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USPS changes parcel pricing strategy; shipper impact unclear

On June 23, the U.S. Postal Service (USPS) implements a pricing change that subjects more parcels to rates pegged to their dimensions instead of their actual weight. What impact, if any, this has on the USPS shipper universe won’t be known for months.

Under the new policy, USPS will, for the first time, price parcels which measure more than 1 cubic feet – or 1,728 cubic inches in multiplied length, width and girth – and which move less than 600 miles by the higher of either its “dimensional” or actual weight. Currently, all parcels moving less than 600 miles are exempt from dimensional pricing. Also on June 23, each parcel measuring more than 1 cubic foot and moving more than 601 miles will be priced using a new “divisor” that calculates dimensional pricing, better known in the industry as “DIM.” The divisor will be reduced to 166 from 194.

USPS will not apply dimensional on any parcels measuring less than 1 cubic foot.

USPS would not disclose the mix of parcels that fall under the cubic threshold and would not disclose the typical parcel’s length-of-haul, and would. Gordon Glazer, a USPS specialist at consultancy Shipware, LLC, estimated that 80 percent of USPS traffic cubes out at less than 1 cubic foot. That’s because USPS is most price-competitive for small and lightweight shipments that would likely measure less than 1 cubic foot, Glazer said.

USPS in 2017 had a 61 percent delivery share of U.S. parcels weighing five pounds or less, according to data from consultancy ShipMatrix. Under 5-pound parcels comprise 69 percent of the U.S. parcel market, ShipMatrix found.

If the mathematical gyrations of DIM pricing sound a bit arcane, they are. But they are potentially significant for postal shippers whose items measure more than one cubic foot. Take a two-pound parcel cubing out at more than 1,728 cubic inches. Dividing the cubic sum by a 194 divisor yields a dimensional weight of about 8.9 pounds. Using a 166 divisor, the dimensional weight would climb to 10.4 pounds. Because USPS would bill at the higher of the two weights, a 2-pound parcel with a 1 cubic-foot dimension could be priced equal to a 10-pound shipment. The lower the divisor, the costlier it will be for shippers.

Under the new USPS formula, the rate on a parcel measuring 1 cubic foot would increase by 18 percent whether it moves more than 1,800 miles or 600 miles, according to Glazer. The pace of increases levels off as the parcels climb in density, based on Glazer’s data. Still, the increases range between the high single-digit and low double-digit levels depending on dimensions, Glazer said.

Like all freight, parcels cube out before they weigh out. Bulky items occupy a disproportionate amount of trailer space, thus reducing the number of total parcels each can hold. The dimensional charges have been designed, carriers say, to compensate them for any foregone revenue and the increased costs of handling larger stuff.

The DIM charges are also meant to force shippers to improve their packaging processes, carriers say. Carriers have been after their customers for years to minimize, if not eliminate, the use of bubble wrap, styrofoam and other supposed protections that add bulk to a box, and which may be overkill depending on the item’s value.

Parcel giants FedEx Corp. (NYSE:FDX) and UPS Inc. (NYSE:UPS) have shrunk their divisors several times over the past five years, going from 194 to 166 to the present-day divisor of 139. Each time a change was made, the firms rang the register to the tune of tens, if not hundreds, of millions of additional dollars from shippers whose parcels, for whatever reason, got caught in the dimensional pricing net. FedEx and UPS impose DIM pricing on all parcels.

USPS has a bigger challenge than UPS and FedEx with parcel pricing because it is what Satish Jindel, founder of ShipMatrix, referred to as the “dumping ground” for all types of packages, especially those that, up until June 23, had not been billed by their dimensions. In 2017, USPS handled 477 million parcels weighing more than five pounds, according to ShipMatrix data. That was a fraction of its 5.7 billion total parcel volume. Yet Jindel said the over-5 pound shipments shipments weighed heavily on postal costs because they required greater handling capabilities and challenged internal systems that were created to handle letters and small parcels.

USPS spent $7.9 billion in 2017 to purchase intercity transport services from trucking firms, according to last year’s Presidential task force report in postal reform. That was ostensibly used to move bulkier and heavier goods, Jindel said. He advised USPS to set a maximum weight limit–10 pounds, for example–and decline to accept all shipments weighing more than that; USPS accepts parcels weighing up to 70 pounds. Jindel said he would prefer USPS accept just those items that fit inside a consumers’ mailbox, locations where it has a monopoly. USPS Spokesman Carl Walton said such initiatives would need to be cleared by the U.S. Postal Rate Commission, an independent agency that oversees USPS’ products and services.

The dimensional weight playing field hasn’t been a level one, and is unlikely to stay that way after USPS’ expands it. FedEx and UPS have been known to grant temporary exemptions to DIM pricing for large customers, and have tweaked the formula for some to allow their parcels to slide by at the higher thresholds. Mark Magill, vice president of marketing for OnTrac, a regional parcel provider that covers eight states including California, said the company has no issue with bumping up the DIM for its biggest customers from its current 166 divisor to 194. USPS negotiates highly confidential service agreements that provide rate discounts to its big shippers. It may also modify the DIM formula for those shippers but is unlikely to allow them to avoid the pricing scheme altogether.

Ironically, FedEx, UPS and Amazon.com, Inc. (NASDAQ:AMZN), the three most visible postal parcel users, could get caught in the USPS’ DIM net because they induct millions of parcels deep into the postal delivery network for the final trip to the end customer. FedEx and UPS already impose DIM pricing on the shippers who use those services, known, respectively, as SmartPost and SurePost. It remains to be seen how much of that business will be subject to DIM, or how the giants will react to the change.

Andrew Gabbard, warehouse and fulfillment expert for ShippingEasy, a shipper consultant, said he doesn’t expect much shipper attrition from the USPS move. Even at the more stringent levels, merchants will find the new divisors easier to swallow than those imposed by FedEx and UPS, Gabbard said. In addition, FedEx and UPS assess a wide and expanding array of accessorial fees and surcharges, something USPS does not do.

USPS’ customers won’t benefit unless they get a great negotiated rate from FedEx or UPS, and even high-volume shippers don’t get much of a break off retail rates, Gabbard said. Even when shippers are forced to pay dimensional weight for larger packages, “USPS will still end up being the most cost-effective way to do so more often than not,” he added.

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Mark Solomon

Formerly the Executive Editor at DC Velocity, Mark Solomon joined FreightWaves as Managing Editor of Freight Markets. Solomon began his journalistic career in 1982 at Traffic World magazine, ran his own public relations firm (Media Based Solutions) from 1994 to 2008, and has been at DC Velocity since then. Over the course of his career, Solomon has covered nearly the whole gamut of the transportation and logistics industry, including trucking, railroads, maritime, 3PLs, and regulatory issues. Solomon witnessed and narrated the rise of Amazon and XPO Logistics and the shift of the U.S. Postal Service from a mail-focused service to parcel, as well as the exponential, e-commerce-driven growth of warehouse square footage and omnichannel fulfillment.

9 Comments

  1. We have been watching this and have been aware it was coming since sometime last here.. It is finally here. Going to be devastating to us, on on product line we sell and ship. We are a online shipping supply store. Bubble wrap, light and a little bulky… To many addresses, shipping will double…. We are negotiating with FedEx and UPS trying to find am alternative, but they also use dimensional weight. So it may get interesting if you currently purchase bubble wrap online and have it shipped to you via small parcel shipping.

    1. Currently we can ship a roll of bubble wrap at the actual 3lb rate. Come June 23rd, we will have to pay the 29 lb rate!! 20x20x12″ package, actual weight 3 lbs!

      It’s not just us, all of our competitors also. USPS Parcel Select Ground was the last cost effective way to ship this type of product. I sure many other industries are going to get caught in this mess too.

      We, and it sounds like some of our competition at least will be switching these package from USPS to UPS/ Fedex, where there is still dim weight, but also is negotiated discounts, dim divisors etc that will make them the better option over the USPS.

      I keep reading volume is down at the USPS, letters down, due to email, online bill pay etc. Losing money every qr. How does this help? I cannot imagine how this is going to effect their package volume, thus profits. They just priced themselves out of the market for many packages.

  2. Who could have seen this coming? Oh yeah, everyone did. USPS is subsidizing their bad contract with Amazon by bleeding it’s small business shippers dry. Good job guys. First you get raided by congress, then you let Bezos bend you over at 0.30 cents a parcel and now you try to reverse the billions of loss by attacking the little guy.

  3. > USPS spent $7.9 billion in 2017 to purchase intercity transport services from trucking firms, according to last year’s Presidential task force report in postal reform.

    I can’t for the life of me figure out why the USPS steadfastly refuses to utilize intermodal rail. That could cut that figure down by a significant amount and reduce Parcel Select (and Retail Ground) pricing for long-distance shipments.

    Currently, Parcel Select pricing is virtually the same as Priority Mail, even though the latter utilizes far more expensive (and far less environmentally friendly) air cargo. If the USPS would ship long-distance parcels by rail instead of truck, they’d be able to make ground shipping prices low enough to entice shippers to move low-priority shipments off of the expensive air cargo contracts and onto more fuel-efficient overland transport. That would also help the USPS to be more competitive with UPS and FedEx Ground in many shipping lanes where they’re actually currently more expensive than the private carriers.

    USPS managers have said that they don’t want to use rail transport because it will lengthen transit times. News flash: no one on earth currently ships Parcel Select when they care about transit time, because the service standards are far worse than the private carriers’ (and are often, oddly, more expensive). The USPS should embrace this and focus on providing the lowest-cost service. When cross-country Parcel Select transit times are already 7 days compared to UPS or FedEx Ground’s 4 days, what’s an extra day or two, especially if the price is 20% cheaper than the alternatives?

    For that matter, these days, even First Class Mail is frequently not urgent. Perhaps the USPS should revise standards and send trays of letters overland, too, and save on expensive air freight contracts.

    Unfortunately, no one at the USPS seems interested in actually improving efficiency and cost control in their long-haul shipping logistics, so we’ll instead continue to see prices rise and financial problems at the USPS.

  4. I can only say, I am a simple crafter senior citizen who lives on SS. I can no longer send even a 5×7 Manila envelope anywhere international because USPS charges me 2 rates, either $14.00 or $23.00 these are less than 1/4 inch thick.
    This is what I call Highway Robbery at its finest!!! I worked for the Post Office a long time ago when they did things differently, and weren’t so GREEDY! It’s a sad state of affairs and they refuse to make the proper changes . They rather keep making STUPID decisions like they did when they spent 7.9 Million to purchase inner city transport services from trucking firms which you can find in the Presidential Task Force report on Postal Reform! I agree with Chris Luth, above, and know that I will no longer be able to mail any package other than a small letter envelope overseas that cost $1.15/1.25
    We keep having to pay for their bad decisions and I wonder how long it will be before the masses get smart and have an uprising about this!!! COME ON PEOPLE, PAY ATTENTION WHAT IS GOING ON WITH THE POSTAL SERVICE! DO YOU REALLY LIKE BEING MONOTARIALLY RAPED BY THE POST OFFICE??? No one person can change this but if we all get together, we can!!! I hope everyone at least reads this!
    I’m infuriated over these charges and want to see change.

  5. Maybe this’ll teach people not to ship a pair or socks or something in a 12x12x12 inch box or some other such nonsense. As a letter carrier that’s one of the things that pisses me off the most. “Oh awesome, by swimming googles are here!!” Guy says after he opens the briefcase sized and shaped box that I just handed him. That could of been shipped in a little padded envelope. I’m glad for this change. Makes my life a little easier not having to fit all these nonsense boxes into my small delivery vehicle.

  6. Last week before the ‘adjustment’ they were the lowest cost to ship, now they’re almost double what UPS and Fedex cost. As much as I hate Amazon getting into shipping, there is a great opportunity to undercut the greed of the entire industry… Still working it’s way out but I can see some sort of Uber for freight which would spread the workload, get people paid based on productivity and benefit everyone including the person that wants to ship a product. Something has to change, the pricing is getting ridiculous.

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