model, they established revenue-based incentives. These earned discounts are now favored by the Carriers because it encourages shippers to award a Carrier a major part of their parcel portfolio.

Incentives offered on Carrier contracts can be complicated, so it’s important for shippers to understand available savings and potential opportunities. The best way to optimize revenue-based incentives is to constantly monitor gross spending and always carefully examine invoices to ensure that discounts are being properly applied. In addition to forecasting and continuous monitoring, your communication with Carrier representatives to negotiate rates will increase your bottom line.

LJM Group eliminates any Carrier contract confusion. Because we were once on that side of the table, our consultants recognize exactly what to look for on contracts and invoices.  LJM’s pricing experts provide you with the negotiation know-how you need to secure the best contract for your business needs.

1. Deloitte Insights, United States Economic Forecast 2nd Quarter 2021
2. Personal Income and Outlays, June 2021 and Annual Update