One of the most common challenges I hear from volume parcel shippers is that they don’t know how good – or bad – are the incentives, terms and structure of their carrier pricing agreements. Why? Amongst many factors, the majority of carrier contracts include confidentiality language that preclude shippers from sharing information.
Moreover, the carriers are focused on package yield management. As public companies, their mandate from shareholders is to sell your business at the highest rates possible while still retaining you as a customer.
Of course, no shipper would ever negotiate a contract and knowingly leave money on the table. But the reality is that some of you have done a better job than others when it comes to negotiating the most favorable rates and terms.
How can you be certain your rates are truly best-in-class? How do you obtain parcel pricing benchmarks, especially given contract confidentiality concerns?
Shipware and PARCEL set out to provide shippers with a comprehensive set of parcel pricing benchmarks. During last year’s PARCEL Forum (October 2014), dozens of shippers participated in a live pricing survey. We asked the questions, you provided responses. Contracts were not shared, but rather, participating shippers responded to survey questions based on ranges. Moreover, survey responses were entirely blinded.
Published for the first time to non-survey participants, this article provides survey results related to Ground dimensional pricing, carrier contract negotiations, and mode/carrier optimization.
SURVEY DEMOGRAPHICS
Industry
Participants included a mix between several industries including manufacturing (25% of survey respondents), retail/wholesale (38.9%), 3PL/warehousing/fulfillment/distribution (19.4%), software/high tech (5.6%), ecommerce (5.6%) and others (5.6%).
Annual Revenues
Small and large companies alike were represented with annual sales revenues ranging from under $100M (32.4%), $100M-$500 (24.3%), $500M-$2B (16.2%), $2B-$5B (10.8%) and greater than $5B (16.2%).
Primary Carrier
Predictably, UPS (44.7%) and FedEx (39.5%) were cited as the “primary” carriers (as defined as more than half of overall volume). Other carriers that survey respondents named as primary included UPS SurePost/Mail Innovations (7.9%), FedEx SmartPost (5.3%), and regional carriers (2.6%).
Parcel Spend
Annual parcel spend revealed a balanced mix of small, medium, large and huge shippers: Less than $5M (26.3%), $5M-$15M (13.2%), $15M-25M (18.4%), $25M-$40M (13.2%), $40M-$70M (15.8%), and $70M or higher (13.2%).
SURVEY RESPONSES
Ground DIM Divisor
The survey was taken two months prior to the January 2015 dimensional pricing changes in which the carriers eliminated the 5184 cubic inch threshold. At that point, only 52.6% had attempted to negotiate with the carriers on the new dimension based pricing, although 31.6% had plans to do so. Fifty percent of those that already had negotiated reported “no success” in getting the carriers to back off the changes; 23.1% were “partially” successful, and 26.9% were “extremely” successful. Outcomes for those reporting “partial” or “extreme” success are listed below.
| If “extremely” or “partially”, which statement best describes your outcome? |
|
| Actually improved threshold | 9.1% |
| Kept 5184 threshold for duration of contract | 54.5% |
| Kept 5184 threshold, but diminishes YOY | 18.2% |
| Got some threshold, but less than 5184 | 18.2% |
However, only 22.9% of all shippers expected to retain or improve the 5184 exception; 62.9% expected to be on standard terms.
| UPS and FedEx shippers: 2015 Ground dimensional threshold exception? |
|
| None (standard) | 62.9% |
| 1728 or less | 2.9% |
| 1729-5183 | 11.4% |
| 5184 | 20.0% |
| >5184 | 2.9% |
Regarding the elimination of the 5184 cubic inch dimensional exception, 35.1% of shippers anticipated the pricing change would result in rate increases up to 5%; 16.2% forecasted increases of 6-10%; 10.8% of respondents expected increases of 11-15%; only 2.7% of shippers had forecasted cost increases of 16% or greater. Interestingly, 13.5% hadn’t yet analyzed the impact pending increases, and 18.9% forecasted no higher costs in spite of dimensional pricing. Most shippers would attempt to mitigate cost impact through negotiations (87.5%) and modifying box dimensions to create smaller, denser packages (71.9%).
| What are you doing to mitigate 2015 DIM changes? All that apply |
|
| Contract negotiations | 87.5% |
| Change box dimensions | 71.9% |
| Switching carriers | 25.0% |
| Other strategy | 25.0% |
| Shift to polybag | 18.8% |
| Packaging automation | 18.8% |
| Flat & cubic rate programs | 9.4% |
| Not much we can do except pay more | 3.1% |
The other factor important to the DIM conversation of course is the DIM divisor. Nearly half of respondents (47.4%) get the standard factor of 166. Only 2.6% reported negotiating a DIM factor greater than 300.
| What’s your current Ground DIM divisor? |
|
| 166 (Standard) | 47.4% |
| 166-194 | 7.9% |
| 194 | 15.8% |
| 194-220 | 5.3% |
| 221-250 | 10.5% |
| 250-300 | 10.5% |
| >301 | 2.6% |
Contract Negotiations
Contract negotiations remain the most popular strategy for shippers to keep costs in check (73%). Other common responses included implementing least-cost routing software (62.2%), modifying packaging (56.8%), greater use of the USPS and regional carriers (54.1%) and auditing carrier invoices (51.4%).
| To keep shipping costs in check, over the next 12 months, we plan to… (All that apply) |
|
| Renegotiate rates | 73.0% |
| Least-cost-routing s/w | 62.2% |
| Improve packaging | 56.8% |
| > USPS & Regionals | 54.1% |
| Audit carrier invoices | 51.4% |
| > Parcel Select | 29.7% |
| Zone skipping | 24.3% |
| Lower Returns costs | 8.1% |
| No active plans | 2.7% |
There was a correlation between the frequency of carrier contract negotiations and price satisfaction. Shippers that negotiate on a more frequent basis reportedly receive better contract incentives. When negotiation contracts, changes tend to be more minor (42.4%) than significant (39.4%), and only 18.2% conclude with a new carrier or all-new agreement.
| When is the last time you negotiated pricing with your primary parcel carrier? |
|
| < 6 mos | 48.7% |
| 6-12 mos | 17.9% |
| 1-2 yrs | 23.1% |
| > 2 yrs | 10.3% |
| Extent of contract changes |
|
| Minor | 42.4% |
| Significant | 39.4% |
| All new agreement | 18.2% |
The contract changes were most typically around accessorial charges or general rate increases (GRI) as shown below.
| What changes were made? All that apply |
|
| Changes to accessorial | 24.3% |
| Adjustments for GRI | 24.3% |
| Improved discounts | 18.9% |
| Minor language | 8.1% |
| Change revenue thresholds | 8.1% |
| Changes to Min Charge | 8.1% |
| Added rebate | 8.1% |
By a margin of nearly 6-to-1 shippers continue to report that it’s harder to negotiate contracts today than ever before.
| Do find negotiating with the carriers to be harder or easier now than a few years ago? |
|
| Harder | 57.5% |
| Easier | 10.0% |
| No difference | 17.5% |
| N/A, I’m new to negotiations | 15.0% |
Shippers understand that the primary national carriers are focused on growing profitable revenue (78.3%) and that there are few competitors (60.9%). Interestingly, 65.2% reportedly believe FedEx and UPS have an unsaid agreement to avoid “price wars”.
| If you answered “harder” to the question above, why? All that apply |
|
| Carriers focused on revenue/margin | 78.3% |
| FedEx & UPS have tacit agreement to avoid “price wars” | 65.2% |
| Few competitors | 60.9% |
| Commoditized pricing | 52.2% |
| Not able to use a third party consultant | 13.0% |
Mode/Carrier Optimization
The majority of shippers continue to single source (defined as giving 80%+ volume to a single carrier).
| Single or multisource? (>80% of volume) |
|
| Single | 59.5% |
| Multi | 40.5% |
Regarding the use of the U.S. Postal Service, the majority of survey respondents still do not believe that Priority Mail is a viable alternative to UPS/FedEx air services (56.4%), although 74.4% “definitely” or “probably” feel those postal products are in fact viable alternatives to Ground services.
| USPS PM Express & PM viable alternatives to UPS & FedEx Air/Express? |
|
| Yes, definitely | 20.5% |
| Probably | 23.1% |
| I doubt it | 38.5% |
| Definitely not | 17.9% |
| USPS PM Express & PM viable alternatives to UPS & FedEx Ground? |
|
| Yes, definitely | 30.8% |
| Probably | 43.6% |
| I doubt it | 20.5% |
| Definitely not | 5.1% |
Only 34.2% of survey respondents reported using regional carriers, and only 7.9% on a “significant” basis.
| Do you use regional parcel carriers (like Eastern Connection, LSO, OnTrac, Spee-Dee, LaserShip, etc.)? |
|
| Yes, significantly | 7.9% |
| Yes, but not significantly | 26.3% |
| Not at all | 65.8% |
Those shippers using regional carriers reported several benefits, many price-related including overall savings (80%), fewer surcharges (66.7%), more favorable shipment minimum charges (46.7%) and improved DIM pricing (40%).
| What benefits have you realized? (All that apply) |
|
| Cost savings | 80.0% |
| Fewer surcharges | 66.7% |
| Larger 1-2 day delivery footprint | 60.0% |
| Improved minimum charges | 46.7% |
| Better DIM divisor/threshold | 40.0% |
| Other | 26.7% |
| Specialized/Custom solutions | 20.0% |
| Improved billing terms | 20.0% |
| Same day options | 13.3% |
While the majority of shippers using regional carriers reported savings up to 10% (42.9%), over one third (35.7%) enjoy savings greater than 21%.
| If using regional carriers, what cost savings realizing over FedEx & UPS? |
|
| 1-10% | 42.9% |
| 11-20% | 21.4% |
| 21-30% | 28.6% |
| 31% > | 7.1% |
Moreover, shippers’ use of regionals reportedly increased in the past year, perhaps indicating satisfaction with those services.
| Regional carrier users, how has % of total parcel volume handled by regionals changed past year? |
|
| No change | 43.8% |
| Increased | 50.0% |
| Decreased | 6.3% |
Use of Parcel Select products is also increasing. While FedEx SmartPost continues to enjoy primary carrier status for the highest number of shippers (36%), UPS SurePost and Mail Innovations came in second with 32% of the survey population.
| Parcel Select Shippers: Primary Carrier |
|
| FedEx SmartPost | 36.0% |
| UPS SurePost or Mail Innovations | 32.0% |
| DHL Global Mail | 16.0% |
| Newgistics | 16.0% |
| Other | 0.0% |
By and large, shippers are enjoying the cost and value of Parcel Select products; 88% of survey respondents are mostly or extremely satisfied.
| Parcel Select Shippers: Overall, are you satisfied with the cost/value of service? |
|
| Extremely | 16.0% |
| Mostly | 72.0% |
| Not really | 8.0% |
| Not at all | 4.0% |
BENCHMARKING VALUE & LIMITATIONS
It is important to note that while overall volume and revenue certainly play a role in pricing, FedEx and UPS discounts are largely based on the carriers’ analysis of distribution footprints and package characteristics, which are directly tied to the carriers’ “cost to serve” pricing model.
Revenue management teams at the national carriers have become quite adept at understanding how much it costs to move a customer’s packages through their networks. Package profiles that are relatively easy to handle are priced more competitively than those in which the carrier is likely to incur additional costs.
Therefore, simply reviewing benchmarking data may not be enough to draw conclusions that you, too, should be receiving similar discounts.
Benchmarks like those published above will provide shippers with an idea of what’s possible — high watermarks for which to strive. And when survey questions are cross-tabulated with shipper volume, spend, industry or other key metrics, shippers can get a better sense of how they compare with others.
Imagine how your carrier contract negotiations would improve to your favor if you knew that you were getting the worst incentives against a peer group on part of your contract; or that three quarters of companies had negotiated a discount on a surcharge, the same surcharge the carrier rep told you is never discounted.
Shipware and PARCEL will continue to promote and publish these beneficial benchmarking surveys. For the fourth consecutive year, Shipware and PARCEL Forum are pleased to bring back this popular and beneficial session on October 20, 2015 to the PARCEL Forum in Chicago. We hope to see you there!
Rob Martinez, DLP is President & CEO of Shipware LLC, an innovative parcel audit and consulting firm that helps volume parcel shippers reduce shipping costs 10%-30%. Rob offers more than 25 years’ experience negotiating parcel contracts – on both sides of the negotiating table – for some of the most recognizable brands in the world, and is a sought after speaker and industry thought leader. He welcomes questions and comments, and can be reached at 858.879.2020 Ext 114 or rob@shipware.com.
