How Dimensional
Rate Pricing will
Impact Businesses
in 2015
January 2015
The purpose of this whitepaper is to examine changes being
implemented in 2015 by FedEx and UPS concerning the application
of Dimensional Weight (or DIM Weight) rules. Additionally, this report
considers the impact of the newly published rates recently announced
by FedEx and UPS for 2015.
In May of 2014 FedEx Ground (FXG) announced that,
beginning on January 1, 2015 it will adopt new rules when
determining the weight it applies to all its domestic ground
shipments. UPS, the largest U.S. domestic ground carrier
and FXG’s chief rival in the market, followed suit in June,
announcing its change would take effect on December 29, 2014.
Up until now, UPS and FedEx Ground have both calculated charges for ground shipments based upon
the actual weight of a package, rounded up to the nearest pound. However, if the volume (length x width
x height in inches) of a ground package measured over 5,184 cubic inches, the package’s dimensional
weight – a measure which takes package density into account – was used as the basis for calculating
charges.
After the announced changes are implemented, UPS and FedEx will apply this so-called DIM rule on all
ground packages, regardless of cubic volume. This follows a similar change both carriers adopted in 2011
for domestic and international air shipments. These changes are scheduled to coincide with both carriers’
General Rate Increases, discussed later in more detail, along with an analysis of their combined impact for
shippers in 2015.
Dimensional Weight Calculation
To determine the dimensional weight of a package, you follow these steps:
Figure 1: Dimensional Weight Calculation Source: The Colography Group, Inc.
The Impact of Rate and Billing Changes for 2015
2
Step 1
•
Measure each of the package’s three dimensions – length, width and height – in inches. For
each dimension, measure at the longest point, rounding each measurement to the nearest whole
number (for example, 1.00 to 1.49 inches is considered 1 inch, and 1.50 to 1.99 is considered 2
inches). Then, multiply length x width x height. The result is the package’s volume expressed in
cubic inches.
Step 2
•
Divide the cubic volume in inches by 166 to determine the dimensional weight in pounds.
Increase any fraction to the next whole pound.
EXAMPLE: PACKAGE 12 IN. LONG, 10 IN. WIDE AND 8 IN. HIGH HAS A CUBIC VOLUME OF 960 CU.
IN. (12” X 10” X 8” = 960 IN.3) AND A DIM WEIGHT OF 5.78 LBS. (960 ÷ 166 = 5.78 LBS.) WHICH FOR
PRICING PURPOSES IS ROUNDED TO 6 LBS.
•
If the resultant figure is less than the package’s actual weight, the actual weight is used;
if greater, the dimensional weight is used. In either case, the larger number will be used.
The figure ‘166’ – known as the dimensional weight volumetric divisor – assumes a standard package
density (weight per unit of volume) of 10.4 pounds per cubic foot (lb./ft3). Therefore, any package with
a density below 10.4 lb./ft3 is, by adoption of the DIM Weight rule, considered to have at least of 10.4
density for pricing/rating purposes. If its density is greater than 10.4 lb./ft3, then the package is charged
its actual weight.
DIMENSIONS
VOLUME
(CU. IN.)
DIM. WEIGHT
VOLUME
DIVISOR
DIM.
WEIGHT
CHARGEABLE
WEIGHT
(CHW)
PERCENT
CHW GT
ACTUAL
7 lb..
12” x 12” x 12”
1,728
194
8.9
9.0
27.2%
7 lb.
12” x 12” x 12”
1,728
166
10.4
10.0
48.7%
7 lb.
12” x 12” x 12”
1,728
N/A
N/A
7.0
-
25 lb
36” x 12” x 12”
5,184
194
26.7
27.0
6.9%
7 lb.
12” x 12” x 12”
1,728
166
10.4
11.0
48.7%
25 lb.
36” x 12” 12”
5,184
166
31.2
32.0
24.9%
ACTUAL
WEIGHT
Before Change
After Change (2011)
MARKET SEGMENT
Domestic Air
Domestic Ground
Before Change
After Change (2015)
(CHW = Chargeable Weight; GT = Greater Than).
Figure 2: U.S. Domestic Dimensional Weight Changes For 2015. Source: The Colography Group, Inc.
For international shipments, the DIM Weight calculation is the same except for the dimensional weight
volumetric divisor which is 139, equivalent to 12.4 lb./ft3.
The Impact of Rate and Billing Changes for 2015
3
Why Is This Change Occurring?
Three trends are transforming today’s domestic package delivery market:
1.
Modal substitution of ground for air: U.S. domestic overnight has declined as a percentage
of total air and ground packages; since 2008, 70% of the growth in total air and ground parcels
has been by ground.
2.
Growth in B2C delivery: Over the past 3 years, the percentage of total U.S. domestic air
and ground parcel deliveries to residential addresses has grown at a compound annual rate
of 6.6%.
3.
Average shipment weight has declined: The percentage of pieces weighing less than 2
pounds has increased – from 27.9% in 2008 to 33.4% in 2013. The resultant overall average
weight of U.S. domestic packages less than 70 pounds is steadily declining.
2010
2013
73%
67%
27%
Percent Of
Volume
< 2 lbs.
33%
Figure 3: U.S. Domestic Market under 70-Pound Shipment Weight, CY 2008 vs. 2013. Source: The Colography Group, Inc.
Compounding this trend is the enormously popular Flat-Rate pricing program inaugurated by USPS for
Priority Mail Express and Priority Mail. With packages priced at roughly the equivalent of Zone 2 and
an “if it fits, it ships” philosophy, flat-rate pricing is hollowing high-density packages out of the overall
mix of domestic traffic. The result is that the remainder of shipments are, on average, even less dense.
The popularity of this pricing program has even prompted FedEx Express to create its own version of
flat rate pricing called FedEx One Rate.
The common thread connecting these trends is the dramatic growth of e-commerce, which currently
accounts for about 9% of all retail sales, a percentage that is growing at an estimated rate of 15%
annually. And this has impacted the business models in two ways: rising costs and declining revenue.
Costs: The vast majority of e-commerce shipments are B2C: over the past 10 years UPS’ has reported
that its percentage of deliveries to homes has risen from 20% to 44%. Because residential stop-density
(the number of packages delivered per stop) is far lower than it is for commercial deliveries, making a
The Impact of Rate and Billing Changes for 2015
4
residential delivery is among the carriers’ most cost-intensive activities. The popularity of the USPS’
Parcel Select Program is due in large part to the fact that UPS and FedEx – its two biggest ‘customers’
– cannot come close to matching USPS’ stop-density. It is more cost-effective for them to divert as
much home delivery traffic as possible to Parcel Select for ‘last-mile’ delivery. In spite of these measures,
though, the sharp increase in residential is increasing unit costs.
As e-commerce has developed, online customers have also come to expect so-called ‘free shipping’:
the primary reason cited by consumers for ‘abandoning’ online shopping carts is the discovery that
free shipping is not provided. Of course, the shipping is not actually free. The cost of shipping is simply
rolled into the overall cost of the product. As a result, e-commerce shippers are constantly seeking
ways to reduce their shipping spend, as such savings have a direct impact on their bottom line.
This, among many other factors such as the recession, higher costs of fuel, maintenance, etc., is a
powerful motive behind the shift from air to ground. While online shoppers prize free shipping, they are
willing to accept slower delivery as an offset, and e-commerce shippers, confronted with delivering on
the ‘free shipping’ expectation, see shifting from air to ground as a necessary step to controlling costs.
Until now, another factor has been that since 2011, air parcels have been subject to the DIM rule, while
ground parcels under 3 cu. ft. have not. This has exacerbated the move from air to ground, particularly
for less dense shipments, which is another factor driving costs. In explaining its rationale for making
the decision to go with dimensional pricing, UPS noted that package weight compared to the physical
exterior dimension is declining.
E-commerce has contributed to this trend in two ways:
•
First, instead of shipping one 50-lb. box containing 25 iPads to a Best Buy outlet in a suburban mall,
increasingly what is taking place is Apple’s distribution center ships twenty-five 2-lb. packages to 25
separate addresses.
•
Second, shippers are notorious for over-packing lightweight packages, partly to protect them from
the handling that goes on in the carriers’ hubs and partly out of convenience. For years UPS and
FedEx have been trying to persuade shippers into adopting more sensible packaging. But without
any financial incentive to do so, years and years later, shippers are still accustomed to shipping
smartphones and other small electronics in larger-than-necessary boxes stuffed with bubble wrap.
•
Lower density packages eat up cubic capacity in trucks at little or no cost to shippers. Up until
now, the cost of moving a five-pound shipment was essentially the same whether it came in a
larger box or not. This, in turn, causes cargo space to be less efficiently utilized and results in a
higher cost per package.
Cubic space is vital to both on line-hauls and local deliveries, because trucks and vans often “cube
out,” or run out of useful space, before they reach their overall weight limit. This, in turn, requires the
carriers to buy and operate more trucks and vans to handle what essentially is the same amount of
revenue-producing freight.
Last year’s holiday season delivery crisis occurred because FedEx and UPS found they had insufficient
capacity in airplanes, trucks and vans to handle the late seasonal surge in e-commerce package
volume. The result was a disaster for their bottom line: despite record volumes and revenue, their
costs exploded; they fielded a much higher volume of calls to customer service from unhappy shippers
and consignees; they were forced to pay a higher percentage of claims for unmet service commitments;
The Impact of Rate and Billing Changes for 2015
5
and worst of all, they had to purchase additional capacity under less-than-advantageous emergency
circumstances – a guaranteed prescription for runaway costs.
Revenue: Until now, distance and weight (and the shipper’s highly negotiable rate discount) were
the prime factors in determining a shipment’s price. This, too, is changing: as previously mentioned,
average package weight is declining, and while lighter-weight parcels command a higher price per
pound, a 7-pound parcel still generates less revenue than a 9-pound one.
Even more significantly, the shift from air to ground – and within air from overnight to second/third day
delivery or even to Parcel Select – has contributed to the overall decline in yields, as the lowest-yielding
traffic is growing at the fastest rate.
Moreover, distance or Length of Haul, the second component besides weight in determining shipment
price, is declining, too, also as a result of trends triggered by e-commerce. Amazon.com, one of the
largest e-commerce shippers on the planet, has 43 regional distribution centers in the U.S. alone, up
from 32 in 2012. Amazon Prime, its hugely successful program guaranteeing free 2-day shipping to
anyone who pays a $99 per year fee, can only accomplish two-day delivery using ground transportation
if the point of origin is close to the customer, thus sending packages to the shortest distance, or zone,
possible to make shipping costs economically feasible.
UPS DIM Weight Policy
USPS’ dimensional pricing policy is more liberal than its competitors: Priority Mail Express has no
dimensional rule whatsoever, while Priority Mail uses dimensional pricing only for packages measuring
greater than 1 cu. ft. (1,728 cu. in.), applied only to packages moving in Zones 5-8, and employing a
greater dimensional weight volumetric divisor of 194.
The 2015 General Rate Increase
These changes are also taking place in the context of UPS and FedEx’s annual general rate increases.
It should be noted that UPS air and ground rates are virtually identical to FedEx’s, as are their proposed
2015 rate increases, which are +4.9% for both domestic air and ground shipments.
However, as Figure 5 illustrates, the degree of the increase varies by product and weight. The areas
highlighted in green indicate circumstances where a slower, cheaper transit service had a higher
rate increase.
Figure 4: U.S. Domestic Rate Increases By Carrier, Product And Weight: FedEx And UPS Standard Rates
(Average Of Zones 2-8). Source: The Colography Group, Inc.
The Impact of Rate and Billing Changes for 2015
6
Given the trends discussed earlier, this should come as no surprise: essentially, the carriers are raising
the rates most on the products that are growing the fastest, and by the same percentage. The lone
exception is FedEx’s 7.7% to 7.9% increase on Express Saver rates compared to UPS’ slight increase
of 0.1% to 1.2%, and no increase for shipments over 10 pounds.
It is also noteworthy that both carriers’ rate increases for ground service are commensurate, albeit
slightly lower, than their increases for their second-day air products. As has already been discussed,
however, the burden of the dimensional rule changes will impact ground services more than air,
because this is where e-commerce shipment volume is most heavily concentrated. Moreover, the
dimensional rule change for ground service was already implemented for air services four years ago.
Both carriers are also imposing rate increases on fees and surcharges. By and large, both carriers levy
fees for the same accessorial services, but the level of increase is slightly different:
•
UPS average for all surcharges (excluding fuel):
4.3%
•
FedEx average for all surcharges (excluding fuel):
5.7%
These fees mask the full extent of their general rate increases. For the purposes of this report,
the surcharges most relevant to e-commerce business are those for ground residential delivery:
•
Ground residential surcharge
6.9%
(+$0.20 to $3.10)
•
Air residential surcharge
4.8%
(+$0.15 to $3.50)
And both Delivery Area and Extended Area Delivery surcharges:
•
Delivery Area Ground Residential
5.3%
(+$0.15 to $3.00)
•
Delivery Area Air Residential
4.4%
(+$0.15 to $3.55)
•
Extended Area Ground Residential
4.9%
(+$0.18 to $3.80)
•
Extended Area Air Residential
4.1%
(+$0.15 to $3.80)
When sending a package to a residential address where the residence falls in a delivery area surcharge
area, the customer is charged both the residential surcharge AND the delivery area surcharge. For a
ground package delivered to a residence in a ZIP code designated for a delivery area surcharge this
totals $6.10 in added charges; for an extended area, it increases to $7.30. These surcharges testify to
the fact that making residential deliveries is an expensive proposition for UPS and FedEx, and explains
why they have become such big Parcel Select participants.
Unlike its two competitors, USPS has proposed no rate increases for 2015, neither for Priority Mail (PM)
nor for Priority Mail Express (PME). Therefore, Commercial Base and Commercial Plus rates for both
services compare very favorably to UPS/FedEx standard rates for shipments up to 10 pounds, which is
where the majority of shipments, and in particular e-commerce shipments, reside (see Figure 5).
The Impact of Rate and Billing Changes for 2015
7
This advantage is nearly comprehensive:
•
It extends across Zones 2-8 for PME vs. FedEx’s Standard Overnight and UPS’ Next Day Air Saver
(which have identical published standard rates), ranging from 40% to over 53% (exclusive of
discounts and fuel surcharge).
•
PM’s rate advantage over UPS/FedEx 2-Day Air rates ranges from 60% to nearly 70%, and
extends across all ranges.
•
Even against FedEx/UPS Ground rates, PM rates enjoy an advantage from Zone 2 through Zone
4 ranging from 15.1% to 33.3%. However, it is important to consider that beyond Zone 4, FedEx/
UPS Ground transit times range from 3 to 6 days, while PM offers the same 2-day delivery
commitment across all zones.
While it is true that UPS and FedEx offer deep discounts from its standard rates to high-volume
accounts, the degree of these advantages, in the weight and transit ranges most applicable to the
rapidly growing e-commerce business, suggests that even after discounting, PM and PME remain
very price competitive.
The Impact of Rate and Billing Changes for 2015
8
Impact on Shippers
Going into calendar year 2015, shippers will have to be mindful of their shipping costs as the announced
2015 General Rate Increase of 4.9% is not uniform across all services, weights and zones. In addition,
the change in DIM weight rules will compound shipping expenses.
Consider the following example: a student’s backpack weighing 2 pounds, ordered online is shipped
from Louisville, KY to Canton, GA in a carton measuring 18” x 12” x 4”:
Zone 4 Ground Rates
Dimensions
18" x 12" x 4"
Cubic Volume 864 cu. in.
2014 Actual Weight -­‐ 2 lbs. Residen:al Delivery Surcharge Delivery Area Surcharge Total 2015 Dimensional Weight -­‐ 6 lbs. 9.77 Residen:al Delivery Surcharge 3.10 Delivery Area Surcharge 3.00 Total 15.87 7.88 2.90 2.85 13.63 +16.4%
Figure 6: Change In Cost To Ship School Backpack 2014 Vs. 2015 (Excluding Fuel Surcharge)
Source: The Colography Group, Inc.
While it is true that the 2015 rate of increase for a 2-pound shipment is 6.9%, the newly levied DIM rule
will cause the chargeable weight to rise to 6 pounds, making the effective year-over-year net increase
$1.89, a 24.0% increase. Adding residential and delivery area surcharges increases the total expenditure,
but, because these are only increasing 6.9% and 5.3%, the resultant net increase is lowered to 16.4%.
How the dimensional rule is applied will become yet another subject for negotiation. For some larger
accounts, shippers have been able to leverage their purchasing power and are being offered a four-year
phase-out of the DIM rule exception. For example, in Year 1 the 5184 cu. in. DIM exception is maintained;
in Year 2 the exception will be lowered to 4000 cu. in.; in Year 3, to 3000 cu. in.; and by Year 4, the DIM
rate rule will be applied in full.
Through dimensional pricing, UPS and FedEx expect shippers will seek to optimize their packaging
practices, which will reduce excess packaging materials and overall package sizes, leading to related
reductions in fuel use, vehicle emissions and transportation costs. This, however, may be easier said
than done as very few shippers track data on the dimensions of packages, especially those under 3
cu. ft. causing shippers to be more mindful than ever before.
Depending on the customer and fulfillment processes, many shippers will have to make an investment in
the deployment of more sophisticated measuring devices and packaging equipment to better associate
the size of the box to the size of the item being shipped. It’s also going to require shippers to audit and
evaluate the cost of implementing such changes vs. the cost of dimensional pricing over and above the
annual general rate increase. Only larger, more sophisticated shippers will be able to do this effectively.
For the remainder, small-to-medium size shippers – a segment of the retail market that is also growing
thanks to e-commerce – the value proposition of the USPS, which only applies DIM rules for packages
over 1 cu. ft. and delivered to zones 5-8, is becoming increasingly attractive.
The Impact of Rate and Billing Changes for 2015
9
About Endicia
Endicia is the leading provider of solutions for eCommerce shipping. Our intuitive, easy-to-use electronic
postage technologies and services allow you to print U.S. Postal Service® shipping labels right from
your desk using a Mac or PC. We offer several product and service plans, as well as APIs, and integration
into over 200 partner applications so we scale with you as your business grows. Our tools not only
save you time and provide you with best possible rates, but they also help build your brand with easy
customization of your shipping labels. Endicia is headquartered in Palo Alto, CA. For more information
on Endicia visit www.endicia.com.
And if you’d like to learn more about the latest eCommerce trends and tips and tricks for online
shipping, be sure to check out our blog, The Savvy Shipper at online-shipping-blog.endicia.com.
About The Colography Group
In its 31st year, The Colography Group delivers primary research, strategic planning and new program
development services to businesses looking to identify and capitalize on growth opportunities in the global
time-definite, or expedited, cargo market. Its suite of proprietary databases is based on information gained
from detailed interviews with hundreds of thousands of shipping decision makers. Through this statistically
representative interview sample, The Colography Group extracts the market intelligence clients need to
effectively plan their transportation strategies. The Colography Group is based in Atlanta, GA. For more
information on The Colography Group, visit www.colography.com.
© 2015 PSI Systems, Inc. Endicia and Endicia Premium are trademarks or registered trademarks of PSI Systems, Inc. All other trademarks are property of
their respective owners. U.S. Postal Service, USPS and Priority Mail are among the many trademarks of the United States Postal Service. www.endicia.com
The Impact of Rate and Billing Changes for 2015
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