The pricing of services in the Parcel industry is a topic that invariably comes up whenever I meet with clients and colleagues. It is a baffling topic to say the least. It defies logic and stifles the most analytical minds. There is a common misconception that industry pricing is based upon the cost of serving a particular parcel. This may appear to be sound reasoning but it is a woefully wrong assumption. Most users of parcel carriers are manufacturers or distributors of products. In their world, pricing in its simplest form adds the cost of goods sold plus all other expenses plus available profit margin as permitted in the marketplace, be that competitive or non-competitive. Well, it doesn’t work that way in the parcel industry.
First of all, there is very little relationship between the cost to service a parcel and the carrier’s base rate. So the essence of carrier base rates does not reflect cost as manufacturers and distributors are accustom. As you know, pricing is a function of zone and weight. Those two variables are a far cry from being correlated to cost. For starters, there is nothing to address parcel size or configuration. The base rates assume parcel size is immaterial to the cost of servicing a parcel when, in reality, parcel size plays a large role in carrier cost.
Let’s consider an example that happens every day: a small parcel (12”x12”x6”) weighs 5 pounds and is charged a base rate of $11.70 for a zone 8 shipment, while another parcel four times the size of the first parcel (12”x12”x24”) but weighing only one pound, is charged $7.70. Fact 1: the smaller parcel is much less costly to service than the larger one because it requires only one-fourth the space in a trailer than the larger parcel. Fact 2: the smaller parcel is priced $4.00 (52%) more than the larger parcel simply because of a meaningless (as it relates to carrier cost to service) weight difference. Logic tells you that the pricing should be reversed while reality sticks you with incomprehensible pricing.
Which 40 pound parcel would you rather handle: one with dimensions of 3”x3”x49” or one measuring 18”x18”x18”? The latter is a square box with a maximum side of 18 inches while the former has one side over four feet in length. Given the same weight and zone, the pricing would be identical while the ease of handling is vastly different. Doesn’t seem fair, you say. Well, I agree with you.
How about the incremental pricing for residential delivery when the stop is right next to a commercial establishment! If you’re like me, you can name many streets, avenues and roads that have commercial businesses on one side while residences align the other side. Clearly, there is no greater operating cost for a carrier to deliver a parcel to the residence. But, nonetheless, you’ll have to pay the surcharge. Who said life was going to be fair?
At one time, all overnight shipments were flown from origin to destination. Not anymore. In an effort to reduce operating expenses, today it is rare for a shipment traveling 300 miles or less to ever see an airplane. These short-haul parcels travel over-the-road in the same trailers used to service ground parcels, rather than aboard a high cost airplane. Yet, when you compare the base rates of ground to overnight service, the differences are staggering. For example, UPS Next Day Air and Ground Commercial base rates for a zone 2, 10-pound parcel are $36.95 and $9.01, respectively. Twenty-eight dollars is quite a difference for two parcels that will travel side by side from shipping dock to consignee. Many people think that on-time service is quite different between ground service and “air” service. The difference is actually quite small. In fact, only about a percentage point or so separates them. And much less for the shorter length-of-haul shipments since ground parcels only go through a single hub (if that). And don’t forget that ground commercial parcels also are guaranteed and the vast majority are delivered by noon.
I was amazed to read last week that an “industry expert” stated that two shippers with the same annual parcel spend should have similar discounts or incentives. The next time some auditor knocks on your door and professes to be an expert in parcel pricing because they once were a carrier account representative, tell them they can keep their benchmarking and crystal ball analyses to themselves. Then ask them to explain the carrier cost relationship to their base rates and sit back and see just how good a salesperson they are. Oh yeah, one more thing, take notes in case you ever need a good laugh.
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.