Estimate Your Shipping Costs: What Goes Into The Rates You Pay With FedEx and UPS
- How to Estimate Your Shipping Costs
- What’s Behind the Rate You Pay
- How to Get the Cheapest Shipping Rates
Every year, FedEx and UPS raise their rates. That’s certainly no surprise to anyone who ships parcels as part of their business.
For several years, both companies have posted general rate increases of 4.9 percent per year. But that’s not necessarily an accurate way to describe how fast your rates rise.
Increasingly, surcharges and accessorial fees account for more and more spending on shipping. Holiday rates, oversized package fees, and additional handling fees — and changes to the definitions of when “holidays” are or what “oversized” packages are — change to benefit carriers every year too, often by much more than 4.9 percent.
When surcharges are included, shipping rates increase by more like 6.2 percent annually.
Overall, we’ve found that about 35 percent of most shippers’ overall shipping spend is dedicated to surcharges.
Each of these surcharges applies to a fraction of the parcels a company ships. That means that, without package-level data about shipments, it’s nearly impossible to understand how accessorial fees will impact a company’s shipping spend.
Plus, surcharges can change with little warning or fanfare, so companies need to be equipped to make these calculations at lightning speed.
Estimating your shipping costs starts with knowing your company’s shipping data — exactly what you ship, how much those parcels weigh, what their dimensions are, and what volume you sell; exactly where you ship, including zone distributions and whether your customers are commercial or residential; and how fast you need to ship, including what proportion of your parcels require next-day or two-day delivery.
Only with that data in hand can you understand how your carrier’s rates, and rate increases, will impact your bottom line.
UPS Shipping Rates
United Parcel Service is the world’s most valuable logistics brand. The company moves 25 million packages per day to, it says, more than 220 countries and territories. It’s a behemoth, and almost every shipper has or will interact with the company at some point.
Generally, UPS pricing is organized based on destination and delivery time.
Large firms tend to deal with UPS Freight. Freight service is broken into tiers — Next Day Air Freight, 2nd Day Air Freight, 3 Day Freight, and Standard — with sub-tiers specifying delivery time. UPS also offers specialty freight services, like trade show and temperature-protected shipping.
Within the U.S., freight services include:
- Next Day Air Freight: Guaranteed delivery the day after the order is placed, by 12 p.m. or 5 p.m., depending on the level of service specified
- 2nd Day Air Freight: Guaranteed delivery the second day after the order is placed, by 12 p.m. or 5 p.m., depending on the level of service specified
- 3 Day Freight: Guaranteed delivery by 5 p.m.
- Freight LTL: Time varies depending on whether shippers choose standard service, A.M. delivery or urgent delivery
Next Day Air, 2nd Day Air and 3 Day Freight all include “NGS” service tiers, which offer the same delivery times, but without the “guaranteed service” caveat.
Within each service level, pricing varies by distance and weight. Let’s consider a shipment weighing 500 pounds, traveling to Zone 2:
- Next Day Air Freight has a price floor of $129.20, with a charge of $1.40 per pound.
- 2nd Day Air Freight has a price floor of $127.08 with a charge of $1.24 per pound.
- 3 Day Freight has a price floor of $109.30 with a charge of $0.94 per pound.
- Non-guaranteed service reduces these price floors by about $7 each, and per-package rates by about $0.07 each.
Shippers dealing with less volume may use Packages shipping instead, when parcels are priced individually and not in bulk. Prices differ — it’s much more expensive to ship single packages, with UPS Ground starting above $10 per parcel for a package weighing 10 pounds — but they’re organized the same way, with various service levels, and pricing within each dependent on zone and weight.
A 10-pound package traveling to Zone 3 would cost:
- Next Day Air (by 10:30 a.m.): $57.72
- 2nd Day Air: $28.60
- 3 Day Select: $21.96
- Ground: $10.94
Finally, UPS offers SurePost, which has the U.S. Postal Service cover last-mile service of packages to residential customers. Pricing, again, varies by weight and zone. Typically, SurePost is about 20 percent cheaper than shipping a parcel at Packages rates, and Saturday delivery is included for free. Shipping may take an extra day, though.
Finally, UPS imposes a fuel surcharge based on the current price of jet fuel. These percentage fees can range from 14 to 18 percent; in mid-May, it was at 17.5 percent.
The fuel surcharge applies to only a few services — Worldwide Express, Worldwide Express Freight, Worldwide Express Plus, Worldwide Express Saver, and Worldwide Expedited, all of which are freight services.
But it also pops up when certain other accessorial fees are imposed. For example, whenever a package carries a charge for Saturday delivery or a large package surcharge, the fuel surcharge kicks in. It’s critical that UPS customers include this percentage fee in their cost calculations.
FedEx Shipping Rates
FedEx is UPS’s primary competitor. Although it’s smaller and younger than UPS, it poses significant competition in the U.S. and worldwide. The two claim to have an effective duopoly over the shipping industry, and as such, their prices look very similar.
FedEx freight services look a lot like UPS’s, but the company offers slightly fewer options — two next-day services, one second-day service, one third-day service, and ground.
Like UPS, shipments are priced by weight and distance. So let’s consider the same example: A 500-pound shipment traveling to Zone 2:
- 1Day Freight has a price floor of $126.00, with a charge of $1.26 per pound.
- 2Day Freight has a price floor of $124.00, with a charge of $1.24 per pound.
- 3Day Freight has a price floor of $123.00, with a charge of $1.16 per pound.
- FedEx does not differentiate between “guaranteed” and “non-guaranteed” service.
FedEx also offers per-package pricing for non-freight customers.
Again, let’s consider a 10-pound package traveling to Zone 3:
- Priority Overnight (next day by 10:30 a.m.): $57.15
- 2Day: $28.41
- Express Saver (3rd day by 4:30 p.m.): $23.25
- Ground: $10.32
In each case — for both freight and per-package pricing — FedEx is slightly cheaper than UPS for comparable service.
FedEx offers some flat-rate pricing through its FedEx One Rate service, which is more comparable to the USPS’s Priority Mail than to anything UPS offers. With this service, preexisting envelopes and boxes can be shipped for a flat rate — ranging from $35.65 for overnight service (by 10:30 a.m.) to $8.65 for third-day service for a “small box.” This may not make sense for bulk shippers, but could be well-suited to small businesses’ needs.
FedEx also imposes a jet fuel surcharge, but it’s significantly cheaper than UPS’s. Its percentage fees range from 5.5 percent to 8.5 percent, less than half of what UPS charges. In mid-May, the FedEx Express surcharge was 7 percent. However, this charge applies to all air shipments, not just handful of them.
On top of that, FedEx adds an additional fuel surcharge for ground shipping. It ranges from 4.5 to 7.5 percent and stood at 6 percent in mid-May. Again, the ground fuel surcharge applies to all shipments — and it’s tacked on after package rates plus any surcharges those packages carry.
Shippers and carriers routinely sign contracts that lay out what services the carrier will provide and how much the shipper will pay.
The trouble is, carriers have far more control over contracts than shippers do. Contracts are intentionally complex, designed to make shippers pay more without noticing right away.
Traditionally, carriers have had most of the power in negotiations, too — they set base rates and surcharges, and it’s the shippers who have to request changes.
But that balance of power can shift when shippers arm themselves with data. The better you understand how your shipping rates are calculated, how various fees affect you, and where your business fits into your carrier’s overall plan, the more strategic you can be in targeting certain components of your contract for negotiation.
What Goes into Your Rates: Business Factors
Fundamentally, how much companies spend on shipping is based on what they ship and how far it travels. The more you ship, the faster it moves, and the bulkier those items are, the more you’re likely to pay.
But that’s hardly a framework for negotiating a contract.
Carriers have created dozens of ways to charge shippers for the parcels they move, from base rates to surcharges to holiday and weekend pricing. Every shipper’s needs are different, which means all those prices affect every shipper differently.
Further, when carriers change rates, they often tweak and add surcharges, not base rates.
To negotiate a favorable contract, shippers need to understand exactly how these various prices affect them, and how significantly changes will eat into their bottom lines.
To do that, shippers need to understand what they ship and where it goes at a granular, parcel-by-parcel level. Then, they need the expertise to step back, identify inefficiencies, and target those opportunities for savings.
Understanding your shipping profile
A shipping profile is a dataset that provides a package-by-package breakdown of what a company ships and where it goes. The more data points collected, the clearer the picture of a company’s supply chain becomes — and the easier it is for leaders to spot trends and inefficiencies.
For starters, shippers should collect data about packages themselves: Their dimensions, how much they weigh, whether they contain fragile or sensitive material, and how many identical packages were shipped in a given day or week.
Second, shippers should examine where packages go: Which zone they’re traveling to, whether they’re shipped by air or ground, and whether their destination is residential, commercial or industrial.
Third, shippers need to know if customers called for expedited shipping and if packages were delivered during weekends or holidays, when prices rise.
Finally, shippers should track whether packages arrived on time and know if they were damaged in transit. This data can help hold carriers to account, and ensure shippers collect the refunds they’re owed.
The best predictor of the future is the past. Data from the previous year gives shippers a huge advantage in understanding what their shipping spend will look like during the next year. Company leaders who know exactly how many parcels of a certain size they ship can quickly understand how much a change in the definition of an “oversized package” will impact their bottom line. Those on the west coast, who often ship high volumes to Zones 7 and 8, can calculate how valuable their faraway customers are.
General rate increases are easy to predict. It’s changes to surcharges that can really shock shippers. Carriers can increase these fees by 20 or 50 or even 200 percent almost overnight, and because they affect a relatively small number of packages, many companies don’t notice right away — unless some of the packages most impacted are theirs.
Carriers can, and often do, straightforwardly increase surcharges. But because these fees typically impact a relatively small set of packages, they can really hike them up. This year, UPS boosted its address correction surcharge by 18 percent, and its additional handling surcharge by a whopping 75 percent.
But they’re not always so direct. Carriers can change definitions that lead to surcharge increases. In 2018, FedEx reduced the dimensions of packages that require additional handling surcharges from 60 inches on the longest side to 48 inches on the longest side. Suddenly, additional handling surcharges applied to a whole new set of parcels.
Shippers who have sophisticated data on what they ship can easily understand how these changes will impact their bottom line. Take FedEx’s change in which packages require additional handling surcharges: If a company regularly ships a product that is between 4 and 5 feet long, it now has to pay additional handling surcharges on each of those parcels. A company who sees that change coming can act fast to package the product in a new way or target that fee in its next negotiation.
Price floors or minimum spending requirements
A common mechanism in shipping contracts is a requirement that a shipper spends a certain amount. For carriers, these “price floors” are meant to lock in cash flow. But for shippers, they can be unexpectedly costly.
Remember that carriers design shipping contracts based on their needs, and that parts of these contracts may be intentionally obtuse. Price floors are one such tool. They succeed when shippers spend less than the minimum required and have to pay the difference without the carrier moving additional volume.
Carriers’ goal in designing price floors is to choose values greater than shippers are likely to spend in most months.
This is where data can help shippers outsmart their carriers. A shipper who has granular data, describing exactly how much they shipped and how much it cost in each of the last 12 months, can push for a price floor that actually reflects their minimum spending. A shipper without that data might be stuck with the carrier’s choice.
Carriers sometimes write discounts into shipping contracts as concessions to consumers. Often, however, these discounts reflect buy-one-get-one sales: To get the advertised savings, you may have to spend more than you initially planned.
This is another opaque carrier strategy that shippers can see through with good data.
When you see a discount in a proposed contract, plug in your numbers from the previous year. Would that tweak have saved you money? If not, has there been a change in your business that makes it likely such a policy would save you money this year?
If the answer to both questions is no, discounts can become another point for contract negotiation. Consider proposing a swap: Replace the discount you don’t need with a small surcharge reduction that will benefit your business much more.
What Goes Into Your Rates: Carrier Factors
Shipping rates aren’t solely determined based on shippers’ needs. Carriers are running businesses, too. They have existing delivery routes, fulfillment centers, and over- and under-served regions. The better a shipper fits within that existing network, the more profitable that client can be.
After you understand the details of your shipping profile, it’s essential to step back and put yourself in your carrier’s place. FedEx and UPS evaluate their potential partners, too. So, ask yourself: How does your customer network align with their deliveries? How big is your contract in the context of their existing business? Would your brands partner smoothly?
The best negotiations end in mutually beneficial contracts — saving shippers money without eating too deeply into carrier profits.
How profitable is your business for your carrier?
One of the first things carriers measure when scrutinizing small clients is how much they spend on shipping small parcels. Generally, businesses that spend less than $100,000 annually on these shipments get similar suites of services at similar rates.
That doesn’t mean small or medium-sized companies can’t negotiate their rates — only that it’s harder.
To combat carrier disinterest in these small contracts, smaller companies can comb through shipping data to find specific contractual points that don’t work for them. If you ship more commercial than you did when you last negotiated your contract, or if your zone distribution has changed, or if a new product is suddenly incurring additional handling fees, then you can craft a negotiation strategy around those points.
To a carrier, these may seem like relatively small asks — but to a small to medium-sized business, they can mean thousands of dollars in savings.
For businesses that spend more than $100,000 on small parcels, however, carriers know they’re negotiating with valuable partners — and that gives these shippers a lot more leverage. Carriers want these contracts.
As with smaller businesses, large companies likely have room to negotiate on accessorial fees. But these companies should also review price floors, minimum volumes, and even base rates to see where small contractual changes could make the greatest differences in their shipping spend. No carrier policy is iron-clad.
Location, location, location
When carriers court businesses, they often examine their customer networks to understand how well your distribution network aligns with theirs. This is an exercise all shippers should undertake: Examining how well their customers’ geography fits into carriers’ existing delivery networks.
The more carriers can deliver along established routes, the more money they stand to make. That’s why regional carriers are often able to offer lower rates than national carriers — they cut costs by covering short distances multiple times per day.
National carriers also have these established routes, both within regions and on freeways between fulfillment centers. Locations for distribution hubs are critically and carefully evaluated for efficiency and proximity to certain markets, which, ideally, align with shippers’ markets.
For regional carriers, the better your location data matches theirs, the more likely they are to want your business. This holds true for national carriers as well — but keep in mind that national carriers are more likely to be considering expansion. If a national carrier doesn’t have a foothold in the region your company seeks to serve, could you offer one? That could be a valuable negotiation point.
Beyond geography, consider whether your product needs align with what carriers can provide. If your company manufactures or ships sensitive products, such as perishable food or pharmaceuticals, it’s essential to verify that your carrier has the technology to serve your needs properly.
Finally, carriers consider brand value. Brands that inspire devotion — like running shoes, cookware or skincare — tend to have repeat customers, in relationships that often last for years. By extension, Nike’s customers become customers of whichever carrier ships Nike products from factories to fulfillment centers to doorsteps.
How much competition does your carrier have?
Shipping is a zero-sum game. Most shippers work with just one carrier — so if DHL wins your contract, FedEx does not. Astute negotiators can convince carriers that they have a lot more to lose by walking away from their contracts than by making some concessions.
First, consider your carriers’ location-based interests. Does one national carrier dominate a certain region that you serve? If so, you may be stuck with higher rates, unless you consider switching to a regional carrier for some services. Is a competitor looking to gain ground in that region? If so, you may be able to leverage that into a better contract with your existing carrier.
Additionally, demonstrate to your carrier what they could lose by not working with you. Show them your year-over-year growth figures. Explain the forthcoming rollout of a new product or expansion into a new region. If carriers see that your business has good reason to be ambitious — supported by good data, of course — then you can style your company as an investment.
That is, if UPS can win your loyalty now, you will put thousands of future parcels on their trucks — and, equally importantly to UPS, those packages will not ship on FedEx trucks.
How long has it been since you renegotiated your contract?
Logistics generally doesn’t offer loyalty perks. Carriers like businesses that stay with them for years — but they’re unlikely to knock 1 percent off a contract just to say thanks. Renegotiation is almost always the shipper’s responsibility.
Generally, at Reveel, we recommend that shippers renegotiate carrier contracts every time their shipping profile sees a significant change. That might mean the debut of a new product line or expansion into a broader geographic area; but shipping needs also change when assembly plants close or certain products are phased out. Our clients generally undergo these changes once every two to three years.
Renegotiation is also wise in cases of mergers, acquisitions and spinoffs. If your company merges with another and you both have current shipping contracts, a joint contract will probably increase efficiency for both your company and your carrier. And if your company spins off from a parent, it probably doesn’t need the same level of service the larger firm did.
In each of these situations, businesses may also want to consider switching carriers entirely. FedEx and UPS tend to follow one another’s lead when it comes to rates and surcharges — but as discussed above, there are some key differences that could make all the difference for a certain business or in a certain market.
Finally, keep an eye on evolving carrier services. According to a 2017 Parcel survey, more than 80 percent of U.S. companies use USPS for at least some of their business. Ratings of the postal service, long reviled for inefficiency and horrible customer service, have been ticking upward in shipper surveys for years now.
So while a true multiple-carrier strategy — one that relies on contracts with several corporate shippers — may seem like too much to manage, giving some of your business to USPS or a regional carrier may make a significant difference in your shipping spend.
Every company needs different services from its carrier, which is why every company negotiates its own contract. Some carriers might be better suited to those needs than others, and that may change every few years as carriers battle for profits and market share. Certain contractual tweaks might make no difference to one company, but could cut another’s shipping spend by 15 percent or more — at least, that’s how much Reveel consultants have been able to help our partners save.
Reveel’s industry experts can lift the veil on carrier strategies and help companies harness their data, leading to better understanding of their current contracts and better preparation for their next negotiation.
At Reveel, we preach data. The more data a shipper has — and the better company leaders understand it — the more effectively they can review their contract to spot inefficiencies and rates that no longer work for them.
Carrier contracts are intentionally confusing. Carriers know that shippers spend as much as 35 percent of their shipping budget on surcharges, and that surcharges are much harder for shippers to keep track of than general rates are — that’s why they continue to target surcharges for huge rate hikes.
Further, carriers are used to having the upper hand in contract negotiations. They don’t expect shippers to understand their contracts well enough to know which fees impact them most or which discounts they might be able to claim. Shippers armed with that kind of information can walk into negotiations confidently and take their carriers by surprise.
Finally, carriers do the same thing with invoices — long, dense documents that tell shippers which packages were delivered and whether they made it on time. Buried in these invoices is information about the refunds carriers owe their shippers. Unfortunately, it’s shippers who have to parse invoices, figure out what they’re owed and file claims.
Again, this is something carriers don’t expect shippers to do — but companies who can stand to save a lot of money.
It all starts with knowing your data.
Understand your data
The first step toward lower rates is an internal one: Know your data.
Most executives have a general sense of what, where, and how they ship. But those who can actually quantify such information have a huge advantage when it comes to monitoring and managing their shipping spend.
Think of these data points as pixels, illustrating a cohesive portrait of your shipping profile. Zoomed out, they reveal broad trends. But zoomed in, each is distinct: Each parcel has dimensions, weight, a destination, and its own profit margin.
Collecting package-level data is not an easy task, but once companies implement software and workflow changes to incorporate it into their process, it’s enormously powerful.
Data allows executives to see exactly how much they spend on each surcharge their carrier levies. They can quickly identify the products that rate changes will impact, and know how significantly those changes will eat into their bottom line. They can even make decisions about how to package new products so they ship more cheaply.
More importantly, shippers with robust data understand this component of their business at a much deeper and more sophisticated level.
For example: The dimensional divisor
Both FedEx and UPS have been reducing dimensional divisors service by service, year by year, for about five years. Dimensional divisors are now at 139 across the board.
Imagine that, next fall, your carrier reduces the dimensional divisor for standard ground parcels from 139 to 125. (Remember, dimensional weight is the product of the length, width and height of a package divided by the dimensional divisor; carriers charge according to dimensional or actual weight, whichever is greater.)
A 10x10x10 box had a dimensional weight of 7.19 pounds under the previous rates. Now, it’s dimensional weight is 8 pounds. That means, if your company ships a 10x10x10 box product that weighs 7.5 pounds, it will now be charged according to dimensional weight rather than its actual weight — an increase of about 7 percent per package.
That may seem like a narrow example — but that’s how carriers work.
Fees increase incrementally. Rate hikes impact every shipper differently depending on their shipping profiles. A large increase in UPS’s oversize package fee might not impact your business at all — but FedEx’s 20 percent reduction in the length of packages that require additional handling surcharges might erase your profit margins on a given product.
Executives who understand exactly what their shipping profile looks like can easily see which of their carriers’ policies impact their bottom line the most. And that gives them a clear sense of what to target in their next contract negotiation.
Negotiate a better contract
Re-negotiating a contract is the single most important step a company can take to secure better shipping rates. A shipper who has all the information described above is in a strong negotiating position.
Traditionally, “contract negotiation season” in the shipping industry takes place in the fall, around the time carriers announce general rate increases. But there’s no rule that says that’s the only time negotiations can occur. Shippers can call for renegotiation at any time.
At Reveel, we recommend that shippers negotiate new contracts whenever their business undergoes a significant evolution, like the addition of a new product or expansion into a new region.
Beyond that, we recommend that shippers renegotiate their contracts at least once every two years. Think about it this way: Every time carriers announce rate increases, they’re engaging in a kind of renegotiation by asking shippers to accept new rates. Most shippers do. But shippers who’ve accepted those increases continually for several years may be surprised to find how much their shipping spend has grown.
Preparing for negotiation starts with reviewing your current contract in conjunction with your data. What are your current discounts, accessorial fees, and price floors? How significantly does each of those impact your business? Follow the money to identify areas of your contract that would benefit most from renegotiation.
Second, it’s important to consider your contract compared to competitors. Do you know what other companies in your market spend on shipping? If not, you may benefit from a shipping intelligence partner like Reveel, who can lift the veil on some of that hard-to-find information.
Third, consider your carrier’s competitors, too. How long has it been since you did a side-by-side review of FedEx and UPS? Have you kept up with regional carriers, the U.S. Postal Service, and new entrants into the market, like DHL? Have you considered the impact Amazon’s forthcoming delivery service could have on your business?
Revisit alternative options regularly, not only to check their rates, but to see what services they’ve added. Stay open to a multi-carrier strategy or an altogether new carrier. Even if you don’t decide to leave your current carrier, this research can offer powerful leverage.
Parsing detailed shipping data, figuring out which contractual points to target, and preparing for negotiation can feel overwhelming. That’s where a trusted partner like Reveel can come in.
Many of our expert consultants are former pricing executives for shipping carriers. They’ve been on the other side of these negotiations. They know what carriers are thinking. And they know how shippers can spin their desired changes as win-wins, so that everybody leaves the negotiating table satisfied. They routinely save clients 15 to 20 percent on shipping.
And even after they have better contracts in hand, shippers still need to stay on top of their carriers — to make sure their invoices accurately reflect their services, and that shippers are getting all the refunds they’re owed.
Audit your invoices
Carrier invoices report every package delivery during the previous billing period. They contain valuable information about late and missed deliveries — carrier failures for which shippers can usually claim refunds — but it’s obscured in thousands of numerically coded lines.
If carriers really wanted to pay out those refunds, they could tell shippers about their on-time performance outright. But, of course, it’s not in carriers’ interest to have shippers double-checking their bills. Instead, it’s up to shippers to review these invoices, figure out where their carriers messed up, file claims for their refunds, and follow up to make sure those refunds are paid.
It’s a tedious, time-consuming process, and most companies simply don’t have a staffer with enough free time to take on invoice auditing. But it’s a critical part of reducing your shipping spend.
First, carriers make billing mistakes. Pretty often. They mistakenly label commercial addresses as residential ones or vice versa. They may charge shippers for address corrections when they aren’t necessary. They may use dimensional weight instead of actual weight incorrectly. Depending on their internal process, they may even mark packages as shipped when they haven’t been loaded onto trucks yet. It’s important for shippers to compare invoices to their internal records and make sure they match.
Second, most carriers promise refunds when they make mistakes, especially for late or missed deliveries. But they almost never tell shippers directly about these mistakes. They’re simply recorded, quietly, in hundred-page invoices.
Those shippers who are able to find evidence of late deliveries in their invoices then have to undergo an arduous claims process — they only have a couple of weeks to file claims, these claims are subject to very specific rules, and they may have to follow up with carriers several times to ensure they get paid.
Painstaking though it might be, it’s essential that shippers make time to claim these refunds. They can be worth thousands of dollars.
One of our core missions at Reveel is to ensure that shippers collect all the money they’re owed. That’s why we developed Invoice Auditing — our custom service that performs 45-point audits on each of our clients’ invoices. In one case, we helped the San Diego Zoo recover $13,000 its carrier had promised when a shipment was just a few minutes late. (That was after we helped zoo executives prepare for contract negotiations and save 20 percent on their ongoing shipping spend.)
We can help your company unlock the information hidden in your invoices, too. Contact us today for a free invoice audit to see how much you could save.