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Dimensional pricing could add $550 million annually for UPS, FedEx
If one analyst is right, moves by UPS Inc. and FedEx Corp. to
begin pricing some ground packages based on their dimensions rather than
on their weight will yield more than half a billion dollars in
additional annual revenue for the two companies.
By Mark B. Solomon
If one analyst is right, moves by UPS Inc. and FedEx Corp. to begin
pricing some ground packages based on their dimensions rather than on
their weight will yield more than half a billion dollars in additional
annual revenue for the two companies.
Within the past two months, both carriers said they would impose
"dimensional weight" pricing on all packages measuring less than 3 cubic
feet. That represents a big chunk of both their ground delivery mix and
e-commerce traffic. The moves, which will take effect at UPS on Dec. 29
and at FedEx on Jan. 1, will effectively make prices for shipping
lightweight, often-bulky shipments much higher than they are now. The
additional revenue will be generated without much, if any, increase in
capital investment.
Rob Martinez, president and CEO of the consultancy Shipware LLC, said
that, when fully implemented, the changes will generate an estimated
$380 million in additional annual revenue for UPS and $170 million a
year for FedEx, which has a smaller ground parcel footprint. Martinez
said the programs are likely to be phased in over time, and full
implementation may take three or four years.
The additional revenue stream is a fraction of the companies' combined
revenue, which is on pace to exceed $102 billion a year by the end of
their next annual reporting period. Still, the pricing changes could be
pure gravy for the big two.
To calculate dimensional pricing, the companies use what is known as a
"volumetric divisor." A parcel's cube is first calculated by
multiplying its length, width, and height. The cube is then divided by
the divisor, currently set at 166, to arrive at the dimensional weight.
For example, a 3-cubic-foot package measures 5,184 inches; dividing
5,184 by 166 yields a rate equivalent to that of a 31-pound box,
although the box's actual weight is likely much less. Shippers generally
pay the greater of either the dimensional or the actual weight. Both
companies already apply dimensional pricing on ground shipments
measuring more than 3 cubic feet as well as on all of their air express
shipments.
UPS and FedEx made their announcements months ahead of time to give
customers an opportunity to change packaging practices. Larger customers
may also use the window to negotiate contractual modifications in an
effort to mitigate the potential damage to their bottom lines, Martinez
said.
The pricing change was driven in part by the explosion of e-commerce
transactions, which has resulted in what the carriers could consider an
unwelcome increase in business-to-consumer (B2C) shipments. B2C packages
are lighter and are usually delivered one residence at a time. By
contrast, business-to-business (B2B) parcels are heavier and are
delivered to each stop in larger quantities, thus maximizing a carrier's
revenue per stop. FedEx and UPS have a virtual duopoly in the B2B
segment; however, growth there has been relatively flat.