UPS Inc. has rolled out a pricing program that offers shippers one all-in rate while waiving almost all delivery surcharges, according to sources familiar with the effort.
UPS (NYSE: UPS) is marketing the initiative as a simplified way to pay for shipping and a convenience to shippers, the sources said. However, the convenience might come at a price.
Rates in the new program are not as deeply discounted as they are in the original pricing version. The net result is that shippers could easily be paying more under the revised formula than under their original pricing matrix, one source said. The traditional formula breaks out each surcharge as line items in contractual agreements.
The new formula will be offered to all customers regardless of their shipping profile. It will be available to those shipping by air and ground, as well as internationally. There will not be a volume commitment for small to midsize shippers (SMBs), one source said. However, large enterprise customers will have a volume commitment.
The program isn’t a take-it-or-leave it proposition. UPS has allowed several shippers that were offered the new pricing to return to their current plans. The bottom-line differential between the two versions is not egregious or predatory.
“We want our customers to have pricing options that match their needs,” UPS said in a statement. “Some customers place more value on all-in pricing, particularly because it can streamline the billing process. We strive to help our customers think through the best pricing structures and provide options accordingly.”
There is no indication that rival FedEx Corp. (NYSE: FDX) has developed, or is developing, a similar initiative. Both companies boast a long reputation for following each other in lockstep on programs such as the one UPS has introduced.
The only surcharges that might still be imposed would apply to the handling of bulky, oddly dimensioned parcels that cannot be run through a conveyor and require extra labor and other resources to deliver, one source said.
There is a large element of psychology behind the initiative.
UPS is mindful that parcel shippers loathe delivery surcharges, which have grown in number, cost and complexity. Once few enough to fit on one or two pieces of paper, surcharges today number around 100.
Many shippers believe surcharges are designed to generate profitable revenue for the carriers, rather than being priced as pass-throughs to offset their costs to serve. The biggest complaint is over fuel surcharges, which don’t involve any carrier effort yet are levied in a manner, industry experts maintain, out of line with the normal price movement of the commodity.
The carriers do little to change the perception of what surcharges are designed to do. On quarterly analyst calls, carrier executives tout the value of surcharges in meeting their financial projections. So they have no inclination or motivation to ratchet them back.
UPS is banking on customers being so sick of surcharges, especially with the plethora of peak-season levies on the horizon, that they will migrate toward a pricing plan that effectively waives the levies and replaces them with one consolidated rate based on package weight and geographic delivery zones.
The initiative is also aimed at those businesses that might not be savvy enough to understand their total cost of delivery, one source said. The new pricing incorporates an imputed cost of surcharges into the base rate. The original version could benefit the shipper more because many surcharges wouldn’t apply to that customer. Thus, UPS wouldn’t be able to capture revenue on surcharges that wouldn’t be relevant to that customer.
The sources advised shippers to be prudent before they jump into a contract that might sacrifice cost in the name of simplicity. They should also know, if they don’t already, that UPS will not be the party caught off guard by the new pricing’s nuances. UPS is focused on boosting yields per package, and it will not be swayed from that goal for the sake of shipper convenience.
UPS has spent about eight years developing the initiative, according to one of the sources. It also has spent considerable time and money reformatting its technology to accommodate the program.
UPS is taking on some risk with the effort. Fuel surcharges, which can make up as much as 40% of all surcharge expenses, can fluctuate frequently and sometimes wildly depending on moves in the prices of oil and fuel. UPS could commit to a contract based on a certain price point for air and diesel, only to see fuel prices rise and the carrier not able to adjust its contractual terms.
In some ways, the program is tantamount to the rates paid by retail customers — those who don’t receive regular pickups from UPS — if they dropped off a package at one of the UPS Store storefront locations.
“It’s a retail model for non-retail customers,” said one source about the all-in pricing initiative.
It also harkens back to turn-of-the-century parcel pricing when the carriers would announce a general rate increase and back out a certain percentage — typically 2 percentage points — for the cost of fuel.