The costs of running a business are important in determining the sustainability of a business. In today’s business environment, where customers have multiple choices and are highly price sensitive, there is little room for price differentials and increased margins can only be achieved by increasing efficiencies and reducing input costs.
Shipping-related costs constitute a considerable – and highly variable – component of costs incurred by businesses. In order to remain in control of profits and costs, businesses need to closely monitor shipping costs and changes that may impact the bottom line.
Shipping carriers review and revise their pricing periodically, factoring in changes in the cost of fuel, other variables, and also to align prices with industry demands. Most shippers usually implement such changes in January and 2019 is no different, with most carriers having already increased prices or have announced plans to increase rates marginally.
The United States Postal Service (USPS) has announced both an increase in prices and the methodology of calculating prices which took effect January 27, 2019.
USPS is implementing zone-based pricing for first-class packaging service, aimed at aligning prices to cost of service in a better way, and also to offer better value. For shippers, these changes mean the cost to ship is now determined both by weight of the package and its destination. (Previously, cost was determined only by weight, regardless of destination.)
Until a while ago, the primary goal of a logistics player was restricted to moving a parcel from point A to point B. But e-commerce has changed the old rules. This is the age of same-day delivery, scheduled delivery, just-in-time purchases, product lifecycle transparency and so on. Logistics is no longer a discreet business function restricted to few people, but an operation that has larger data visibility.
Conversely, USPS is eliminating balloon pricing for priority mail. Until now, balloon pricing applied for packages weighing up to 20 pounds, and with a size between 84 to 108 inches in combined length and girth, for shipping to zones 1-4. These packages will now be priced based on their actual weight.
The dimensional divisor for priority mail is being reduced to 166 and will now include all zones. Lowering the divisor means larger packages will receive a “heavier” dimensional weight which will increase the rate charged. Businesses shipping large but light products which cannot be compressed into a box smaller than 12 x 12 x 12 inches will pay more when sending products through Priority Mail.
The revised charges also mean First-Class Package International Service is set to increase by 3.7% on average and the expedited global express guaranteed (GXG) rates will go up by 4.9%. As an example, a first-class package to Zone 1 weighing 6 oz. that previously cost $2.92 will now cost $3.18, or an increase of $0.26 per package. A medium flat rate box which cost $13.65 in 2018 will see an increase to $14.35 in 2019, representing a 4.9% increase .
Overall, items shipped to Zone 1 and 2 more or less remain the same, and as such, there will be no significant increase in cost when shipping packages first-class mail, locally. Hoyear over yearwever, when the package weight gets close to 1 lb., and zone classification applies, the increased costs will come into play.
Standard postage stamps have also increased from 50 cents to 55 cents.
FedEx is set to increase prices by 4.9% year over year. There are also significant increases in surcharges. Additional handling surcharge is now $13.50 per package, up from $12 per package in 2018, an increase of 12.5% year over year. Likewise additional correction is $16, up from $15, and COD is $14.5 per package, up from $13.5 per package. Surcharge for oversize packages has increased to $90 from $80.
The Print Return Label service, which allows merchants to pre-print return labels for convenience, has doubled in price, up from $0.50, to $1.
Another area of focus in recent years has been “minimum billable rates” for various services. Many minimum billable charges increased by 4.9% or more, on average. For instance, standard overnight shipment rates are now $27.18, up from $25.79 in 2018, a 5.39% increase.
UPS increased retail shipping prices by 4.9%, on average effective December 26, 2018. UPS Ground increased by about 5.2%, on average, UPS 2nd Day Air increased by an average of 7.2%, and UPS Standard to Canada increased by 1.8%, on average.
DHL Express has increased retail shipping prices by 5.1%, on average across-the-board effective January 1, 2019.
Canada Post has increased domestic retail prices by 4% and international retail price by 2%, on average effective January 14, 2019.
Among the specific services, Xpresspost increased by 2.9%, Small Packet USA Air increased by 2.0%, and Tracked Packet USA increased by 2.0%, on average.
Bulk shippers and businesses engaging with shippers on regular basis may be eligible for discounted, negotiated rates. In many instances, the old rates may still apply, and the revised retail rates may not apply until the next round of negotiations. Businesses shipping in bulk or on regular basis may do well to negotiate custom rates with shippers, if not already done so.
For others, the actual increase in price may be only a few cents or dollars at the most per package, but costs can quickly add up, and make a significant dent in the bottom line.
Businesses offering free shipping would obviously need to absorb the increased cost of shipping, bringing increasing pressure on margins. Businesses seeking to preserve their margins would need to explore cost-savings elsewhere, or increase prices marginally to absorb the increased cost of free shipping.
Businesses that pass on shipping costs to the customer also need to study the changes in-depth and communicate accurate shipping charges to customers. While the calculated rates displayed at checkout will automatically update to the 2019 rates, higher shipping costs, especially when the charges seem higher than what is promoted or advertised, could lead to abandoned shopping carts. Businesses may do well to offer discounts to keep total costs the same, or to reduce the impact of the hike until the new rates become the norm.
Businesses could seek a middle path by offering a free shipping minimum, a time-tested tactic to increase average order value. Margins from increased volumes could help offset the increased cost of shipping. Businesses offering flat rate shipping prices could think in terms of offering a higher flat rate on small orders and progressively lower flat rates as the cart sizes increase.
Customers who have to pay more invariably do so grudgingly. Increased rates almost always cause customer dissatisfaction and only businesses who tackle the situation head-on can mitigate or neutralize the damage
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