UPS Inc. launched a pricing program that offers shippers a single, all-inclusive price and waives nearly all additional shipping fees, according to sources familiar with the effort.
KBS (NYSE: UPS) It offers the initiative as a simplified way to pay for shipping and convenience for shippers, sources said. However, convenience can come at a price.
The rates in the new program are not as significant as in the original version of the pricing. The net result is that shippers could easily pay more under the revised formula than under the original pricing matrix, one source said. The traditional formula breaks down each surcharge by line item in the contractual agreements.
The new formula will be offered to all customers regardless of their delivery profile. It will be available to those who ship by air and ground, as well as internationally. One of the sources said there would be no volume obligations for small and medium-sized shippers (SMBs). However, larger enterprise customers will have volume commitments.
The program is not a take-it-or-leave-it proposition. UPS has allowed several shippers who were offered the new rates to return to their current plans. The resulting difference between the two versions is not glaring or predatory.
“We want our customers to have pricing options that fit their needs,” UPS said in a statement. “Some customers place greater value on bundled pricing, particularly because it can simplify the invoicing process. We aim to help our clients think through the best pricing structures and offer the appropriate options.”
There is no indication that rival FedEx Corp. (NYSE: FDX) has developed or is developing a similar initiative. Both companies have a long history of consistently following each other through programs like the one UPS introduced.
The only additional fees that could still be imposed would apply to the handling of bulky, odd-sized parcels that cannot be passed through a conveyor belt and require additional labor and other resources to deliver, one source said.
There is a large element of psychology behind this initiative.
UPS knows that package shippers hate additional shipping fees, which have increased in number, cost and complexity. Once they were enough to fit on a sheet or two of paper, today the surcharge is around 100.
Many shippers believe that the surcharges are designed to generate profitable revenue for carriers, not to offset their service costs. The biggest complaint is fuel surcharges, which involve no effort on the part of the carrier but are levied in a way that industry experts say is out of step with the normal movement of commodity prices.
Carriers are doing little to change the perception of what surcharges are for. On quarterly calls with analysts, carrier executives tout the value of the surcharges in meeting their financial forecasts. So they have no inclination or motivation to take them back.
UPS expects that customers will become so fed up with the additional fees, especially due to the high number of fees during peak season, that they will switch to a pricing plan that effectively eliminates the fees and replaces them with a single, consolidated rate based on package weight and geographic delivery area .
The initiative also targets businesses that may not be savvy enough to understand the total cost of shipping, one source said. The new pricing includes the imputed cost of additional fees in the base rate. The original version could benefit the shipper more because many of the additional fees would not apply to this customer. Therefore, UPS will not be able to profit from additional charges that will not be related to this customer.
Sources advised shippers to be prudent before entering into a contract that could sacrifice cost in the name of simplicity. They also need to know, if they don’t already, that UPS won’t be caught off guard by new pricing nuances. UPS is focused on increasing packaging profitability and will not deviate from that goal for the convenience of the shipper.
According to one of the sources, UPS spent about eight years developing the initiative. He also spent a lot of time and money reformatting his technology to adapt to the program.
In making efforts, UPS assumes some risk. Fuel surcharges, which can be up to 40% of all additional costs, can fluctuate frequently and sometimes dramatically based on changes in oil and fuel prices. UPS may enter into a contract based on a certain price for air and diesel, only to see fuel prices rise, and the carrier will not be able to change the terms of the contract.
In some ways, the program is equivalent to the rates paid by retail customers — those who don’t receive regular pickup from UPS — when they drop off a package at a UPS Store.
“It’s a retail model for non-retail buyers,” one source said of the all-in pricing initiative.
It also harkens back to turn-of-the-century parcel pricing, when carriers would announce a blanket rate hike and refund a certain percentage — usually 2 percentage points — of the fuel cost.