How Shipping Affects the Customer Experience – Shipware Quoted Extensively – MCM August 2014

By September 19, 2014 News

Raising the Bar on the Customer Experience — Then Shipping It

BY MIKE O’BRIEN

Delivering a consistently stellar customer experience remains the order of the day in 2014 and continues to fuel changes in how merchants get items from point of sale to the doorstep. This includes rising expectations of free or reduced shipping, ultra-fast delivery and the advent of the seven-day schedule.

A number of current research findings all point to the fact that consumers have been “primed” to expect that things they order online will be sent quickly, cheaply and when and where they want it.

For instance, 81% of respondents to a joint UPS/comScore study in June 2014 said that free shipping options were important when checking out online. Similarly, 81% of respondents to a 2014 Harris Poll said free shipping made them more likely to buy online, and 66% said shipping costs were their No. 1 ecommerce pet peeve.

“The effects of this are tremendous,” said Rob Martinez, president and CEO of shipping and logistics consulting firm Shipware. “As shipping costs go up, merchants are having a harder time offering low-cost or free shipping rates, which consumers are clearly expecting, even with preferred transportation methods. Thus, companies doing ecommerce are challenged, getting their margins squeezed by consumer demands and rising costs.

“I definitely think Amazon has single-handedly set customer expectations higher,” said Robert Escobar, vice president of operations for subscription-based women’s clothing rental service Gwynnie Bee. “That has caused everyone to really go up a few notches, offering expedited shipping and lower shipping fees or even free. They’re looking to build out a network of facilities to create 1–2 day delivery zones to customers, so an order made in the morning is in hand within 24–48 hours.”

Which brings up an interesting question: Is there really overwhelming demand from consumers for same-day or next-day shipping? The UPS/comScore study also found that consumers were more interested in “free” shipping than immediate delivery. Four out of five respondents said free shipping is an important consideration in online purchases, while 83% said they were willing to wait an additional two days or more if they didn’t have to pay the freight. Free is actually a misnomer, because shipping is never actually free—there’s always a cost. Either the retailer bakes the cost into the price or partially or completely subsidizes it to win the sale. But as appearance often becomes reality, consumers see free and latch onto the promise.

“There are major retailers like Amazon and Google and Target trying to get products to me as soon as possible and as cheaply as possible,” said John Haber of Spend Management Experts. “They’re trying to establish a benchmark in terms of where the market is going. But from my standpoint, I see some migration there but haven’t seen a ton of data that consumers are demanding same-day delivery.”

With the same-day/next-day mantra, Haber said he believed Amazon and Google are following the philosophy of “if you build it they will come.”

“That’s how I perceive it,” he said. “Sometimes it works, sometimes it doesn’t. They’re doing a lot of piloting and test marketing, especially Amazon, investing a lot in that model. They have a lot at stake, so at some point it needs to come to fruition for them.”

How Omnichannel Affects Shipping

To meet rising consumer expectations of a quick and seamless fulfillment experience, the use of tactics such as ship to store, ship from store and pick up in store—aka “click and collect”—have become an increasing trend for merchants.

A growing list of retailers and brands are offering these options for consumers, including Ace Hardware, GameStop, JC Penney, Kay Jewelers and REI.

The omnichannel phenomenon has caused merchants to retool and sometimes overhaul their distribution approach in order to meet consumer demands and capture a larger slice of the rapidly growing ecommerce pie. eMarketer projects U.S. ecommerce will grow 11.4% in 2014 to $304 billion, while increasing 20.2% globally to $1.5 trillion.

Ship from store, for instance, allows merchants to leverage store-based inventory and get closer to their customers while saving on shipping, as orders aren’t fulfilled from a distribution center. They also improve customer satisfaction by getting products into their hands faster. The challenge is balancing associates’ time between the back room and the sales floor—or hiring dedicated fulfillment staff if possible—and training workers to handle fulfillment duties.

Ship to store can also present some logistical challenges, particularly in storing excess inventory. This is why many retailers using this tactic have adopted “just-intime” inventory models, where products come in one day and go out the next, instead of pool distribution, i.e., getting regular shipments from a DC.

“You need to factor in how much room you have to store goods and to operate,” said Haber of Spend Management Experts, who advises clients like GNC and cosmetics and fragrance retailer Ulta on omnichannel strategy. “You don’t want any shipments in the sales area. Customers don’t want to see you processing packages; they want to go to the register, pay and leave.”

The Impact of DIM Pricing

Several experts said the coming changes in dimensional weight pricing for ground parcels—known as DIM for short—by both UPS and FedEx were the biggest issue impacting shipping in 2014.

Under the new rules, all UPS and FedEx ground packages will be subject to DIM pricing in 2015, meaning the fee will be based not just on weight but also on volume. Currently, packages measuring less than 3 cubic feet—representing about 85% of ground shipments—are exempt from DIM, and shippers have gotten used to sending small, lightweight items in larger boxes as there was no penalty.

UPS and FedEx made the move to avoid the common problem of “cubing out” — running out of room on their delivery trucks—long before they reach maximum weight load, thus losing a ton of potential revenue.

Generally, the switch to DIM is in response to rising fuel costs and the increasing popularity of online shopping.

As products shipped from online marketplaces like Amazon.com and eBay are often smaller items packed in larger boxes, they can take up a lot of space on delivery trucks but are priced at lower rates.

Doug Starcke, managing partner of First Flight Solutions, a parcel spend management company made up of former UPS and FedEx employees, said the moves by the major carriers will likely lead to double-digit cost hikes for shippers when annual rate increases are factored in.

“In 2007, UPS and FedEx went to dimensional pricing for packages over 3 cubic feet, so this is just a continuation of that trend,” Starcke said. “That one hit companies shipping large items like furniture, and now everyone is getting dinged, including the guy shipping a T-shirt or pair of shoes.”

Shipware estimates that when DIM is fully deployed, it will bring in an additional $380 million per year to UPS and $180 million per year to FedEx, without any additional cost.

Bala Ganesh, retail director for UPS, said the overall additional revenue from the DIM change was “difficult to determine.” “However, the long-term effect of expanding dimensional weight should enable UPS to apply pricing appropriately where our costs are higher, and ultimately, enable competitive pricing for packages with more favorable characteristics,” Ganesh said.

“Unlike others in the shipping industry, the USPS is not implementing any new dimensional weight charges, continuing our commitment to deliver the best value for our customers,” said Nagisa Manabe, USPS chief marketing and sales officer. When asked by Multichannel Merchant, FedEx said no one was available to comment for this report.

Controlling Shipping Costs

As shipping represents such a large portion of fulfillment costs for merchants, it’s important to find ways to save as much as possible in order to maintain and grow margins.

Regarding DIM pricing, Hempstead recommended merchants call their UPS or FedEx representative and seek some kind of relief through negotiation. For instance, he said, merchants can seek a waiver of DIM for the first year, and ask that it be imposed incrementally after that (2-cubic foot packages exempted the second year, 1 cubic foot the third year, then full implementation).

“My guess is FedEx and UPS don’t want shippers to place their business out for competitive bid as a result [of DIM],” Hempstead said. “They’d much prefer granting exemptions to risking loss of business.”

Shipware has created a chart to help merchants understand the impact of DIM changes (at left). Martinez recommended they conduct an analysis of their primary box sizes and actual weights to compare with the DIM rates. He also offered a number of steps merchants can take to deal with the impact of DIM:

• Ask FedEx or UPS for a customized cubic inch threshold and/or DIM factor. Both carriers know they won’t be able to implement DIM with all of their customers right away.

• Consider deferred ground services, such as FedEx SmartPost and UPS SurePost, as they are not affected by DIM pricing.

• Look at alternative carriers, including the U.S. Postal Service and regional carriers.

• Seek help from a shipping/logistics consultant.

Scot Wingo, CEO and founder of ChannelAdvisor said one way merchants can combat higher shipping costs is through growing their omnichannel operations. Instead of viewing physical stores as a liability due to sunk costs, now they are again being seen as an asset. “Amazon might have all those distribution centers, but a retailer might have 200 or more stores,” he said. “A number of retailers have proven consumers are willing to participate in pick up from stores, and we’ve seen a ton of experiments in that regard.”

He said he expected U.S. merchants to explore the “pick-up locker” model from companies like UK retailer Argos, which could include the use of third-party locations. Some domestic grocery chains have already begun using this approach.

In an effort to remain competitive against the major carriers especially given the DIM changes, the USPS in July 2014 filed notice with the Postal Regulatory Commission to change Priority Mail prices, including a reduction in prices on average for businesses and other customers who use commercial plus and commercial base online shipping services.

The price change request included a modest increase for Priority Mail prices at post offices and other postal retail outlets. The proposed changes, which would go into effect in September 2014, are intended to offer more competitive pricing and build on Priority Mail’s popularity with customers.

Working to Avoid Another Holiday Shipping Disaster

Given the major problems of last-minute shipping delays during the truncated 26-day holiday season in 2013, with customers up in arm about packages arriving after Christmas Day, carriers and merchants have been working overtime in an effort to avoid a repeat in 2014.

Ganesh said UPS has had “meaningful discussions” with customers about their holiday shipping plans in order to develop an accurate joint forecast of delivery volume during the critical period. Ganesh said this would help UPS better manage how large accounts impact its network.

Some features of the company’s $175 million investment in handling increased holiday capacity include:

• Technology upgrades to improve communication with customers, providing better information on package location and shipment status

• Facility automation and expansion projects, including several new building and retrofit projects in California and Texas, which will come online later this year, providing additional capacity and flexibility

• UPS will open about 50 new hub sorts in existing buildings to increase capacity

• Running full operations on Black Friday “UPS is focused on staying ahead of the holiday shipment surge that starts during Cyber Week,” Ganesh said.

When asked by Multichannel Merchant, FedEx said no one was available to comment for this report.

Spend Management Experts’ Haber said he’s seen both carriers and shippers making huge efforts to ensure that history doesn’t repeat this holiday season.

“A lot of people blamed the shorter holiday season, but this one is tight too, exactly 28 days,” he said. “People understand the calendar and how negatively it can impact customers. A lot of what happened last year was self-inflicted, with orders not processed in time to get out the door, and shippers not figuring out carriers’ schedules or overcommitting. There’s been a tremendous amount of focus on having better planning this year.”

Escobar of Gwynnie Bee said he’s also seen carriers be much more proactive inworking with shippers to develop accurate forecasts. “They’re saying, let’s go through the numbers together and see how realistic they are, and how to build in contingencies if something spikes,” he said. “In the past they might have said, ‘we have this capacity, we’re good,’ but now they certainly understand how larger customers can overwhelm the system, so it’s in everyone’s best interests to sit down and understand volumes and how to act during the holidays.”

Sunday Delivery Becomes Reality

Years ago, merchants staying open and selling products on Sunday was unthinkable, and so-called “blue laws” prohibited it in many places. Now, with the neverending commerce cycles comes Sunday delivery, being pushed by Amazon in concert with its delivery partner USPS.

Most recently, Amazon opened eight specialized sortation centers to facilitate Sunday delivery, with plans to launch seven more by the end of 2014.

“The sortation centers help us get closer to customers, so that we can have fastest delivery speed as well as deliver on Sundays, which is a big deal for us in the U.S.,” said Tom Szkutak, Amazon’s CFO, on a conference call with analysts to discuss the company’s Q2 results.

Spend Management’s Haber said one interesting aspect of Sunday delivery is that customers are more likely to be home to physically receive a package on weekends, resulting in fewer trips and reduced costs. Currently, UPS delivers Monday through Friday, while FedEx operates on a Tuesday–Saturday schedule.

“If you look at customer surveys, a very high percentage of people like the experience of getting a delivery from a driver; it also reduces the risk of theft,” Haber said. “Also, a lot of stuff that’s shipped now is high value, requiring a signature. If someone isn’t home, it can’t be delivered. That can factor into the Sunday delivery equation.”

Wingo said Sunday delivery does give Amazon one major advantage: gaining four more delivery days during the holiday season, going from 26 to 30. “They’re seeing it as a way to get 16% more capacity,” he said.

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