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Shipping 101: What do UPS and FedEx take into consideration when offering you Pricing?

by LJM Group
When meeting with Shippers, we are often asked why Carriers offer such a vast variance in pricing options… typical response – “because they can”. As we explore this question further, there is validity to why Shippers qualify for diverse pricing. We’ll examine some of the key factors that contribute to Carrier (UPS, FedEx, DHL Express, USPS, and Regional Carriers) costs, which ultimately impact the pricing that can be offered.
Volume is the core driver that carriers typically consider. It’s the foundation that a pricing program is usually built on. Since a mix of fixed and variable costs apply, the greater the volume (assuming similar shipping attributes, such as consistent commodities, packaging / sizes, without adding pickup locations), the greater the opportunity for additional incentives, since the cost per shipment is reduced.
Service Mix; the % of spend by Ground, Domestic Air (1, 2, 3 day), International, etc. is an important factor. Although the cost related to moving shipments by air rather than ground (truck or rail) is significantly higher, so is the revenue that’s associated with it (note that many air shipments never get more than 6 feet off the ground). The base tariff for a Next Day Air (based on UPS Daily Rates) shipment with UPS is typically 5-7 times higher than a Ground shipment. With common pricing practices being applied (discounts), the cost typically remains at 2-3 times higher.
Without the protection of the 3 cubic foot rule since the beginning of 2015, the “dimensional weight” for shipments often leads to much higher billable weights. Evaluating packaging and dunnage is an important step towards evaluating how it ultimately affects the carrier and how they are pricing your shipments.  If box sizes can be reduced, so will your costs.
Average weight is not a good indicator, since a 6 oz. letter and a 40 lb. box averages 20 lbs.  The same goes for zone distribution. Although a Zone 2 and a Zone 8 shipment equates to an average Zone 5, this is not an accurate indicator of costs. Example: Zone 8 shipments have a base tariff that is 200% more than Zone 2 shipments at heavier weights, but less than 25% more at lighter weights. It is evident that the carrier costs don’t necessarily align with their pricing.
Line-haul costs are certainly important, as are operational costs that include pickup, sort, delivery, and more. Understanding this as you evaluate your shipment profile is critical in order to have meaningful pricing discussions with your Carrier(s). Considering that the pickup requires travel to and from, as well as a stop to pick up shipments, as the number of locations grows, the cost associated with pickup costs also increases. For remote origin points, the pickup costs can be substantial. If there is growth, some or all of this can be offset. Since UPS operates a single network while FedEx operates multiple networks based on mode (in addition to independent contractors), each Carrier incurs different costs as well.
In some cases, the commodity is the single most important factor to consider. The value or nature of a product may require something as extreme as security guards to accompany the UPS or FedEx truck directly from a pickup location to the station. In other cases, the commodity may be vulnerable to damages, which drives claims ratios. Then there are the more common implications of dimensional weight versus the actual weight of the commodity that’s being shipped (popcorn or lamp shades versus books and bowling balls). In all cases, the commodity or commodities must be considered.
Residential % and Remote deliveries are important factors, as well. Many shippers believe that these have a negative impact on the profile. With a standard residential surcharge exceeding $3.00 and Delivery Area Surcharges (DAS) approaching as much as $4.00, this isn’t accurate. At the standard price-points, the cost is more than offset by the additional revenue that’s generated.
Technology Credits, Supplies paid by Carrier, Cobranded Packaging, etc. will increase Carrier costs, but will often create an environment where future negotiations becomes challenging. The more integrated one becomes with the Carrier, the less flexibility there is going forth. Be careful about saving a little today and leaving yourself vulnerable to the general rate increase or changes in your shipment profile.
The following are some additional factors that impact carrier costs. Packages that require special packaging, additional handling, oversize, declared value, special pickups (Sat / banded / etc.), hazmat, seasonality, signatures upon delivery, and more. The Carriers typically error on the side of caution and apply accessorial charges that more than offset these additional costs. The key is to recognize how carrier costs align with the fees that are being charged and then negotiate accordingly.
Understanding one’s shipment profile and how these factors impact costs are key components to managing pricing with the carriers.  It’s recommended to make any internal changes and adjustments, and then work with the carriers to build a case for optimizing one’s agreement. With the changes that have occurred just in the past 15 months, including a 10-15% rate increase  (Jan 2015 and Jan 2016), a 0.75% increase to the fuel surcharge table, a 2.5% increase to 3rd Party billed shipments (UPS only), and implementing dimensional weight on all Ground shipments, now’s the time to evaluate how much your costs have increased.  Contact LJM Consultants for any help that you may need.  We welcome the opportunity to assist.
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