Competing in the Online Retail World – Then and Now (Part 1)

By April 15, 2016 News
onlineshopping

The number one reason online shoppers abandon their cart at checkout is due to the spike in price when shipping fees are included. National parcel carriers continue to implement monumental rate hikes year over year, which have a significant impact on the small/medium- sized businesses trying to compete in the .com world. Additionally, mega online retailers are somewhat insulated from these rate hikes as their volume allows them leverage to negotiate caps on these annual rate increases. Consequently, barriers to entry and barriers to fair competition have been heightened and fortified over the years.

To better understand how parcel rates have increased over the previous five years, let’s consider the following example:

Small/medium-sized retailer with an average 30% Ground Discount and an average 60% Express Discount.

Package shipped is a 10”x10”x10” box that weighs three pounds.

Delivery destination is a rural home address, 800 miles away from pickup location (zone 5, which is 601-1000 miles from pickup location).

This package shipped via the Ground network with FedEx/UPS in 2011 would have cost $10.67 (incurred a Delivery Area Surcharge and a Residential Delivery fee) and billed at the actual weight of three pounds. The same shipment this year would cost $15.14. The 2016 package has the same surcharges (each of which significantly increased from 2011); however, now this package is also impacted by dimensional billing policies that increase the billed weight from three pounds to seven pounds, thus driving costs higher as heavier packages are more expensive to ship.

The same package shipped via Express (Next Day Air Saver with UPS or Standard Overnight with FedEx) in 2011 would cost $29.93, which includes DAS (Delivery Area Surcharge) and Residential Delivery fees as well as the dimensional upcharge from three pounds to seven pounds due to the carriers’ dimensional billing policies. In 2016, this same package would cost $40.64, which also includes the same surcharges (at the inflated rate due to annual increases) and the dimensional billing upcharge.

This ground shipment went from a billed rate of $10.67 to $15.14, which represents a 42% increase over five years! The same shipment sent via Express went from a billed rate of $29.93 to $40.64, a 36% increase over five years!

Additionally there’s a stark contrast in today’s marketplace when comparing approximate parcel discounts offered to an e-commerce startup, a small/medium-sized business, and a mega retailer. An e-commerce startup would have paltry discounts, no concessions on accessorial fees, no relief on minimum charges, no relief on dimensional billing policies. A small/medium-sized retailer could expect improved discounts on service rates, possibly some accessorial discounts, and maybe relief on minimum charges, but likely no relief on the dimensional billing policies. A mega retailer could expect deep discounts on service rates, many accessorial discounts or full waivers, and possibly no minimum charge, along with concessions on dimensional billing policies. Assuming the same package characteristics as our example above for this year, net pricing fluctuations per each business category could look like this:

Ground Shipment Costs

  • E-commerce startup – $18.22
  • Small/medium-sized retailer – $15.14
  • Mega retailer – $5.80

Express Shipment Costs

  • E-commerce startup – $73.62
  • Small/medium-sized retailer – $29.93
  • Mega retailer – $14.28

Note #1: Many contractual pricing components impact pricing far beyond service discounts. Some of these often overlooked items are: General Rate Increases (caps on the GRI), Fuel Surcharge (discounts on fuel), Dimensional Billing Policies (Improved DIM Factor and dimensional threshold), Minimum Charge (reduction per each service), Rebates, Early Termination Penalty, Minimum Commitment Penalty, unfavorable thresholds on volume based (Earned Discount Tiers for FedEx and Portfolio Tiers for UPS), Payment Terms, and more. And some of the common accessorial surcharges: Residential Surcharge discount, Delivery Area   Surcharge discounts (Residential, Commercial, Resi & Comm Extended different for Ground and Express), Additional Handling Fee discount, Address Correction discount, Signature Required discount, Pick Up Fee discount, Advancement Fee discount, and many more.

Note #2: The discounts communicated above should not be considered a “benchmark” as they do not communicate nuances of an organization’s particular shipping profile. This is important because specific distribution and package characteristics vary from one shipper to the next. These characteristics are as unique to an organization as one’s own fingerprint. No two are alike. However, these specific shipping characteristics or shipping profile will affect the parcel carrier’s profitability and, in turn, impact pricing proposed by the carrier. Some of these critical components are service usage mix, weight distribution, zonality, pick up & delivery density, package dimensions, and more.

Shipware

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