FedEx and UPS Jolt Ecommerce with Dimensional Weight Pricing
A UPS driver loads a cart with boxes before making a delivery on June 17 in San Francisco. Photograph by Justin Sullivan/Getty Images
Ecommerce may mean a loss of sales for some brick and mortar stores, but for businesses that rely on shipping products door to door, such as FedEx and UPS, ecommerce is a boon. However, FedEx’s previous method of charging by size alone has caused the company to restructure their pricing strategy. Now, FedEx and UPS have announced that they will be charging by the dimensions of the package, in addition to the weight of the contents.
Have you ever received a large box from Amazon that had only a few small items inside? It is unnecessarily oversized boxes such as these, as well as the increase in online sales, that has driven FedEx to this decision. The new weight limit will encourage smaller and lighter packaging, which will increase the space available in each truck.
FedEx announced in May that they planned to apply this “dimensional weight” pricing to all ground shipments starting in January 2015. For a 32-pack of toilet paper to be shipped between 601 and 1,000 miles, under the new rate system, the price of shipping would increase 37% to $13.81.
The ecommerce industry is experiencing quite a jolt, as shipping prices are dramatically changing for some. The pricing change would greatly affect ecommerce stores that sell bulky but lighter weight items, such as toilet paper or diapers. Previously, only packages that measured three cubit feet or more were priced based on their weight and size. Shipping is already one of the most rapidly increasing costs for large online retailers, such as Amazon.com, and this new pricing structure could mean up to hundreds of millions of dollars in extra shipping costs for online shoppers and retailers.
Since the number one reason for online shoppers abandoning their shopping carts is the price of shipping, online retailers will likely increase the price of their merchandise to cover the cost.
Larger retailers, like Wal-Mart Stores Inc., Walgreen Co. and Saks Fifth Avenue, will likely be able to negotiate phase-in pricing when renewing their contracts, as they did when a similar pricing change occurred in 2011. Smaller retailers will have less negotiation room, so they will likely have to compensate in price increases or increased shipping costs for customers. Online retailers may also want to look into encouraging shoppers to increase the size of their baskets (getting more things in one single purchase, rather than multiple purchases) in order to maximize their shipping efficiencies, said Brian Cohen, GM of Etailing Solutions.
“This is FedEx trying to figure out how to better manage their margins for the packages they already have,” said Travis Burt, a partner at Transportation Impact, LLC, which audits on behalf of shippers, as well as helping with negotiations.
Fed Ex and UPS typically move in lockstep when it comes to their pricing strategies, and this time is no different. UPS unveiled its plan in May to move to dimensional prices as soon as this Christmas.
“UPS has been researching the potential expansion of dimensional-weight pricing for a number of years because it enables us to more appropriately align rates with costs, which are influenced by both the size and weight of packages,” said UPS Chief Operating Officer Alan Gershenhorn.
UPS has not yet revealed what larger packages will cost customers.
In the mean time, ecommerce giant, Amazon.com is testing it’s own in-house shipping program, which may be implemented sooner than later, due to this pricing shift.