Editor’s Note: Trevor also touched on this topic in our March/April issue. You can read that here
There’s a unique consumer profile for every organization competing in the online retail world. We can broadly identify unique trends that differ from one industry to the next. There are some markets in which the customer base is more time-sensitive than they are cost-sensitive. In other words, when an online customer is checking out, if the option is available, some might choose a shorter delivery time in exchange for a higher price. Other industries might have more cost-sensitive consumers. These customers will prefer free shipping (if available) and be happy to wait a week for their orders to arrive. Regardless of particular consumer preferences, the challenge rests on the company to: 1. Know their customers and 2. Strike the right balance between cost and time in transit. “Balance” is the operative word in this formula. It is never binary; while the quickest delivery may be most important to the customer, this does not mean that cost is disregarded entirely. Identifying this balance will improve shopping cart conversions, enhance customer lifetime value, and ultimately provide a competitive edge in the marketplace. Furthermore, knowing how to execute time in transit improvement as well as the ability to reduce overall shipping costs can mean the difference between surviving and thriving in the online retail world.
There are numerous ways to improve time in transit. However, omnichannel fulfillment delivers the strongest competitive edge. While omnichannel fulfillment has its challenges (namely inventory management), it is here to stay and will continue to offer a competitive advantage as it addresses both sides of the time vs. cost equation. Large retailers that have multiple distribution centers and dozens (if not hundreds) of stores across the nation can drastically reduce their delivery time by leveraging their national footprint. Ensuring each location has inventory to fulfill online orders, although challenging, means shortening the distance between product location and the consumer’s delivery location. The subsequent hurdle is employing the right distributed order management technology to dynamically pair the delivery ZIP Code with the closest location that has inventory to fulfill the order. If executed properly, this strategy offers a quicker delivery at less the cost. Less the cost because the parcel carriers price each parcel based on the distance from pickup to delivery destination, categorized as zones by the carriers. A Zone 2 (1-150 miles) shipment costs much less than a shipment to Zone 8 (1,801+ miles). Theoretically, a company employing omnichannel fulfillment can eliminate shipments to the more expensive outer zones while also reducing time in transit. There are multiple considerations and complexities to omnichannel fulfillment, making successful entry challenging. However, the pursuit of improving omnichannel fulfillment and the competitive edge it provides will continue to deliver meaningful value in the highly competitive .com world.
Whether a company fulfills orders from a single warehouse or from hundreds of locations, it will always need competitive shipping costs. For many online retailers, the ability to procure lower shipping costs allows them to pass the improved rates on to their shopping cart platform, consequently enabling them to win new customers. For other companies offering free shipping, lower shipping costs means improved margins, which enhances competitive sustainability. The most immediate way to reduce shipping costs is to renegotiate pricing with the parcel carriers. However, navigating the parcel negotiation waters can be a challenging. Parcel carriers are making it more difficult than ever to negotiate competitive shipping rates. Carriers are implementing new contract complexities, new and meaningful nuances that often get overlooked. Additionally, while the parcel carriers raise their rates every year, most online retailers typically do not. Consequently, these annual increases directly cut into the profit margins of the online retailers. The carriers have evolved over the years to ensure they are delivering value to their shareholders by offering shippers specific pricing based on the unique package characteristics. These specific shipping characteristics or shipping profile will affect the carrier’s margins and, in turn, impact proposed pricing. These critical components include service usage mix, weight distribution, zonal usage, pickup and delivery density, package weight and dimensions, and more. Therefore, every shipper has different criteria and a unique set of priorities when pursuing contract renegotiations. There isn’t enough space in this publication to detail every consideration when procuring best-in-class parcel pricing. For brevity’s sake, I’ll list the common contract negotiation pitfalls that online retailers should avoid when procuring competitive parcel pricing from their carrier:
1. Piecemeal. Don’t negotiate each concession one at a time. Consolidate requests and form a business case justifying the requests.
2. Discount tunnel vision. Don’t focus solely on improving discounts per service category. There are other components, like the minimum charge, that can significantly mitigate a competitive rate down to a far inferior discount.
3. Wrong path. It’s not uncommon to see competitive concessions within a contract only to realize upon further analysis that there is little to no financial impact from said concession.
4. Uninformed. Educate yourself on the carrier’s dimensional billing policies, general rate increases, accessorial charges, minimum charges, etc. This is often an expensive oversight for many online retailers.
5. Pricing cliff. Most contracts have volume-based discounts with upper and lower thresholds. Overlooking the threshold bandwidth could inadvertently allow pricing to fall in to a step-down tier. The lower tiered pricing is typically second-rate and far inferior compared to the targeted volume based discount tier.
6. Data. Analyze it and understand your unique shipping profile, which will uncover areas of focus for maximum financial impact.
7. Loyalty. Sadly, long term loyalty is not always rewarded. A relationship between an online retailer and their parcel carrier is critically important. The relationship may have been initiated with competitive pricing. However, sustaining competitive pricing is difficult when the incumbent carrier doesn’t feel threatened by its competitors. Remaining with the same carrier for years on end can lull online retailers in to a less than competitive pricing program.
In conclusion, there are many other strategies to help reduce transit time and dozens of other negotiation pitfalls that a company should avoid when procuring competitive shipping rates. Of course, there isn’t a one-size fits all strategy. However, the strategies discussed should contribute to the development of a competitive advantage in the online retail marketplace.
Trevor Outman, MBA, is Co-Founder & Principal Partner of Shipware, an innovative audit and consulting firm that provides expertise focused on helping companies reduce their shipping costs. Mr. Outman founded Shipware over a decade ago, leveraging years of experience analyzing volumes of parcel data and carrier contracts. Trevor's knowledge of how the carriers structure their margin-based pricing has allowed him to assist some of the most recognizable brands in the US in reducing their parcel costs 10-30%. He welcomes questions and comments, and can be reached at 858.879.2020 x117 or firstname.lastname@example.org