Executive Briefings

How the New UPS and FedEx Pricing Formula Is Affecting Shippers

We've had a few weeks to assess the impact on shippers of FedEx and UPS's adoption of dimensional weight pricing for all ground packages. What's the picture look like now?

How the New UPS and FedEx Pricing Formula Is Affecting Shippers

The two parcel-handling giants implemented dimensional weight pricing at the beginning of this year, for ground packages under three cubic feet in size. (Larger boxes, as well as air shipments, were already being priced on that basis.)

The formula takes into account a package's size as well as its weight. It allows carriers to charge for the actual space that a shipment takes up on the truck. And it generally means higher rates for shippers – between 30 and 50 percent, according to estimates made at the time the changes were announced. Large, lightweight goods will experience the greatest impact.

Well, maybe. Joe Bartone, president of Shift Freight, LLC, a provider of less-than-truckload (LTL) services, says the proper classification of parcel freight should be “a non-event” to shippers. Which isn’t to say they won’t pay more to move their packages than before – it’s just a question of fairness, he says.

Carriers should be compensated for the use of space in their trailers, Bartone says. As for shippers, “I don’t think they should be concerned if they’re truly being honest with measurements and classifications.” On the contrary, the presence of a clear formula that applies to all packages “might take away a major headache in the form of re-pricing.”

All it really requires is a tape measure to understand what you’re going to pay for freight. Shift puts all of its packages through a dimensioner, which outputs the correct rate instantly. The formula is a simple one, even if shippers that weren’t subject to it before might have a difficult time adjusting.

There are some easy ways to minimize the impact of the pricing change. One is to take a fresh approach to packaging, exploring ways to reduce the size of a carton, which often is too big for the contents anyway. How many e-commerce shipments arrive at the buyer’s door padded by Styrofoam or air pillows that take up more than half the box? Is that much cushioning really needed to product an item in shipment?

The U.S. Postal Service, which isn’t adopting dimensional pricing for packages up to one cubic foot in size, is another alternative. In fact, USPS views the FedEx and UPS pricing change as an opportunity to grab a larger share of the small-parcel market. Last year, at the same time it raised rates for retail customers tendering packages of five pounds or less in zones 1 through 8, it offered discounts for customers using electronic postage services – the Commercial Base and Commercial Plus categories. Users of Commercial Base pricing reportedly are seeing average savings of 25 percent over FedEx Ground and UPS, for packages of five to 10 pounds in zones 1 through 5. Higher-volume shippers that are eligible for Commercial Plus stand to save even more, up to 42 percent.

The USPS discounts, announced in advance of last year’s peak holiday shipping season, are part of an effort by the agency to replace revenues lost from a sharp drop in First-Class mail. It posted a net loss of $5.5bn in 2014, even though revenue from shipping and package services was up 9.1 percent. The package business, along with pricing changes, were the primary reasons behind two straight years of revenue growth, USPS said.

Shippers don’t necessarily agree with Bartone’s take on the necessity and painlessness of dimensional weight pricing. For starters, many were late in learning about the change. A survey taken last year by Endicia found that 28 percent of business owners hadn’t even heard of the rating method. And of those who did understand it, 74 percent considered it “expensive and unfair.”

Fair or not, 70 percent of the companies polled by Endicia said their businesses would be affected by the change. Most intended to take action that would lessen its impact. Fifty-nine percent said they would in some cases use alternative services, such as USPS. (There are also a number of regional parcel carriers, including OnTrac, Lone Star Overnight, Eastern Connection, Lasership and Pitt Ohio Express, that haven’t switched to dimensional weight pricing for all packages.) Twenty percent were planning on passing the extra charge on to their customers, and 10 percent were exploring new or smaller types of packaging.

Businesses shipping over half their packages with FedEx and UPS were even more adamant about making a change, according to Endicia. In that category, 75 percent of customers using FedEx, and 70 percent using UPS, said they would switch to USPS for larger, lightweight shipments. (It should be noted that Endicia offers electronic postage services for mail and packages handled by USPS.)

Judging from the reactions of some shippers to the new pricing formulas, USPS still has work to do, in convincing FedEx and UPS stalwarts that it can offer the same level of reliability in tandem with lower rates. But any increase in prices by the two biggest players in the market is bound to cause companies to rethink their carrier strategies. The only unacceptable option is to remain ignorant of the changes – a stance that becomes increasingly untenable, as shippers begin reviewing their invoices for 2015.

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The two parcel-handling giants implemented dimensional weight pricing at the beginning of this year, for ground packages under three cubic feet in size. (Larger boxes, as well as air shipments, were already being priced on that basis.)

The formula takes into account a package's size as well as its weight. It allows carriers to charge for the actual space that a shipment takes up on the truck. And it generally means higher rates for shippers – between 30 and 50 percent, according to estimates made at the time the changes were announced. Large, lightweight goods will experience the greatest impact.

Well, maybe. Joe Bartone, president of Shift Freight, LLC, a provider of less-than-truckload (LTL) services, says the proper classification of parcel freight should be “a non-event” to shippers. Which isn’t to say they won’t pay more to move their packages than before – it’s just a question of fairness, he says.

Carriers should be compensated for the use of space in their trailers, Bartone says. As for shippers, “I don’t think they should be concerned if they’re truly being honest with measurements and classifications.” On the contrary, the presence of a clear formula that applies to all packages “might take away a major headache in the form of re-pricing.”

All it really requires is a tape measure to understand what you’re going to pay for freight. Shift puts all of its packages through a dimensioner, which outputs the correct rate instantly. The formula is a simple one, even if shippers that weren’t subject to it before might have a difficult time adjusting.

There are some easy ways to minimize the impact of the pricing change. One is to take a fresh approach to packaging, exploring ways to reduce the size of a carton, which often is too big for the contents anyway. How many e-commerce shipments arrive at the buyer’s door padded by Styrofoam or air pillows that take up more than half the box? Is that much cushioning really needed to product an item in shipment?

The U.S. Postal Service, which isn’t adopting dimensional pricing for packages up to one cubic foot in size, is another alternative. In fact, USPS views the FedEx and UPS pricing change as an opportunity to grab a larger share of the small-parcel market. Last year, at the same time it raised rates for retail customers tendering packages of five pounds or less in zones 1 through 8, it offered discounts for customers using electronic postage services – the Commercial Base and Commercial Plus categories. Users of Commercial Base pricing reportedly are seeing average savings of 25 percent over FedEx Ground and UPS, for packages of five to 10 pounds in zones 1 through 5. Higher-volume shippers that are eligible for Commercial Plus stand to save even more, up to 42 percent.

The USPS discounts, announced in advance of last year’s peak holiday shipping season, are part of an effort by the agency to replace revenues lost from a sharp drop in First-Class mail. It posted a net loss of $5.5bn in 2014, even though revenue from shipping and package services was up 9.1 percent. The package business, along with pricing changes, were the primary reasons behind two straight years of revenue growth, USPS said.

Shippers don’t necessarily agree with Bartone’s take on the necessity and painlessness of dimensional weight pricing. For starters, many were late in learning about the change. A survey taken last year by Endicia found that 28 percent of business owners hadn’t even heard of the rating method. And of those who did understand it, 74 percent considered it “expensive and unfair.”

Fair or not, 70 percent of the companies polled by Endicia said their businesses would be affected by the change. Most intended to take action that would lessen its impact. Fifty-nine percent said they would in some cases use alternative services, such as USPS. (There are also a number of regional parcel carriers, including OnTrac, Lone Star Overnight, Eastern Connection, Lasership and Pitt Ohio Express, that haven’t switched to dimensional weight pricing for all packages.) Twenty percent were planning on passing the extra charge on to their customers, and 10 percent were exploring new or smaller types of packaging.

Businesses shipping over half their packages with FedEx and UPS were even more adamant about making a change, according to Endicia. In that category, 75 percent of customers using FedEx, and 70 percent using UPS, said they would switch to USPS for larger, lightweight shipments. (It should be noted that Endicia offers electronic postage services for mail and packages handled by USPS.)

Judging from the reactions of some shippers to the new pricing formulas, USPS still has work to do, in convincing FedEx and UPS stalwarts that it can offer the same level of reliability in tandem with lower rates. But any increase in prices by the two biggest players in the market is bound to cause companies to rethink their carrier strategies. The only unacceptable option is to remain ignorant of the changes – a stance that becomes increasingly untenable, as shippers begin reviewing their invoices for 2015.

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How the New UPS and FedEx Pricing Formula Is Affecting Shippers