Assessing Whether You are a Desirable Customer for FedEx/UPS

Overview

While there are many fac­tors that can con­tribute to the car­ri­ers view­ing a com­pa­ny as a desir­able client, one major on is whether their pack­age and busi­ness pro­file is more desir­able (either because costs to ser­vice are low­er than aver­age, or because the rev­enue is high­er than average.)

When we ask whether a cus­tomer is desir­able for FedEx or UPS, we are ask­ing whether their pro­file is more prof­itable than the aver­age cus­tomer, assum­ing that their dis­counts are the same as the aver­age cus­tomer.  Much of this is tied to the way that the car­ri­ers bill for their services.

For exam­ple, deliv­er­ies to res­i­den­tial loca­tions cost more for the car­ri­ers because they are able to deliv­er far few­er pack­ages per hour than to com­mer­cial loca­tions.  The car­ri­ers com­pen­sate for this with a res­i­den­tial sur­charge.  In some cas­es, con­trac­tu­al dis­counts are also low­er for res­i­den­tial deliv­er­ies.  But from an eco­nom­ic per­spec­tive, these dif­fer­ences in price do not make up the dif­fer­ence in costs that the car­ri­ers incur between a res­i­den­tial deliv­ery and a com­mer­cial deliv­ery.  This means that a busi­ness that ships more to com­mer­cial loca­tions will be more desir­able than one that ships to a res­i­den­tial location.

Note that since these con­sid­er­a­tions are tied to pric­ing and costs, changes to pric­ing and costs can shift the pro­file of a desir­able client and ulti­mate­ly, a lot will depend on your dis­counts.  A com­pa­ny with a poor pack­age pro­file who also has nego­ti­at­ed poor dis­counts will often be more prof­itable than a com­pa­ny who has a good pro­file, but has nego­ti­at­ed well.

Major Factors

• B2B vs B2C (or mul­ti­ple pack­ages per deliv­ery) – A pri­ma­ry expense for the car­ri­ers in the ‘final mile.’ When a car­ri­er deliv­ers mul­ti­ple pack­ages to the same address, this cost is spread out across those pack­ages.  In gen­er­al, busi­ness deliv­er­ies have an aver­age pack­age den­si­ty of over 3 pack­ages per stop, while res­i­den­tial deliv­er­ies are just bare­ly above 1 deliv­ery per stop.  If your pack­ages are going B2B, or your prod­ucts involve mul­ti­ple pack­ages per ship­ment, this is more desir­able for the car­ri­ers.  The cur­rent res­i­den­tial sur­charge does not cov­er the dif­fer­ence in costs.  Desir­able because: Costs to ser­vice are low­er than average
• Dense pack­ages – The car­ri­ers bill based on weight, but gen­er­al­ly reach capac­i­ty lim­its based on vol­ume (basi­cal­ly, a truck or plane almost always fills up space-wise, long before it approach­es the max­i­mum weight it can car­ry). Since space is the pri­ma­ry con­straint, the goal for the car­ri­ers is to max­i­mize the rev­enue they gen­er­ate based on space.  (The car­ri­ers use a mea­sure called effec­tive yield to deter­mine how they are doing in this area).  High den­si­ty items take up less space as com­pared to their weight, and so the car­ri­ers love when they can get high-den­si­ty items.  (They pro­tect against being hurt by low-den­si­ty items with the dimen­sion­al weight adjust­ment).  Desir­able because: Rev­enue is high­er than average
• Urban areas vs rur­al areas – As a gen­er­al rule, there are far few­er deliv­er­ies in a rur­al area than there are in urban areas. Many costs, such as wages, vehi­cle main­te­nance, fuel etc. are large­ly fixed costs (though they may vary based on region).  If a dri­ver needs to have a much larg­er ter­ri­to­ry to keep busy all day (because he or she is in an area with few­er peo­ple, much more of that time is spent dri­ving, and deliv­er­ies per hour is far low­er.  Since the car­ri­ers are paid for the pack­age, this means low­er mar­gins.  The car­ri­ers con­tin­ue to hand some ship­ments off to the Post Office in rur­al areas, and both FedEx and UPS have announced remote area sur­charges for 2023, which will shift the bal­ance a bit, but like­ly not come close to com­pen­sat­ing for the actu­al dif­fer­ence in costs.  Desir­able because: Costs to ser­vice are low­er than average
• Large/Heavy pack­ages (the right heavy/large pack­ages) – Large pack­ages are valu­able because ship­ments are billed per pound, while many costs (such as final mile) are large­ly the same regard­less of the pack­age size. An excep­tion to this is pack­ages that are too large to be han­dled with the stan­dard auto­mat­ed process­es and con­vey­er belts at the hubs and need to be han­dled man­u­al­ly (pack­age han­dling takes more than 25x time longer for pack­ages that need to be han­dled man­u­al­ly).  Based on this real­i­ty, the car­ri­ers have intro­duced 3 lev­els of sur­charges: Addi­tion­al Han­dling, Large Pack­age Surcharge/Oversize, and Overmax/Ground Unau­tho­rized.  At the cur­rent time, the sur­charge for addi­tion­al han­dling with a rea­son­able dis­count does not actu­al­ly cov­er the loss in effi­cien­cy that occurs when a pack­age requires addi­tion­al han­dling. (Note that the para­me­ters are an approx­i­ma­tion and often include pack­ages that do not tru­ly require addi­tion­al han­dling.  In those cas­es, the sur­charge is straight prof­it).  On the oth­er hand, the large pack­age and over­size sur­charges are priced so that the car­ri­ers make mon­ey in deal­ing with them.  Nei­ther FedEx nor UPS want to deal with Overmax/Unauthorized pack­ages and so that fee is designed to be puni­tive.  Desir­able because: Rev­enue is high­er than average
• Peak sea­son dur­ing off­sea­son – His­tor­i­cal­ly, the car­ri­ers have both had a sta­ble staff through­out the year and need­ed to hire addi­tion­al, tem­po­rary work­ers dur­ing the hol­i­day sea­son to han­dle the addi­tion­al vol­ume. These tem­po­rary work­ers cost more (per hour) and require train­ing, over­sight etc.  Mean­while, dur­ing the slow­er sea­son, their staff may be under­uti­lized.  A com­pa­ny whose vol­ume is con­sis­tent through­out the year, or whose vol­ume is high­er dur­ing the off­sea­son (par­tic­u­lar­ly sum­mer) and declines dur­ing hol­i­day sea­son, is appeal­ing to the car­ri­ers.  Desir­able because: Costs to ser­vice are low­er than average
• Locat­ed near a car­ri­er hub – If your ware­house is near a car­ri­er hub, the cost of pick­up is reduced. Pick­up costs are not a huge per­cent­age of the total cost for a car­ri­er to process a pack­age, but espe­cial­ly for large pack­ages, it does fac­tor in.   Desir­able because: Costs to ser­vice are low­er than average
• Uti­lize more expen­sive ser­vices – This one is intu­itive to most peo­ple and does not need much of an expla­na­tion. Com­pa­nies that use ser­vices such as Pri­or­i­ty Overnight and Inter­na­tion­al Ship­ping are spend­ing more per ship­ment. Desir­able because: Rev­enue is high­er than average
• Vol­ume — Many the most well-known dri­ver of inter­est from the car­ri­ers is pack­age vol­ume. Besides the ben­e­fit of get­ting more rev­enue from one account, there are also some economies of scale on pick-up costs.  Note that the economies of scale on pick­up costs do not match the dis­counts which the car­ri­ers have his­tor­i­cal­ly giv­en their enter­prise clients.  The car­ri­ers have exten­sive fixed costs in hav­ing a net­work which require a lev­el of pack­age vol­ume, and there was a belief (which has not ful­ly been real­ized) that the car­ri­ers would be able to get addi­tion­al economies of scale on the final mile deliv­ery if pack­age vol­ume got high enough.  This is one of the rea­sons that both FedEx and UPS are heav­i­ly tar­get­ing SMB clients.  Desir­able because: Costs to ser­vice are low­er than average

Conclusion

Note that there are many oth­er rea­sons and ways that a client may be con­sid­ered a desir­able client for a car­ri­er includ­ing ease of ser­vic­ing, risk of leav­ing etc.  We have con­sid­ered this from a cost per­spec­tive here.  Under­stand­ing the desir­abil­i­ty of your pack­age pro­file can help you under­stand your posi­tion in a negotiation.