Within the last couple of months, FedEx and then UPS announced some changes to their pricing structures. Although they tried to keep the news under the radar, industry analysts and consultants were quick to pick up the ball and run with it. It’s understandable that these shipping titans would downplay the announcements, considering the fact that this could be the most significant and dramatic cost increase to come out in the last 15 years.
In the past, both companies have applied a dimensional (DIM) charge to packages larger than three cubic feet. Beginning on December 29 of this year for UPS and January 1, 2015 for FedEx, the DIM factor will be applied to all packages regardless of size. (The policy is already standard for FedEx Express and UPS Air.) If you’re an e-commerce retailer or do any type of shipping, these next few months will be crucial for understanding the changes and developing a strategy to mitigate the increases.
How Dimensional Pricing Works
Traditionally, shipping charges have been based on the actual weight of most standard-sized parcels. DIM pricing uses a formula that incorporates the size and bulk of the item being shipped to arrive at its dimensional “weight”. This is done by calculating the volume of the shipping container and applying a DIM divisor, which is currently 166 for both UPS and FedEx. (Other carriers may use a different number.)
For example: a cubic-foot container would yield a DIM weight of 11 pounds (12″ H x 12″ L x 12″ W = 1,728 divided by 166). If the item you’re shipping has an actual weight of 11 pounds, you’re in luck. However, if it’s six pounds you’ll end up paying nearly double the old charge. The change will have the biggest negative impact on companies that ship light but bulky products.
What the Changes Mean for the Carriers
It’s estimated that these price changes will affect approximately one-third of all ground shipments, although that number will be diminished somewhat since companies have several months to prepare and modify their shipping methods. They will certainly result in several millions of dollars in revenue increases for both companies with little to no corresponding increase in capital investment.
The e-commerce boom is a major driving force behind the new policies. It’s caused a significant increase in business-to-consumer shipments, which are less desirable because they’re lighter and require individual stops to deliver single packages. On the other hand, business-to-business shipments provide greater revenues per stop because the packages are heavier and involve larger quantities.
What the Changes Mean for You
The most immediate concern is formulating a plan to adjust your own shipping policies to avoid a significant financial burden. Depending on your volume of shipping and size of your products, increases could be anywhere from five to 25 percent. If you offer flat-rate or free shipping to your customers, you’ll need to rethink that strategy or figure out another way to absorb the costs.
Fortunately, UPS and FedEx made the announcements earlier than usual to give companies ample opportunity to prepare. Here are some tips to get you started.
- Keep a variety of container sizes on hand so your employees can use the correct one.
- Train all employees to calculate dimensional weight and pack items as densely as possible. Beware of expensive automated systems that claim to perform the calculations for you. It’s easy enough to do it manually.
- New pricing won’t be in effect for the holiday season, but since it’s the busiest shipping time it’s a good opportunity to calculate projected DIM charges for a comparison.
- Meet with your carriers to determine potential cost increases up front. Don’t be afraid to negotiate a change in contract terms. The greater your shipping volume, the more leverage you have.
- Shop around. Smaller regional carriers may offer more pricing flexibility.
With some planning and creative thinking, you can accommodate these changes with a minimum of disruption to your operations. Start now and take advantage of the window of time before they go into effect.
As always Medallion is here to help when you outsource your warehousing and shipping to us you take advantage of our special negotiated low shipping rates helping to squeeze more profit from each dollar you sell.