During the pandemic, skyrocketing e-commerce rates accelerated the evolution of consumer expectations, among them many set in motion by Amazon, including free delivery, next-day deliveries and in many markets, same-day deliveries. Now FedEx and UPS’s efforts to radically increase their profits are impacting retailers and e-commerce companies far more than many expected. This raises the question: are the days of “free” shipping numbered?
There is of course no such thing as free shipping. In reality it is merely an indication of whether sellers are willing to absorb shipping costs or alternatively pass them, or a percentage of them, onto consumers. The stakes of course are high. Those who charge for shipping risk having patrons abandon their online shopping carts.
The other side of the equation is just as problematic, and in many cases more so. With already tight margins, offering “free” shipping – especially when shipping costs vary depending on the product being purchased, its dimensions, how much it weighs and where it is being sent – can result in transactions in which the seller loses money. Handled incorrectly, a simple mistake in shipping cost projections can quickly spell disaster for online retailers.
Simultaneously, carriers today are being more aggressive in their efforts to grow revenues than ever before. As a result, the margins sellers have to work with when determining if they can realistically offer “free” shipping are shrinking.
Just how aggressive are carriers in their quest for higher profits? We’ve often discussed the numerous new surcharges, fees, and rules covering everything from parcel dimensions to zones that FedEx and UPS unveiled last year and which can dramatically impact shipping costs. Neither company included these in the 5.9% general rate increase both introduced for 2022.
We’ve also shared on several occasions how the 2022 rates, when combined with all of those added costs will really impact businesses this year. (You can read the news release we issued last fall on the analysis our data scientists completed. We found that the average increase for businesses that ship with FedEx will be 12.86% this year not 5.9%; and the average increase for businesses that ship with UPS will be 10.25% this year, not 5.9%)
As it was, UPS achieved record-breaking financial performance last year and achieved its single highest quarterly profit ever in Q4, while FedEx achieved its highest operating income ever this past December – all before the 5.9% general rate increase took effect. In both cases, this was possible because the carriers increased their revenue-per-piece or RPP. In other words, they raised their prices – independent of their rates – in a big way. Increased network efficiencies were responsible for just a small percentage of revenue gains.
That trend continues today. And nothing is off limits. FedEx recently even changed the tables it uses to calculate fuel surcharges – a move that increased revenue by an additional 1.75% beyond the fuel surcharges the company already introduced since the war in Ukraine began. Even fuel surcharges are now a profit lever, and one that many online retailers regrettably do not consider.
All of this is important because shipping, the lifeblood of e-commerce, is getting more expensive even as consumers continue to demand it for free. That’s why it’s never been more important to gain the shipping intelligence and actionable data shippers need not only to effectively negotiate, but identify and act on opportunities to immediately save money. The alternative is to continue accepting carriers’ price increases or to significantly raise shipping costs for consumers. For many e-commerce companies and online retailers that’s not an option.