A frequently question asked of me by companies shipping parcels is, “Why do parcel carriers charge more for residential deliveries?” The standard reason they have been given in the past is, “Because it costs more!” But does it?
The residential surcharge is now a whopping $3.10 for Ground parcels. Needless to say, carriers are not bashful about what they charge residential shippers. For many years, the ever growing disparity between commercial and residential rates has been a great concern for the non-store retail industry….both sellers and consumers. The carrier’s position has always been that there are significant operating cost differences between commercial and residential deliveries. The two main differences are: (1) residential deliveries are more likely to be “off the beaten path” and require more driving time between stops; and, (2) the variance in parcels delivered at a stop is significant. While there’s no doubt those conditions hold true for many companies, it does beg the question: “Is the surcharge appropriate for all residential shippers?”
Typically, there is a single parcel delivered to a residence, while multiple parcels are routinely delivered to commercial consignees. However, that isn’t always the case. Carrier costs to service a delivery vary greatly from customer to customer because each customer’s parcel characteristics are different. Let’s take a look at an example.
Let’s assume a delivery driver earns $30 per hour. (Employee benefits and vehicle operating expenses will be ignored in this example.) Assume for a moment that a driver delivers a residential stop every 3 minutes in a major metropolitan area and every 6 minutes in a rural area. That’s 20 stops per hour in the metro area and only 10 stops per hour for rural deliveries. In the metro area, the carrier’s cost (driver wage) per stop is $1.50 ($30 per hour/20 stops per hour) versus $3 per stop in the rural area. But what is the carrier’s cost per parcel? Well, that depends upon the number of parcels per shipment.
Now, using the above cost assumptions, let’s consider Company’s A & B. Both ship 10 pound packages. The average zone is 5. Company A averages two parcels per shipment to major metropolitan areas; while Company B ships only one parcel per order to rural areas. What is the carrier’s allocated ‘per parcel’ cost for delivery for each company? It’s very simple. For Company A it’s $0.75 ($1.50 per delivery stop/2 parcels per stop); while for Company B it is $3 ($3.00 per delivery stop/1 parcel per stop). $3 versus $0.75….that’s quite a difference! In the case of Company A’s, the residential surcharge is not warranted. However, for Company B it is justified.
The bottom line is that it’s more costly carriers to deliver in the Dakota foothills compared to the typical suburban community simply because of the differences in stop density. There are a lot fewer miles between stops in suburban America than in our nation’s rural lands. And driver “windshield time” is unproductive and costly, and shippers should expect to pay for it. Conversely, carriers use ‘driver release’ delivery (no signature required) in low risk communities which further reduces their delivery time and cost.
Under the current pricing structure, the winners are those companies that ship to rural addresses with one parcel per shipment; while companies sending multiple parcel shipments to major metropolitan areas are clearly overpaying for service.
With limited competition in the residential delivery sector it is easy for UPS and FedEx to ignore the economics of your parcel characteristics and charge as they please. Ultimately, the price you pay for shipping services depends on your knowledge of carrier operations and your ability to present the value of your parcel characteristics during rate negotiations. The greater your understanding of the parcel business, the more you will get out of your transportation dollar.
Joe Loughran is President of Parcel Rate Solutions and an expert in the parcel industry. Parcel Rate Solutions is a transportation consulting company offering services in Carrier Rate Analysis and Carrier Agreement Analysis. Joe can be reached by phone at (724) 934-0626 or email: firstname.lastname@example.org.