Every year, FedEx and UPS announce “general rate increases” or rises in base rates, which both companies have held steady at 4.9 percent for several years.
But general rate increases usually don’t tell the whole story.
The major parcel shipping carriers continue to introduce new surcharges and accessorial fees, each often following the other’s lead. Last year, FedEx and UPS debuted holiday rates which appear to be here to stay.
Back in 2016, UPS imposed a small fee on third-party billing. FedEx held out for two years, then added a 2.5 percent third-party billing fee in its 2018 rates.
As you work to understand how rate increases will impact your shipping spend, it’s critical that you don’t merely add 4.9 percent to your budget.
How Much do Surcharges Influence Total Shipping Spend?
These surcharges may or may not rise every year, but when they do, they can increase much faster than the general rate increase. For instance, UPS hiked its additional handling surcharge by 75 percent in 2018.
Plus, surcharge changes affect every company differently. A change in the definition of an oversized package won’t affect a bookseller, but it may take a huge bite out of a manufacturer’s budget.
Overall, we’ve found that about 35 percent of a company’s overall shipping spend is dedicated to surcharges.
Knowing your company’s shipping profile is key to understanding how rate and accessorial fee changes will affect your shipping spend and how you might change your practices, or your contract in response.
Do Surcharges Increase Predictably Every Year?
Not at all. There are three different ways in which carriers can use accessorial fees and surcharges to increase spending on shipping.
First, companies can straightforwardly increase surcharges. This may involve driving up the cost of address corrections or oversized packages. In 2018, UPS increased its address correction surcharge by 18 percent and FedEx raised its by 9 percent.
Second, carriers expand surcharges and accessorial fees by changing their definitions.
In its 2018 rates, FedEx reduced the dimensions of packages that require additional handling surcharges by 20 percent — from 60 inches on the longest side to 48 inches on the longest side. That means, if your company ships a product that is between 4 and 5 feet long, you’ll now have to pay additional handling surcharges on each of those parcels.
FedEx and UPS both introduced dimensional weight about five years ago. With this model, packages are priced according to both size and weight so large, lightweight packages cost as much as small, heavy ones. To calculate dimensional weight, carriers use a predetermined dimensional divisor, a number by which a package’s dimensions are divided to produce their “dimensional weight.” Generally, a drop in the dimensional divisor results in higher prices.
Dimensional weight is a great example of the third challenge of surcharge increases: FedEx and UPS don’t move in lockstep though they do tend to imitate each other.
Both companies have been dropping their dimensional weight divisors for about five years.
Typically, one drops to a new number and the next year, the other company matches them there.
In 2018, the last two holdouts — FedEx SmartPost and UPS packages smaller than one cubic foot — reduced their dimensional divisors to 139. This figure is now the industry-wide standard.
Once Rate Increases are Adjusted, are They Locked in for the Year?
It’s cynical, but it’s usually safe to assume that carriers will always adjust rates to their advantage. Carriers can adjust rates at any time throughout the year.
Sometimes carriers announce midyear raises in advance. UPS announced an increase in its large package surcharge from $70 to $80 last fall, but added that the fee would rise to $90 for packages heavier than 70 pounds in July 2018. But sometimes they do not.
The first step in responding to sudden changes in parcel delivery pricing is knowing your data which means collecting information, ideally in real time, about what you’re shipping, how much each parcel weighs, what the dimensions of those packages are, how far each one travels and how much of each item you ship. Then, you can plug in surcharge changes to see how much of an impact they’ll make.
If a particular surcharge has an outsize impact on your shipping spend, target it in your next contract renegotiation — especially if your carrier’s competitor doesn’t apply the same fee.