We all buy products online and wait for them to get delivered by shipping companies (let’s take FedEx as an example), this process, which is parcel shipping, contains complex operations and calculations which we do not see as they are done in the hidden layer happening between businesses and shipping companies, parcel shipping has base standard rates or costs which we all know about as we send some items individually from time to time, but they also have a lot of penalties (or surcharges as called by professionals in the field) which we do not know about, those penalties can reach high values and affect the pricing policies and competitiveness of one business.
What are shipping base rates and what are shipping surcharges and how do they differ?
Shipping base rates and shipping surcharges are the two fundamental parts of the total shipping
cost of goods, but companies add them differently and calculate them based on different criteria, so the primary
difference between shipping base rates and surcharges lies in their purpose and calculation criteria:
Shipping Base Rates are the core shipping costs, calculated based on the logistical aspects of transporting an item
from one origin point to another destination point under standard conditions.
Surcharges (sometimes called penalties or accessory charges) are additional fees charged by companies to cover
specific circumstances, services, or handling requirements beyond conditions set by standard shipping.
Shipping Base Rates (or standard costs):
Shipping base rates are the fundamental costs charged by companies for transporting an item from one location to another, they are standard and based on size and weight of the shipment. These rates are determined by several factors, including:
- Distance: The geographical distance between the origin location and the destination location logically plays a big role in affecting the base rate of shipping, the longer the distance the higher the shipping rates.
- Weight and Size of the Package: The weight and three dimensions of the package (height, length, and weight) are also so important in calculating the base shipping rate of an item. Parcel shipping companies (carriers) have increasing prices (or pricing tiers) for increasing weights and dimensions of packages, dimensions add more than you can imagine as shipping companies use what is called “Length and Girth” which is length plus (two times the height) plus (two times the width) [length + 2 x height + 2 x width].
- Service Type: The time and type of delivery service selected (e.g., standard, express, overnight, next day, third day) also determine the base rate. The faster the delivery time the higher the shipping rates.
- Carrier: Different carriers (e.g., FedEx, UPS, DHL) have their own pricing structures for base rates, influenced by their service offerings, network efficiency, and market positioning.
Those are standard shipping rates, now let's discover shipping surcharges.
Shipping Surcharges:
Shipping surcharges are penalties or additional fees added to the base rate of shipping for a specific item in specific services, specific conditions, specific times, or specific handling requirements.
Surcharges (or penalties) are applied to cover extra costs based on certain shipping scenarios or to compensate for additional risks or efforts done by shipping companies' teams during the delivery process.
Sometimes companies charge penalties on shipments just to make more revenue, take fuel surcharge (penalty) for example which shipping companies add to shipping cost of delivering items to far places, companies sometimes announce frankly that one of the purposes of it is just to collect more revenue.
Common types of surcharges include some surcharges that have standard amounts announced in service guides of companies like FedEx Service Guide that is issued annually by FedEx, other surcharges are changeable and announced weekly or monthly by companies on their websites as percentage of base shipping rates like fuel surcharges and demand surcharges (previously known as peak surcharges), some of those surcharges are:
- Unauthorised Over-Size (Unauthorised OS) Surcharge: the highest surcharge ever a business could have on one shipment, FedEx has announced its value to be 1,250 USD in 2024. This surcharge is charged on some shipments that have extremely big dimensions or weights.
- Oversized or Overweight Packages: Applied to packages that exceed the carrier's standard weight and size limits, requiring special handling.
- Additional Handling Surcharges: Several types of surcharges which are kinds of fees applied on packages that need special care because of their size (Additional Handling Surcharge - Dimension), shape (Additional Handling Surcharge - Packaging), or weight (Additional Handling Surcharges - Weight). Caused by oversized dimensions, irregular shapes, or manual handling needs, these surcharges cover extra handling and equipment costs.
- Fuel Surcharge: Changeable surcharges that are announced by shipping companies on their websites, this surcharge is caused by fluctuating costs of fuel and is calculated as a percentage of the base shipping rate before adding any surcharges to it.
- Demand Surcharge (Previously Called Peak Surcharge): An extra fee added by shipping companies to base shipping rates of shipments shipped during peak times, like holiday seasons or specific events, to manage increased shipping volumes and carrier capacity and to compensates for additional resources, labor, and logistics management required to maintain service levels during high package volumes times.
- Residential Delivery Surcharge: Applied for delivering packages to residential addresses, reflecting the higher cost of these deliveries compared to commercial locations.
- Remote Area Delivery Surcharges: For shipments to locations that are difficult to access or outside of the carrier's standard delivery network.
And other surcharges you can find in the websites and service guides of carriers (shipping companies).
In the following pictures you will find a tabular representation of the most important surcharges announced by FedEx over the last five years, the surcharges are in the first column are categorized by service in the second column:
Clearly, surcharges announced by FedEx are increasing over time which reflects increasing operational costs for businesses, specially e-commerce businesses, that also reflects the inflation levels, and possibly adjustments for increased demand and logistic complexities. That trend applies to domestic services (express, ground, home delivery) and international services (international express, international ground).
FedEx started charging higher amounts for some surcharges for far zones (higher zones number in the data) for domestic services in 2022, higher zones means longer distances. We can see that in several surcharges like all "Additional Handling" surcharges and "Oversize Charge" surcharges.
The "Unauthorized OS" surcharge, which is the highest of all surcharges, increased dramatically from 2019 to 2024, reflecting a strong tendency of FedEx to decrease packages with extremely exceeding dimensions or weight.
Those are the surcharges and their amounts over the last five years, but surcharges are not the base shipping costs but are the penalties applied to shipments for not complying with the carrier's standard sizes and dimensions, on the other hand, shipping companies announce every year what is known as General Increase Rate (GRI) which represents increase in standard shipping rates in different services.
What is GRI (General Increase Rate):
GRI's or General Rate Increases are increases in base shipping rates (standard rates not penalties or surcharges) that parcel shipping companies announce and implement annually on their websites. Parcel shipping companies normally announce those rates at the end of each year and those rate increases take place at the beginning of the next year, the General Rate Increases (GRI’s) announced by those companies affect the base shipping rates and vary for different shipping services like Freight, Home Delivery, Express, and Ground services.
Businesses in the ecommerce sector must monitor GRIs to accurately forecast shipping costs and manage their shipping strategies effectively.
What are the reasons for GRI’s announced by parcel shipping companies?
Reasons can include factors like:
- Inflation (price increases in the country in general will affect shipping prices).
- Changes in transportation and operation costs.
- Changes in fuel prices.
- Enhancements to service offerings
- Changes in demand and supply dynamics within the logistics and transportation sectors, and
- Disturbances in the supply chain and international trade network (take COVID-19 and Russian-Ukrainian war as examples, we all still remember how shipping and freight prices soared during those times)
And other surcharges you can find in the websites and service guides of carriers (shipping companies).
In the following pictures you will find a tabular representation of the most important surcharges announced by FedEx over the last five years, the surcharges are in the first column are categorized by service in the second column:
GRI rates were lower for some services between 2013 and 2018 (3.9% for Freight and Express) and higher for other services (4.9% for Home Delivery and Ground services) which could mean differences in operational costs or competitive pressures specific to each service. The steady GRI between 2014 and 2021 may reflect a balanced approach of shipping companies to cover its increased operational costs while staying competitive in the market.
COVID-19 and Russian-Ukrainian war had their impacts on GRI rates starting in 2021 with an increasing trend in GRI for all services as seen in the chart above, and peaking in the highest-in-12-years GRI in 2023 (7.4% and 6.9% for different services) which means significant changes in operational costs due to global supply chain challenges, inflation and fuel price increases caused by the reasons mentioned above.
In 2024 the GRI was lower than the one of 2023 but still higher than the GRI rates of the previous ten years. This reflects a stabilization of the supply chain challenges, increasing fuel prices challenges, and increasing global inflation challenges caused by both COVID-19 and the Russian-Ukrainian war in the previous years, it also reflects the tendency of FedEx and other companies to stay competitive in the market.
How GRI’s (General Rate Increases) and increasing in surcharges affect e-commerce businesses:
For e-commerce businesses, the GRI and increasing surcharges mean:
- Increased Shipping Costs: As total shipping costs consist of base shipping costs (rates) in addition to surcharges, increasing surcharges and GRI means higher shipping costs for e-commerce businesses. This double layer of increase in shipping costs affects not only the shipping cost of sending items and products but also adds a big effect on sending some oversized packages or packages that require additional handling or signatures.
- Pricing Strategy Adjustments: E-commerce businesses need to revise their pricing strategies more frequently to avoid getting to what is called black holes (where bad or obsolete pricing strategies lead to lost demand on company’s products and a loss of huge market share). These revisions should balance between increasing products prices to compensate for increasing shipping costs and keep a good profit margin and between keeping products prices competitive in the market.
- Searching Other Shipping Options: The effect of increasing base shipping rates (GRI) and increasing surcharges may lead businesses to seek other shipping providers in the market or negotiate better rates and discounts with FedEx and other carriers. This can also lead to working with new solutions like Logistics Intelligence (LI) and other solutions to optimize and cut shipping costs.
- Impact on Customer Experience: As shipping costs are paid by the customer directly or indirectly, increasing shipping rates and surcharges means that businesses should reflect that in their policies and try to seek solutions to cut shipping costs to stay aligned with customer expectations and keep high customer satisfaction and loyalty.
- Optimizing Operations and Logistics: To decrease the effect of increasing shipping rates and surcharges, e-commerce businesses need to invest in operations and logistics optimization like packaging optimization to decrease surcharges on oversized items, a good inventory system to avoid unnecessary shipments, and a good customer service to decrease the volume of returns regarding that returns sent by customers get a lot of surcharges due to bad packaging done by customers.
- Long-term Forecasting: E-commerce businesses need to integrate their shipping costs with their financial planning, by incorporating GRI and increasing surcharges with their long-term budgeting and forecasting they can forecast future costs better and maintain profitability. Using some solutions like LI (logistic Intelligence) can help companies create and adjust their strategies proactively.
Recommendations for E-Commerce Businesses to Mitigate the Effect of GRI and Increasing Surcharges:
Increasing shipping rates and surcharges make it difficult for ecommerce businesses to manage shipping costs and stay competitive in the market. Here are some recommendations for businesses to handle those issues:
- Analyze Your Shipping Data: Use good integrated information systems (MIS), business intelligence solutions (BI), and logistic intelligence solutions (LI) to have your shipping data integrated with other data in one place, this will leverage your ability to analyze and plan your shipping costs, to make decisions faster, and to adjust strategies based on real-time data.
- Get Professional Consultation: Seek consultation from experienced professionals in the field who can negotiate on behalf of you and get your business huge discounts on surcharges and lower shipping rates.
- Adjust your pricing strategy and communicate your pricing policy clearly with your customers. Offering a shipping costs calculator in checkout pages adds a transparency layer and allows your customers to choose shipping options based on service or provider as they desire.
- Operational Efficiency and Innovation: Optimize your packaging operations to avoid surcharges on oversized packages, make sure to implement good inventory management system to avoid unnecessary shipments from far locations. Finally, automate your system to allow automated carrier selection based on service or zone which cuts a huge part of your shipping costs.
- Have a Broad Geographic Existence: Work with local fulfillment centers and 3PL providers to shorten delivery distances, which reduces your shipping costs and time, that also reduce zone-based surcharges. All of that leads to higher customer satisfaction and loyalty. Make sure the cost you are paying to local fulfillment centers and 3PL providers is less than the savings you are incurring in shipping costs and surcharges
Conclusion
As competition is getting higher in the market, focus is being shed more on supply chain and logistics, a lot of successful companies in the market are the ones who have proactive approach toward their shipping strategies and who have the ability to cut as much shipping and delivery costs as possible.
On the other hand, technological improvements has enabled companies to create solutions that automate, plan, and optimize their shipping processes and costs on high and complex levels, an example of those solutions is LI (logistic Intelligence).
Hashtags:
#Ecommerce, #shipping, #OnlineBusiness, #Logistics, #SupplyChain, #Freight, #ParcelShipping, #CostReduction, #RetailLogistics, #ShippingSolutions, #logisticintelligence,Tags:
e-commerce, digital-marketingThank you for taking the time to read my insights on parcel shipping. Please add your thoughts and feedback in the comment below or share the article, and should you have any other ideas to add or discuss, do not hesitate to get in touch please:
- Connect on LinkedIn: Abdulkader Khouja
- Explore our services: Business Niche
- Email: info@business-niche.com
- Tel: +971-58-114-7712
I look forward to hearing from you and exploring how we can drive the future of parcel shipping together.
Resources
If you are interested in knowing more about parcel shipping dynamics and jargons, you can view the following resources:
- FedEx Service Guide 2024 and before for updated surcharge numbers: https://www.fedex.com/content/dam/fedex/us-united-states/services/Service_Guide_2024_preview.pdf
- FedEx GRI announcements, MEMPHIS, Tenn., August 29, 2023: https://newsroom.fedex.com/newsroom/global-english/fedex-announces-adjusted-shipping-rates-fees-and-surcharges#:~:text=(NYSE%3A%20FDX)%2C%20will,rates%20on%20January%201%2C%202024.&text=FedEx%20Express%20shipping%20rates%20will,export%2C%20and%20U.S.%20import%20services.
- Sifted Logistic Intelligence (LI) for optimizing, analysing, and cutting your parcel shipping costs: https://sifted.com/
- Shipware a competitor of Sifted: https://shipware.com/
