Lower your e-commerce fulfillment costs this peak season

Omnichannel retailers are accustomed to peak season surcharges that increase their fulfillment costs during the holiday shopping season, but there are steps they can take to control today’s escalating shipping rates.

In my conversations with parcel shippers at leading retail brands I am always struck by the understanding that underpins their relationships with parcel carriers. Whether it is in work with FedEx, DHL, OnTrac, United Parcel Service, the United States Postal Service or others, there is a feeling of genuine collaboration and recognition of the important role carriers play in the final step of the e-commerce fulfillment process.

Shippers intuitively know there is no such thing as “free shipping.” They also understand better than anyone the very real challenges that peak times and periods of increased demand have on shipping networks and the people who work within them. The fact that it should cost more to ship a parcel on Cyber Monday or during the busiest shopping days of the year is not questioned. Shippers understand.

That is why for years, retail parcel shippers have often accepted the carriers’ peak season surcharges — increases now more often referred to as demand surcharges — with little pushback. But things are different this year for several compelling reasons.

First, it must be remembered that we have seen historic increases in shipping costs over the past several years, beginning with the general rate increases (GRIs) that are unveiled annually. Perhaps more importantly, carriers have shown an equally aggressive penchant for continually increasing their revenue-per-package (RPP) by pulling levers that are not included on their rate cards, but which significantly impact what it costs to send a package from one point to another. These include a litany of new fees, surcharges and rules on everything from zones to package dimensions and weight limits – all of which are typically buried in the fine-print details of lengthy carrier contracts.

Unfortunately, the impact of these new costs are all too real for most retailers. Even if you look strictly at the GRIs introduced by FedEx and UPS over the past three years — for 2024 both again instituted an identical 5.9% increase — they present a compound increase of nearly 20%. In reality though, our analysis has shown that the vast majority of retailers have seen their shipping costs increase by more than 30% during the same period if you factor in all of the new surcharges, rules and fees. And the cost increases keep coming, with the new Delivery Area Surcharges (DAS) introduced by FedEx and UPS earlier this year being but one of many examples.

Historically applied to rural and difficult to reach areas, DAS are now being applied to many of the nation’s busiest metropolitan areas – yet another example of how carriers are increasing RPP without actually amending their rate cards. All of this is crucially important to retailers for a simple and inescapable reason. For online purchases, parcel shipping costs have a dramatic impact on sales margins. Managed incorrectly, they can make entire product lines unprofitable if the interplay between pricing strategies and shipping costs is not closely and continually monitored.

Regrettably, this year’s peak season and demand surcharges offer no relief and will push many retailers’ shipping costs beyond the brink. So what can retailers do to better manage their parcel spend and control their costs in the coming weeks and months?

Following are several considerations and recommendations to keep in mind this peak season.

• It’s never too late to negotiate peak season rates, terms and conditions: During the pandemic and in the year that followed carriers pushed back on many retailers’ efforts to attain better rates terms and conditions, and even let long-term customers go completely. Today, the business landscape for shippers is far more competitive. Most have capacity in their networks and are eager to compete for shipping volume. Retailers should absolutely pursue better demand surcharge rates and other opportunities to lower their parcel spend. The time to negotiate is now.
• It is imperative to gain and maintain visibility over parcel spend: Even a basic parcel audit will typically uncover savings of 1 to 2% of total shipping outlays, often in the form of rebates because the carrier failed to meet its own service-level guarantees with late deliveries. Our research indicates that upwards of 70% of organizations fail to claim the rebates they are entitled to, let alone take the steps needed to optimize their shipping, and consequently their fulfillment operations.
• Know your shipping vital factors: In efforts to effectively manage parcel spend, information is power. Shippers should absolutely know their shipping vital factors – the metrics that directly shape not only the effectiveness of shipping operations, but also negotiations with carriers. These include total shipping spend and total shipping spend with the carrier, total surcharge spend, the average cost-per-shipment, the average weight and dimensional weight, the average zone and minimums – the minimum charge a carrier requires and how often shipments come in under it. Carrier contracts should also be continually monitored. Notably, surcharge discounts often expire before the contract does.

• Make shipping an operational priority: Shipping acumen, strategy and costs have a dramatic impact on bottom and top-line results. Shippers, operational leaders and departments like marketing and sales should be in close communication, particularly during peak times like the holiday shopping season. Just as importantly, retailers should view shipping performance as a differentiator. Monitoring specifics, for example which carrier has the best track record of on-time deliveries, can be a distinguishing factor in strengthening customer relationships. Perhaps most importantly, it must never be forgotten that shipping performance and the ability to lower shipping spend has a direct and immediate impact on how competitive retailers are online, as discounted shipping remains a powerful differentiator in sales and returns. This peak season is a great time to ensure your shipping operation is up to the task.