Every year, parcel carriers announce a general rate increase where they cite an average increase in their rates. For 2024, UPS and FedEx announced a 5.9% average increase. In the parcel industry, it’s a well-known fact that these announced increases are non-linear averages, and the actual increases can vary based on service, weight, and zone. For example, FedEx lists its Priority Overnight, Zone 2, one-pound rate at $37.04 in 2023, while it’s listed at $39.96 in 2024. That’s a 7.9% year-over-year increase. On the other hand, the Ground, Zone 2, 10-pound rate went from $13.51 in 2023 to $14.29 in 2024 – a 5.8% increase. While these differences can cause fluctuations of a few percentage points, the way the minimum reductions are stated in many contracts can cause these single digit increases to balloon to 20% or more.

Building on this reality, shippers must be especially vigilant in navigating these complex rate increases. Far from being straightforward, these hikes often conceal deeper cost surges that go beyond the announced general rate increase. Intricate details, such as minimum charges, can have a substantial impact on a shipper's budget if not carefully planned for. This article aims to shed light on the nuances of these rate adjustments and provide shippers with strategies to manage their shipping costs effectively in a landscape where small percentage increases can translate into significant financial challenges.

Minimum Reductions Impact on Negotiated Rates

In most FedEx and UPS contracts, they will include a section that lists a minimum reduction by service. These minimum reductions are typically listed as a flat amount off the Zone 2, one-pound published rates for domestic US services. Once you subtract the minimum reduction from the Zone 2, one-pound rate, you get the minimum charge. These minimum charges represent the lowest rate a shipper can obtain, regardless of their discounts. If there are no rate caps for a particular service in an agreement, these minimum reductions will remain static throughout the length of the agreement.

As an example, FedEx could list a minimum reduction for Priority Overnight packages as $27.50 off the Zone 2, one-pound published rate in a contract. In 2023, that Zone 2, one-pound rate for Priority Overnight is $37.04, meaning the minimum charge in this example would be $9.54. If there were not rate caps in an agreement, you would subtract the same $27.50 from the 2024 published Priority Overnight Zone 2, one-pound rate to calculate the 2024 minimum charge. In this case, the published rate is $39.96, which means the minimum charge in 2024 is $12.46.

When comparing the 2024 minimum charge of $12.46 against the 2023 minimum charge of $9.54, you can see that it increased by 30.6%, which is much higher than the 7.9% increase of the applicable published rates. This is due to the minimum reductions being expressed as flat amounts instead of percentages, which means that the contractual minimum charge will increase by the same $2.92 flat amount as the applicable published rates instead of the same percentage increase.

Risks and Mitigation Strategy

As with any parcel rating mechanism, shippers need to determine what the risk is to them, and what ways they can avoid or mitigate a cost increase. Any shipper who does not have a rate cap on certain services can have exposure to ballooning minimum rates. A shipper should do a full analysis to determine the exact impact, but shippers who have lighter weight and lower zone packages will typically have more packages that are impacted by the minimum charge. There are two ways to mitigate the impact of ballooning minimums:

1. Rate caps – Rate caps require carriers to limit the rate increase to an agreed upon rate, which would prevent the ballooning effect with minimum charges. It’s important that the rate caps are applicable to all high-volume services, and do not contain any clauses that can void the rate caps.

2. Percentage based minimum reductions – Instead of utilizing the typical flat amount minimum reductions, shippers can negotiate percentage-based minimum reductions. For example, instead of $27.50 off the Zone 2, one-pound rate, a shipper could negotiate the minimum at 74.25% off the Zone 2, one-pound rate.

Any shipper who has uncapped services should evaluate what the annual rate increase does to their negotiated rates. If a shipper finds that they’re at risk of the ballooning minimums, they need to have immediate conversations discussing the risk mitigation options with their carriers. Even getting a rate cap that is above the announced rate increase, like eight percent, can help limit the ballooning effect. As an example, Figure 1 lays out a three-year view for Priority Overnight minimums using an uncapped increase with a $27.50 minimum reduction, an uncapped increase with a 74.25% reduction, and an increase with a $27.50 minimum reduction with an eight percent rate cap.

*Figure 1 – Assumes a 7.9% rate increase to the 2025 Priority Overnight Zone 2 published rate

As illustrated in Figure 1, both mitigation strategies significantly limit how much the minimum increases year over year. The percentage reduction will tie the rate increase to the same rate increase as the Zone 2, one-pound published rate, while having rate caps will limit the increase to the agreed-upon percentage. Both methods lead to a difference of more than two dollars in 2024 and a difference of more than four dollars in 2025 when compared to the flat amount minimum reduction.

In summary, shippers must be vigilant in navigating the complexity of parcel rate increases, which often mask substantial cost hikes beyond the announced general rate increase. The minimum charges are an example of an intricacy that can blow up a shipper’s budget if not planned for properly. Timely conversations with carriers, strategic sourcing best practices, and proper planning are crucial for shippers to optimize cost-effective shipping solutions amidst the complexities of annual rate changes.

Keegan Leisz has been a transportation analyst and project manager for seven years and is a frequent speaker and author on transportation optimization strategies.

This article originally appeared in the January/February, 2024 issue of PARCEL.