The fact that UPS and FedEx are ringing in 2018 with new, higher prices is nothing new. And by now, you have probably read up on the ins and outs of each carrier’s changes.
The good news is that by recent standards, both carriers maintained the level of service during the holiday season that their customers have come to expect. Though UPS struggled out of the gate, it recovered, and FedEx CEO Fred Smith said his company had its best peak season yet.
Still, as companies come up for air following the biggest holiday season on record, a wave of rising costs is already poised to pummel them.
Happy New Year.
Most shippers understand, albeit mostly at a high level, that carrier pricing is negotiable and that much of the fuss over how much shipping costs will rise each year is somewhat offset by their contractual discounts, rebates and rate caps.
Despite that, it is alarming how frequently decision makers throw up their guards when propositioned with potential cost savings through a contract renegotiation, fearful that they are “locked-in” for the foreseeable future.
Whether it’s a valid fear or simply a diversion tactic, the truth is, of course, that these agreements can be revisited at any time, and for just about any reason.
It is imperative in today’s economy that shippers understand that their carrier agreements are organic – they can be changed freely to adapt to changes in the growth or decline of a business. In the same way carriers change prices and rules to advance their own interests, today’s competitive landscape demands that companies maintain competitive terms and pricing.
The inherent bias of the barrage of cost-saving solicitations can dilute the otherwise obvious appeal, but the reality is that rarely is it a bad time to make sure your company is cost competitive. Understandably, there may be internal limitations or priorities that delay the process, but there are few, if any, external obstacles.
(For those wondering, external obstacles might include having signed off on a new agreement within the last, say, quarter or if your company is experiencing or expects to experience a significant drop in volume. In the case of the former, you should still let someone tell you how your new agreement holds up against what the market bears. That way, if opportunity still exists to save money, you will not fall victim to the thought process outlined earlier. If the latter is your problem, a professional can still help you develop a sound strategy to stop the bleeding.)
Here are the basics of what you need to know about small package carrier agreements:
Most carrier agreements are based upon a 3-year, evergreen term. That means the conditions within the agreement are good for 36 months and will continue month-to-month unless one side or the other says otherwise. Simple enough, right?
Why is this important?
First, its important to understand how much things can change in three years. Since 2015 for example, UPS and FedEx ground packages between one and 25 pounds, across all weights and zones, have each cumulatively increased by about 16.5 percent.
To put that in perspective, lets imagine you have a 50 percent discount on ground shipments between one and 25 pounds. For easy math, we’ll forego breaking the service-level discounts down along typical weight breaks (one to five, six to 10, 11 to 20, etc.) and just leave the flat discount to apply to all packages between one and 25 pounds, which represent the majority of common shipments. For further simplicity, let’s also not delineate between commercial and residential.
If your annual gross spend on these shipments is $1 million, then you would have paid the carrier $500,000 in 2015 (assuming you have minimum discounts that would allow you to receive the entire discount, but that’s topic article altogether). By now, in 2018, that gross number has worked its way up to $1,165,000. While you’re still banking the 50% discount, not a lot has changed relative to the service you pay for, but now you’re paying $582,500, or $82,500 per year more than you were three years ago. Even if you have a rate cap, which usually is offered only to very large shippers, it will only help marginally. Your costs are still going up.
Second, the way revenue tiers are typically structured, you stand to lose more if you fall down a tier than you stand to gain if you move up a tier… a lot more. It’s not uncommon to see a company receive merely a token increase of one percent or less in exchange for substantial growth, but to fall five to six percent or more if revenue slips.
Third, as you might imagine, as long as healthy margins remain, neither carrier is likely to call the deal off at the end of the term. Rather, they would prefer to let the deal linger on as long as possible. (The same packages in the example above have 2018 list rates more than 30% higher than they were in 2013.)
The list of issues drags on in what can seem like an endless pattern of the chips being stacked against the shipper. Rates increase annually, and each year are accompanied by new service fees, rule changes, rezoning and more; all of which are designed to push costs even higher.
Therefore, it is imperative for those shippers to understand the organic nature of a small package agreement with their carriers. Due to the dependence most companies have on the important vendor relationship between client and carrier, prodding your carrier rep for cost improvements can be intimidating. Others are downright blinded by the business relationship and lulled into a false sense of security regarding the price they are asked to pay. The truth is that the market bears more favorable rates to those simply willing to ask.
The best time to ask for better rates is immediately at the point in which you feel – or even realize – that the price you are paying for shipping services is out of line with the market.
Even contracts with early termination clauses – a tactic more frequently used by the carriers – often is nothing more than posturing. A carrier would much rather retain profitable business for a long period of time than receive whatever cash payment would be required in the event that a customer were lost.
Let’s face it, your carrier doesn’t need the money.
Shipmint helps companies quickly and easily find the right small package shipping consultants so they can save more money in less time. Welcome to a better way!
Visit goshipmint.com/about or call (919) 706-5844 to learn how your company can reduce its small package spend by 15-25%.