The pandemic accelerated consumers’ adoption of e-commerce, and although online sales decreased slightly over the same period last year, the latest Census Bureau statistics for the fourth quarter of 2021 confirm what most shippers already know: Although fluctuations occur, e-commerce success and business success are increasingly synonymous for retailers of all kinds.
According to the latest estimates from the Census Bureau of the U.S. Department of Commerce announced on February 18, 2022, e-commerce sales adjusted for seasonal variations in the fourth quarter of 2021 accounted for nearly 13% (12.9%) of total sales, or $218.5 billion. Notably, total retail sales in 2021 increased 17.9% from 2020 and accounted for 13.2% of total sales.
Perhaps not surprisingly given these figures, there is a corresponding and direct correlation between the price consumers pay for shipping, delivery times, online sales volume, and businesses’ top line revenue. Amazon revolutionized how people shop online and simultaneously created new expectations for shipping. Now next-day delivery and even same-day delivery for certain product segments are the norm.
Simultaneously, expectations around shipping costs have also changed dramatically. In a global online marketplace where e-commerce and omnichannel retailers compete, shipping costs have become a differentiator and competitive advantage that consumers are now sensitive to and factor into their buying decisions. Consequently, consumers increasingly will not stand for what they see as high or exuberant shipping costs – a reality made all the more important for businesses during a time when the shipping price they are often competing with is “free.”
There’s No Such Thing as Free
Of course, as shippers, we know that “free” is a relative concept. In reality, there is no such thing as free shipping. Moving a parcel from one place to another requires time, effort, energy, and equipment – all things that are costly. The question then is how much of the shipping outlay your organization can absorb in order to be successful in the competition to complete sales in that pivotal moment when shoppers learn how much it will cost them to receive the items they selected.
The answer will differ for every organization, but two things are certain: First, shopping cart abandonment is perhaps the worst of losses because it’s often the final step in the process. In most cases, everything else worked. You attracted a buyer to your site, you provided them with what they wanted, and you delivered an e-commerce experience that prompted them to make a selection. Secondly, one thing likely caused them to change their mind: your shipping cost.
As a shipper, the important role you play in your organization’s success online can no longer be overstated. Nor can you abdicate that responsibility. That’s why it’s never been more important for you to strategically approach your shipping contracts and costs. It has also never been more challenging. Most businesses will be surprised to find when they receive their Q1 2022 bill that their carrier will be asking them to pay more for their shipping this year than ever before.
Look at what is occurring with our two largest carriers in the US. In the fall, both FedEx and UPS announced a 5.9% general rate increase (GRI) for 2022. In response, many shippers added six percent to their annual cost projections for their parcel shipments and called it done. On the surface, this logic and approach would seem sound, but unfortunately, the GRI for 2022 did not include the myriad new surcharges, fees, and rules FedEx and UPS introduced last year.
We asked our data scientists to run a model that applied these new rates, terms, and conditions to the millions of parcel shipments our customers made last year in order to provide a real world-view into how shipping costs will increase this year. What we found will radically impact many companies. Consider these sobering findings:
● Fewer than three percent of companies will see a 5.9% or less increase in their parcel shipping costs in 2022;
● UPS’s 5.9% rate increase will actually equate to an average increase of 10.25%;
● FedEx’s 5.9% rate increase will actually equate to an average increase of 12.86%; and
● Notably, small businesses that used FedEx Ground Economy, formerly SmartPost and typically the least expensive option, will see an average increase of 26%!
In contrast, but not surprisingly, FedEx and UPS have never done better. FedEx had a record year and in Q4 of 2021, UPS achieved its most profitable quarter ever. This reflects a simple fact: Most companies can no longer simply pass their shipping cost along to consumers. To minimize shopping cart abandonment, shippers must act.
What Can You Do About It?
The single most important step you can take to avoid shopping cart abandonment is to offer lower shipping costs and better terms than the competition. And the single most effective way to do that is to renegotiate your shipping contract. Now is the time to negotiate. There is only one alternative – absorb the largest shipping cost increases ever passed onto customers by FedEx and UPS.
What Do You Need to Negotiate Effectively?
To negotiate, you need shipping intelligence. Negotiating without it isn’t negotiating at all, it’s guesswork. Shipping intelligence, like other forms of business intelligence, is combining shipping data with analytics, visualization, benchmarking, modeling, and simulation to make informed business decisions. If you don’t have the tools in place to attain this intelligence, now is the time to gain them. You absolutely have to know your shipping profile better than the carrier for a successful negotiation.
How Can You Negotiate Effectively?
Ideally, your negotiations will enjoy the support of your organization’s senior-most leaders, but if they do not understand the importance of shipping acumen and its impact on online sales, now is the time to educate them. Then, make sure you have the following information before meeting with your carrier rep to provide them with the business case required to secure more favorable terms and conditions. (Additional information on how to successfully negotiate can be found in the article “How to Negotiate Your Contracts in 2022 and Beyond” in the November/December issue of PARCEL.)
It's also critical to:
- Know what is negotiable and what is not;
- Audit your invoices;
- Know your shipping profile;
- Follow the money in your negotiation;
- Negotiate surcharges aggressively for 2022;
- Explore flat rate shipping options and negotiate capacity guarantees; and
- Be prepared to change carriers if needed.
Shippers have the opportunity to dramatically decrease shopping cart abandonment and to impact e-commerce efforts and success. Now is the time to renegotiate your existing shipping contracts and to create a baseline for constant improvement in the future. It’s also a time of great opportunity. Shipping acumen was always crucial. Now is the time to ensure that it’s appreciated enterprise and organization-wide.
Josh Dunham is the CEO and co-founder of Reveel, founded in 2006. Reveel’s Shipping Intelligence Platform is a Software-as-a-Service based analytics, contract analysis and negotiation solution that helps customers ensure they are always receiving the best parcel shipping rates.This article originally appeared in the March/April, 2022 issue of PARCEL.