Small package carriers want to be your partner in business at all times, except during annual rate increase and rate negotiation times. During those times, their objective is not to enhance the customer relationship but rather to maximize the profitability of your account.
Due to the limited number of national small package carriers, industry pricing practices have emerged that favor the carriers at your expense. The carriers adopt these practices because they yield more revenue per package for the same service, and customers have little recourse. Similar to other oligopolies, new charges appear on the bill with little fanfare or explanation. The overriding theme is, Pay more for the same service.
Like most public companies, the carriers have a goal of growing revenue 10% to 15% per year. Since the market for package services is mature and growing less then three percent per year, a large part of this revenue increase must come from gaining more revenue from existing packages.
The carriers use a three-part strategy to achieve their revenue goals. First, an annual rate increase of three percent to four percent is enacted each January. These annual rate increases have a varying effect on customers, depending on the individual customers package characteristics. The second part of the strategy is to introduce accessorial charges in addition to the transportation charges. The number of new accessorial charges and price increases for existing accessorial charges significantly contribute to carriers bottom lines. There are now over 30 accessorial charges on the carriers rate chart. Many of these charges are placed on the package after the customer has tendered the package to the carrier, making it impossible to invoice the end customer accurately for the cost of shipping. These accessorial charges come in a variety of forms and include the following:
Residential Surcharge additional charge for delivering to a residence
Address Corrections additional charge for correcting the address on the label
Rural Surcharge over half of all US ZIP Codes are designated as rural or super rural
Oversize 1 and Oversize 2 domestic DIM (dimensional) weighting of packages
Fuel Surcharge additional charge placed on every package for fuel
The third part of the strategy involves using technology and revenue auditors to place as many accessorial charges on your bill as possible. Shippers are now seeing up to 10% accessorial charges on top of their transportation charges. The carriers identify many of these additional charges by electronically matching up their delivery records to your manifest records. They then look for any discrepancy in their favor and charge you the additional fees. Some of the more prolific examples include:
Packages sent out to commercial addresses that the carriers driver noted as a residential delivery. You get charged the residential surcharge and lose your commercial discount on that package.
Fuel surcharge on every package you ship is automatically added to your bill. This charge has been as low as .25% and as high as four percent.
Packages labeled as address corrections get charged $5 for a ground package and $10 for an air package. Address corrections can be placed on the package by a clerk during the movement of the package or by a driver on route. The source of the correct address is the U.S. Postal Service database of addresses, but the carrier systems allow drivers and clerks to place address corrections on packages without verifying the correct address in the USPS database.
Carriers have deployed dimensional weighing machines at their hubs that automatically measure and weigh packages and calculate the DIM weight of the package. Often, if your package is too lightweight for its size, it might incur an oversize charge. To garner more money, the carriers now have two levels of oversize charges. A third level of oversize charge is rumored to be added during the next rate increase in January.
Another source of increased charges comes from revenue auditors who are charged with manually increasing the money obtained from each package.
The carriers do not use their technology to reduce what you owe them. For example, carriers could match the delivery records to the manifest records and provide credits for packages your company manifested but never shipped. Additionally, the carriers could proactively provide credits for packages delivered late. Dont look for these offerings anytime soon. The carriers are maximizing their profit from your account, not partnering with your business.
Now that you know what carriers are doing to maximize the profitability of your account, lets look at nine ways you can minimize your transportation expense.
1. Analyze your package characteristics. Once you understand which costs have the largest impact on your shipping budget, you will be able to set a pricing negotiation strategy. Carriers pricing strategies have progressed well beyond discounting by product. All charges, including accessorials on the rate card, are eligible for a discount.
2. Analyze your invoices to determine which accessorial costs have the largest impact on your transportation budget and target them for your negotiation. ·
3. Set discount goals for products and accessorial charges.
4. Dont allow carriers to unbundle their services. Carriers will attempt to write out your ability to collect on damages, collect refunds, submit tracers, etc. The carriers objective is to reduce all possible cost elements and thereby maximize your accounts profitability. Your best strategy is to keep their published services bundled together and get their best discounted price. Carriers will never give your account total credit for each of the elements they get you to write out.
5. Do not accept the carriers offer of proactive service refunding. Proactive service refunding is based on less then 100% on-time performance and is subject to the carriers definition of on time, which will not match your definition.
6. Ask for the longest contract period available. This will allow the carrier to offer a more generous discount in the first year of the contract because it will be calculating the profit over the entire length of the contract. Another benefit of a long contract is the insulating effect it has on the next new profit optimizing tactic the carrier introduces. A perfect example of this is the carriers introduction of a minimum charge per package. If a low weight, low zone package is discounted to a $3 rate, but the minimum revenue per piece in the contract is $3.50, the shipper will pay $3.50 for that package. Shippers who had a multi-year contract with a carrier are being insulated from this new pricing scheme.
7. Actively consider a competitor, and make sure your current carrier knows it. If possible, ship 10% to 20% of your volume with the competitor during the negotiation time period. This allows the systems and processes to be developed for each carrier, and your ability to divert all your volume is assured. It is a well-known pricing tactic in most industries to offer an existing customer less of a discount than a prospect you are trying to attract. If the incumbent carrier knows you have no intention of diverting your volume, you have just given up one of the main advantages you possess in rate negotiation.
8. Consider instituting an inbound routing program. It will save you shipping costs from your suppliers and provide you with increased leverage during contract negotiations. In general, the more overall transportation dollars you can bring to the table, the better deal a carrier will offer you.
9. Shippers have the right to renegotiate their contacts at any time by giving a 30-day notice to their carriers. Take advantage of this opportunity by renegotiating during difficult times for the carriers (during labor strife or immediately after rate increases).
If this approach appears to be a lot of work, it is. Analyzing information, setting goals, negotiating, bundling services and re-routing packages is an ongoing process that takes continuous effort. If you do not have the time or expertise to perform this work, consider hiring an outside firm. Many firms will do this work for a percentage of the saving acquired. This means no upfront costs to your company. Hiring outside expertise offers other advantages as well. Speaking in small package industry language shows the carriers representatives they are dealing with an educated negotiator who knows the small package industry. Additionally, outside firms are able to benchmark your current discounts against those with similar package characteristics in similar industries. This means your discounts are more likely to be in line with your competitors. Finally, carriers offer pricing based on a continuum. They first offer the least discount possible to retain your business. If the customer rejects that pricing, they will offer a discount up to the target level discount. The target level discount is what the carriers representatives are authorized to offer without getting their bosses involved. If the customer rejects the target level discount rate, the carriers representatives may offer the maximum discount possible to retain your business. Getting the representative to offer the maximum discount possible is the goal of every negotiation firm. Obtaining these maximum discounts is more of an art than a science; it is dependent on your willingness to let your rate negotiation firm speak with your voice and execute a preauthorized strategy that you and the negotiator have agreed upon.
Carriers have teams of people dedicated to the pricing and profit maximization of shippers accounts. If your company does not deploy the necessary skilled resources to match up against the carriers resources, your company will be one of the many shippers who are paying inflated transportation rates. With the typical company spending two percent to 10% of gross revenue on transportation charges, how much money is your company overpaying your carriers?
Doug Carnes is the CEO of Shippers Advocate Inc. Please call him at 609-792-6397 for more information.