What Determines Your Carrier Rate? Separating the Art from the Science

According to a 2017 survey from Parcel magazine, most company leaders are unhappy with their parcel contracts. Accessorial charges were by far the biggest frustration for nearly 36% of the executives who participated, followed by overall pricing and poor customer service response. Over 66% of the shippers who switched carriers that year were also motivated by pricing.

As with all negotiations, the process that determines the pricing you receive in your carrier contracts is part art, and part science. As a shipper, you may be able to impact both in a way that will improve your rates—if you work to understand the factors at play.

Taking some time to understand your agreement, as well as the common pricing and discounting factors, will put you head-and-shoulders above most parcel shippers.

 

Science = Cost

The “science” boils down to one thing: the carrier’s costs. This is full of complexities on its own; carrier cost calculations are incredibly precise and data-driven, based on package characteristics, distribution pattern, geography and more.

Start by getting a sense for favorable and unfavorable patterns that currently characterize your shipping profile—this will take you a long way toward understanding how attractive a customer you are to the carriers, and what you may be able to change. Are your buyers sending primarily to residential addresses? Do you do much international shipping? Do your customers demand tracking and insurance? Does your shipping profile change during the holiday season?

All of these factors are associated with specific fees that can potentially be negotiated. For a rundown of specific carrier costs, get a primer in our article Carrier Costs 101: The Factors That Raise Your Shipping Rate.

 

Art = Perception & Market

Now, the “art” of carrier pricing is largely a reaction to the vagaries of the parcel market and to customer perceptions.

What Are the Other Carriers Offering?

The top carriers are always closely attuned to what their competition is offering, and many new surcharges, fees and other policies are simply developed in reaction to one another.

How Can They Make You Perceive That a Deal is Good?

The carriers want you to perceive their offering as beneficial, and often succeed at doing so. Review your contract or proposal line by line. If you don’t understand the terminology of a particular point, ask your carrier rep or a qualified parcel-shipping consultant to help you decipher it.

Beware of incentives that are offered “unless otherwise noted”—that’s a red flag, signaling that it’s YOUR responsibility to pore over the contract to see if they are indeed noted.

Are They Genuinely at Risk of Losing Your Business?

Pricing managers have long memories.

Let’s say you’re a UPS customer. If you repeatedly try to play the top carriers off each other by getting a bid from FedEx every year, but never switch, FedEx pricing managers will soon know that your business isn’t truly “at risk,” and will simply stop playing the game.

It can be helpful to mention that another carrier wants your business, but focus on highlighting concrete examples that make your business attractive to them. As we saw in the breakdown in Carrier Costs 101, they favor things like dense deliveries, air shipments, profitable destination/origin points, and voluminous pickups/deliveries.

Non-Cost Considerations

Sometimes the carriers are motivated by considerations that have more to do with prestige than cost. They may focus on owning a specific vertical or industry—in the 1980s and ‘90s, for example, FedEx went after the movie industry, offering aggressive rates to that market.

When this happens, do the other carriers follow suit? Are they willing to concede turf in exchange for something else, or will they work to defend it when another carrier encroaches? Keeping your ear to the ground can help you spot unusual opportunities specific to your industry.

 

Ready to dive deep to get a better understanding of carrier cost drivers?

Check out our free webinar,

How to Think Like a Carrier