Original post by Mark B. Solomon for DC Velocity
UPS Inc.’s announcement yesterday that it will start using dimensional pricing for domestic ground packages measuring less than 3 cubic feet will add $380 million in annual revenue once the program is fully implemented, according to a parcel consulting company. Under dimensional pricing, shipping charges for lightweight packages are based on how much space they take up in a truck or package car as opposed to their actual weight.
Atlanta-based UPS said that, effective Dec. 29, it will extend dimension-based pricing to all U.S. ground package deliveries and on ground shipments moving from the U.S. to Canada. Currently, ground packages measuring less than 3 cubic feet, which represent a large chunk of shipments ordered via e-commerce, are priced based on their actual weight.
Rob Martinez, president and CEO of San Diego-based Shipware LLC, said UPS will benefit from the pricing change as a package measuring under the 3 cubic feet threshold would be charged at a much higher rate than if the pricing was based on its weight alone.
The estimated revenue boost would represent a fraction of UPS’ total annual revenue, which is running at about $55 billion in 2014. However, the additional revenue could be highly profitable for UPS because the pricing adjustment would not require a costly change of operations.
To calculate dimensional pricing on their shipments, both UPS and rival FedEx use what is known as a “volumetric divisor.” A parcel’s cube is calculated by multiplying its length, width, and height. The cube is then divided by the divisor, currently set at 166, to arrive at the dimensional weight. For example, a 3 cubic foot package measures 5,184 inches; dividing 5,184 by 166 yields a rate equivalent to that of a 31-pound box, although the box’s actual weight is likely much less. Shippers generally pay the greater of either the dimensional or actual weight.
UPS’ move came less than six weeks after FedEx announced that, starting Jan. 1, it would change its pricing scheme for ground parcels measuring less than 3 cubic feet. The UPS policy will have a greater impact because its daily ground package volume is about three times more than its rival. Both companies already apply dimensional pricing on ground shipments measuring more than 3 cubic feet as well as on all of their air express shipments.
UPS and FedEx made their announcements months ahead of time to give customers an opportunity to change packaging practices. Larger customers may also use the window to negotiate contractual modifications in an effort to mitigate the potential damage to their bottom lines, Martinez said.
Given the vast size of the carriers’ customer bases, Martinez said it will be impossible for either company to fully implement the changes at the start. He said FedEx has adopted a “multi-year” approach to implementation, with the carrier grandfathering some customers during the first year, but phasing out the exemptions until they no longer exist by 2018.
Alan Gershenhorn, UPS’ newly minted executive vice president and chief commercial officer, said in a statement that the explosive growth of e-commerce transactions has led to a larger number of low-density shipments entering the UPS system. This trend “causes cargo space to be less efficiently utilized, resulting in an increased cost per package,” Gershenhorn said.
The pricing change will encourage UPS’ shippers to remove often-unnecessary materials from their packages, thus reducing waste, cutting fuel use, and decreasing shipping costs, Gershenhorn said. Martinez said that once FedEx made its announcement it was only a matter of time before UPS followed suit. The companies have moved in virtual lockstep on such moves as rate increases, prior adjustments to dimensional weight pricing, and their antipathy toward parcel consultants retained by customers to advise them on contractual matters. The pricing change was driven in part by an increase in business-to-consumer (B2C) shipments. FedEx and UPS face challenges in moving B2C shipments that they generally don’t face in the business-to-business (B2B) world where they have a virtual duopoly. B2C packages are lighter and are usually delivered one residence at a time. By contrast, B2B parcels are heavier and are delivered to each stop in larger quantities, thus maximizing a carrier’s revenue per-stop.
Analysts like Martinez believe FedEx and UPS needed to shift to dimensional weight pricing for the lighter shipments to align revenues with their costs of handling a growing number of ecommerce shipments.