BASE RATE INCENTIVES (aka, service-level incentives)

The base rate is the service-level charge before any accessorial charges or surcharges are applied. Due to low utilization and to save space, three-day products, FedEx Ground Economy (SmartPost), and UPS SurePost are excluded from this article despite being included in the survey.

1-Day and 2-Day Services

(FedEx Overnight, UPS Next Day Air, FedEx 2Day, UPS 2^nd Day Air)

While the largest shippers had the highest discounts and the smallest shippers had the lowest, there is a noticeable trend toward the middle, regardless of shipper size. Questions about applicable minimums are planned for the 2023 survey.

Ground Services

With effective incentives on the lower weights mitigated heavily by minimums, we collected the highest all-in incentives for both commercial and residential Ground services. Discounts typically drop about 10 points between the highest and lowest weight breaks. For example, a response of 70% to either of the following two questions suggests that packages 31 pounds and heavier receive a total incentive of 70%, while packages weighing five pounds or less have a total contractual incentive of around 60%.

(Express/Air Import and Export Services, Canada Ground Services)

FedEx and UPS have more direct competition for shipments into and out of the US, which can lead to wide differences in incentive levels. For example, a $5M shipper that sends mostly export packages could easily have a higher incentive than a shipper ten times their size that ships mostly within the United States. Unlike the faster services, standard brokerage charges are not included in the price for ground shipments to and from Canada, which is priced differently as a result. Minimums still apply to international shipments, but usually differ by zone for each service level.

Deferred Incentives (aka, Rebate Checks)

In addition to discounts applied at the time of shipping, some shippers receive a deferred incentive, usually based on quarterly performance. The value of a deferred incentive varies by two factors, even if the percentage is the same:

• Whether it applies to gross or net package spend
• Whether or not it is limited by service-level minimums

Most deferred incentives require the shipper to reach certain spending tiers (aka, earned discount tiers or revenue bands). Tracking performance to these tier commitments is easy for a gross deferred, since it uses the same rolling average provided on the weekly carrier invoice, but almost impossible for a net deferred. Plus, a gross deferred is an additional incentive off the published packages charge, while the net deferred is applied to the smaller net amount remaining after the weekly incentives are applied.

Deferred incentives subject to minimum charges will not pay out below the applicable minimum charge, often diminishing the value of the deferred incentive significantly.

Carriers may offer a deferred incentive to shippers of any size, but they become more likely as parcel spend increases.

DISCOUNTS ON SURCHARGES AND ACCESSORIAL FEES

Accessorial fees apply when a shipper requests additional services or features like capturing a signature, offsetting carbon emissions, delivering certain services on Saturday, or having a regularly scheduled carrier pickup. Under the right circumstances, it is possible to negotiate a discount on any of these fees.

Surcharges are applied based on a package characteristic. Any trait straying from the carrier’s ideal is potentially subject to these charges. Triggers include size, weight, longest side, second-longest side, packaging material, shape, ZIP code, residential delivery designation, and many more. In fact, costs for some packages have almost tripled since 2015, with surcharges accounting for almost 90% of that increase. If FedEx and UPS can isolate a package characteristic, they can also charge for it. But if FedEx and UPS charge for it, you can ask for a discount on it.

A few additional things worth noting:

· Accessorials and surcharges are not included in the annual General Rate Increase estimates released by the carriers.

· Accessorials and surcharges are not typically included in negotiated rate caps.

· Some surcharges (e.g., fuel surcharge, third-party billing fees) are calculated as a percentage of many or all other charges applied to the package.

· New surcharges are especially profitable for the carriers since almost every shipper will pay the full rate for months before negotiating a discount.

· Discounts on accessorials and surcharges are often more polarized than incentives on base charges. Larger shippers tend to get more and better discounts than smaller shippers.

Residential Surcharges

For Express/Air shipments, FedEx charges slightly less for residential deliveries in 2023 than UPS, $5.80 versus $5.85. The comparison for Ground packages is not as easy. UPS charges $5.25, while FedEx charges either $5.15 or $5.50, depending on how the shipper processes the package (for the cheaper surcharge rate, choose the FedEx Home Delivery service).

Destination/Delivery Area Surcharges

These charges apply to packages sent to ZIP codes identified by the carriers as rural or super-rural. The amount of these charges varies by service and residential/commercial designation, but the same discount percentage often applies. In 2022, UPS added an expensive new surcharge, U.S. 48 Remote Area Surcharge, for ZIP codes it considers extra-super-rural. FedEx followed with their new Remote Surcharge for the 48 contiguous states effective January 30, 2023.

Size- and Weight-Based Surcharges

Additional Handling charges and Oversize/Large Package Surcharges have evolved dramatically over the past ten years, with new triggers being introduced and old triggers becoming more restrictive. A zonal element was also added, increasing costs even more for shipments sent longer distances.

HARMFUL CONTRACTUAL FEATURES

In addition to laying out discounts and incentives, carrier contracts often include clauses that remove service guarantees, reduce or eliminate incentives, limit competition, and restrict the shipper’s ability to negotiate. Failure to adhere to these clauses can lead to steep penalties. These clauses are unacceptable in most cases and should be rejected.

Waiving the Right to File a Guaranteed Service Claim

Before the Covid-19 pandemic, Ground and Express/Air services were all guaranteed to be delivered by a certain time and/or date. Filing claims for late shipments commonly retrieved 4% to 6% of a shipper’s total package spend. These guarantees were understandably suspended during the height of the pandemic, but only guarantees on one-day services have since been reinstated. There is a reason carrier are often willing to trade additional incentives for a waiver of service guarantees: If a shipper’s carrier agreement waives the right to file guaranteed service claims, there is nothing holding the carrier responsible for poor performance.

Every shipper should complain loudly and frequently about the suspension of these guarantees!

Minimum commitment clauses and early termination clauses limit competition and restrict a shipper’s ability to react to a rapidly changing market. While they differ in how they achieve these ends, the limitations are similar and often overlap. The most common elements include:

• Shipper agrees not to renegotiate existing incentives or negotiate new discounts until 90 days before the term of the agreement expires. The carrier, however, remains free to apply unprecedented and unlimited increases.
• Shipper agrees to give the carrier a certain percentage of their controllable parcel volume, sometimes as high as 98%.
• Shipper agrees to meet specific net spend commitments (but the carrier rarely provides the ability to properly measure performance).
• Shipper agrees not to terminate the agreement during the term of the agreement.
• Shipper agrees not to divert any packages away from the parcel volume the carrier analyzed when creating the agreement.

Penalties for both clauses are also similar, usually based on the shipper’s last year or quarter in which they met the commitments. The most common fee is 2% (or the flat-rate equivalent) but can range from less than 1% to more than 10%.

UPS is currently more likely to pursue these payments than FedEx, even threatening to impose fees on some shippers when the only reason they fell short of their commitments was that UPS unilaterally decided not to accept all the shipper’s volume. First, UPS forced these shippers to scramble to find alternate carriers on short notice during the busiest time of the year, then UPS threatened to charge exorbitant fees if the shipper didn’t return the volume to UPS once UPS decided they wanted it again.

These clauses become more common as the shipper size increases, but the carriers go through periods of including it with every offer, not expecting that everyone will accept it.

Carrier “Value-Adds”

Many pricing offers from FedEx and UPS start with PowerPoint slides claiming savings from services outside the pricing agreement. A shipper should not allow this to cloud their judgement – these “soft dollars” are not equivalent to the bottom-line savings achieved through the pricing negotiation, and most services can be found with both carriers – but they can tip the scale when considering two very similar pricing proposals.

Carrier Representatives

Since the start of the Covid-19 pandemic, both carriers have reduced their Sales staff by roughly 30%. While most respondents had two or more reps in the past five years, an overwhelming majority reported having one good rep during that time.

Most respondents were contacted weekly by their rep, which lined up with the preferences of most small and large shippers, but 55.55% of medium-sized shippers desired more frequent interaction. The majority of small and large shippers also trusted information they received from their rep, at least most of the time, while more than half of the medium-sized shippers answered either “more no than yes” or “no” to the question of trust.

On a related note, most shippers of all sizes report doing their part to make it easy for the carriers to work with them. This is in line with the 2021 PARCEL article, “The Key to Success for the Shipper/Carrier Relationship,” where Paul Yaussy wrote that “having a great relationship with your carriers is critical to the success of your organization.” Unfortunately, 70% of medium-sized shippers and 66.67% of large shippers did not believe it influenced the rates they negotiated. It is noteworthy that half of the largest shippers, the group with the fewest average carrier sales reps over the past five years, saw the most benefit from a good working relationship.

Carrier Earnings Calls

Every quarter, UPS and FedEx forecast and report their performance. They also give insights into overarching strategies and their associated tactics. Because these reports are designed to inform and influence their shareholders, the explanations can differ dramatically from what a shipper may hear from their sales rep. (To be clear and fair, most sales reps are faithfully reporting what they read and hear, but most of what they read and hear gets filtered through management and marketing functions before it reaches front-line salespeople.) Anyone hoping to achieve the best possible savings should listen to the carriers’ earnings; they provide insight that is hard to find elsewhere. Among survey participants, large shippers were most likely to listen to earnings calls at least some of the time.

UPS and the Potential for a Teamsters Strike

Almost two thirds of UPS employees belong to the Teamsters Union. That’s about 340,000 drivers and warehouse employees that may walk off the job on August 1^st if UPS hasn’t agreed to a new contract with the Teamsters. This happened only once before, for just over two weeks in 1997. A few months later, FedEx, which had no Ground service at the time, bought the parent company of RPS, a smaller ground shipper, which was rebranded as FedEx Ground in 2000.

During the 2000s and 2010s, to ease the minds of shippers and investors, UPS often finalized the contract the beginning of the year it was due, about seven months in advance. A few locals always held out for unique contractual concessions, called supplementals, which were negotiated semi-independently, but the master contract was basically complete in Q1. Sean O’Brien, the newly elected General President of the International Brotherhood of Teamsters, led one of those locals from 2006 to early 2022.

This year is different in practically every way: Both UPS and the Teamsters have new leaders with something to prove, UPS collected record profits during the COVID-19 pandemic, the market is cooling and may be headed into a recession, the competitive landscape has changed dramatically, and much more. This discussion will continue to fill many articles even after the new contract is resolved, but in the meantime, shippers are left wondering what, if anything, they should do to mitigate the risk of a Teamsters strike.

When asked in October 2022 how early they would begin looking for alternative carriers if a new UPS/Teamsters contract wasn’t signed, the most popular answer was six months or more. The largest shippers, however, were almost evenly split. At the time of writing (April 2023), many shippers that followed this guidance found a willing partner in FedEx and others. Shippers that waited until April or later may find fewer discounts available as non-UPS carriers shift their focus from winning new clients to providing the best possible service to retain their new clients. Regardless of potential difficulties, a Teamsters strike would impact practically every department within a UPS-only shipper. Smart transportation leaders will consult with c-level leaders and all department heads before deciding how to deal with this risk.

SUMMARY: BENCHMARKING VALUE & LIMITATIONS

Benchmarks can only take a shipper so far in their carrier negotiations. While overall package volume and shipper spend are important to carrier pricing algorithms, FedEx/UPS discounts also rely heavily on the carrier’s analysis of distribution footprints and physical package characteristics, which are directly tied to the carrier’s cost drivers. Other pricing factors include the carrier’s desired operating ratios, sales commissions, strategic account value, and competitive considerations.

Simply reviewing benchmarking data may not be enough to conclude that you should receive similar discounts. Benchmarks, like those published above, provide shippers with an idea of what’s possible – high watermarks for which to strive. No shipper has the best possible discount on every service, and this is okay! The carriers need to make money and mitigate network risks too. Understand your shipping data – which services and charges contribute most to your shipping spend – and focus instead on using that knowledge to negotiate the lowest possible average cost per piece.

Finally, a sincere thank you to everyone who participated in this survey, and to everyone at PARCEL, who facilitated the gathering of this data by bringing together shippers, industry experts, and carriers at PARCEL FORUM ‘22! Don’t miss PARCEL FORUM ’23, September 12^th and 13^th in Nashville, Tennessee, for your opportunity to participate in this ongoing research (and much, much more)!

Josh Taylor is the Senior Director of Professional Services at Shipware, LLC, a parcel consultancy that helps high-volume shippers reduce shipping costs by as much as 30%. He previously spent 17 years at UPS in Revenue Management Strategy, Pricing, and Sales. He uses his broad industry knowledge and specific expertise in parcel pricing and services to help clients optimize their supply chain. He is a frequent speaker at industry conferences and webinars, and his opinions and articles are regularly published in industry-specific and mainstream outlets.