Anatomy of a Parcel Rate

Rising shipping rates can erode the profits of online and omnichannel retailers. In fact, “the cost of shipping is the No. 1 challenge for e-commerce merchants today,” says Supply & Demand Chain Executive. If you are seeking strategies to reduce shipping costs, a great starting place is understanding the anatomy of a parcel rate. Here’s a guide to the many factors that affect your costs.

Base Rate

The base rate for shipping parcels is based on published rate structures from the carrier or your negotiated contract. Every service has a zone and weight matrix with specific costs. The base rate applies to every parcel. In 2023, both UPS and FedEx have $10.10 as the published rate for a 1lb shipment going to zone 2. Note that one advantage of working with a third party order fulfillment service with high economies of scale is that they will likely be able to negotiate the most favorable base rate, with up to a 30-50% discount off published rates depending on the service. The factors outlined below add on to the base rate for your final parcel shipping cost.

Distance between zones

The distance between the origin of your parcel and its final destination is determined by how many geographic zones the package travels through. Using published FedEx Ground as an example, a shipment that weighs 3 lbs going to zone 2 shipment would cost $11.34 as of March 2023. This same shipment to zone 7 would cost $15.47. Generally speaking in the U.S., each 300 miles from the origin denotes another zone and higher cost. Although this is a rule of thumb, each carrier has its own zone/zip code structure. If you are serving a large geographic area, attention to zones can be a crucial factor in managing your shipping costs.

Practical Ecommerce suggests a careful look at where you locate warehousing and order fulfillment operations. Business.com advises, “If you’re not big enough to maintain facilities throughout the country, using an order fulfillment company with a regional, national, or international infrastructure lets you utilize their bulk delivery discounts, resulting in lower shipping costs for your customers.”

A free order fulfillment network analysis from FIDELITONE can reveal the optimal strategy for your order fulfillment to minimize zone-related shipping costs.

Accessorial fees

Accessorials, extra fees added to the base rate, can sometimes account for more than 20% of the total shipping costs. There are dozens of these fees. Examples of UPS published surcharges include residential delivery ($5.50) , remote area delivery ($7.15), large package ($135-$170), additional handling ($16.50 – $34.50), and address correction ($19.50), to name a few. Accessorial fees are complex, and pricing may be dynamic, making it challenging for shipping managers to control and optimize final costs. This is another advantage of working with a third party order fulfillment service, as they will likely be able to negotiate a discount of up to 30-50% off published rates, depending on the surcharge.

Peak surcharges

Peak surcharges are fees added for seasonal surges, such as holiday shipping. However, peak periods can be extended by carriers. Most peak surcharges take the form of a flat fee per package added to the base rate.

Fuel surcharge

Parcel carriers add a fuel surcharge that is adjusted weekly based on national fuel indices. Air and ground services have different fuel indices, which are tied to different fuel—jet fuel for air, and diesel for ground. For example, as of March 31, 2023, the fuel surcharge for ground services for FedEx is 15.50%; see the FedEx weekly fuel surcharge specification for details. This surcharge is applied regardless of distance or weight of the shipment and can account for 10%-20% of the overall cost of the shipment.

Dimensional weight

A carrier may charge for parcel weight based on actual weight or dimensional weight, whichever is higher. Dimensional weight is based on the length X weight X height of the box, the DIM. It accounts for the space a package will take up in transit, and it affects total costs. “Dimensional weight reflects package density, which is the amount of space a package occupies compared to its actual weight. Dimensional weight may apply to all UPS domestic and international package services,” explains UPS. This is distinct from actual weight.

Each carrier has a DIM divisor they apply to the length X weight X height figure to determine dimensional weight. For example, USPS uses a divisor of 166. They divide the DIM by 166 to determine how many pounds the package “weighs” for billing purposes. FedEx currently uses a DIM divisor of 139, which means the same package would come out with a higher “weight” for billing. The higher the divisor, the lower the calculated weight. Knowing the DIM divisor for carriers helps you compare and manage shipping costs effectively. A major advantage of working with a 3PL is their buying power over the DIM divisor. This figure is typically negotiated, and a third party can typically provide a higher divisor, resulting in significant cost savings.

Also be aware of the total shipment going out to a carrier. “For multiple-package shipments, total the billable weight of all packages in the shipment,” explains UPS. Rather than handling packages as one-offs, working with a fulfillment service that can manage the sum-total of shipping requirements also has the potential to save costs.

Needless to say, smaller, more efficiently packed boxes can affect shipping costs, too. “Reducing packaging can make shipments more environmentally friendly by helping lower fuel emissions, and can help you avoid overpacking, which wastes material,” says FedEx.

Cartonization technology, which uses algorithms to specify the smallest dimensions possible for each order being fulfilled, is one of the solutions FIDELITONE uses to secure the lowest possible shipping costs for order fulfillment clients.

Package weight

Actual weight of a package, if higher than dimensional weight, will determine the billable weight used by carriers to determine shipping fees. Keep in mind that carriers typically also charge accessorial fees for heavy packages.

Service level

How quickly do you want your packages to reach your customers? The cost differences between next-day or two-day versus routine or ground can be significant. For example, as of March 2023, a shipment weighing 5 pounds going to zone 3 on FedEx Standard overnight is $55.87 versus the same shipment going Ground Economy ($15.85) or Home Delivery ($21.00).

Customers may expect quick fulfillment of their orders, but they also seek out free shipping. Every business has to make its own assessment of how to manage tradeoffs between service levels and costs. (Learn how to balance service and cost in the blog, 5 Choice to Optimize Your Ecommerce Fulfillment Strategy.)

As you consider service speed to the customer, keep in mind that processes count. Order cycle time is more than just shipping speed. For example, initiating order fulfillment faster once the order has been received can make the difference between shipping it out today versus tomorrow. Having the right technology integrations in place can shorten order cycle time.

Likewise, working with a fulfillment provider who processes orders and uses shipping cutoffs that are later in the day can make a difference. Attention to these order fulfillment details can be specified in your order fulfillment SLAs.

Navigate the shipping cost conundrum

With shipping cost calculations being dynamic and complex, reducing your shipping costs is no easy task. To understand the impact of shipping cost factors and evaluate options on your business, consider working with an expert who can analyze your parcel data, geography, packaging, service options, and more to leverage the best possible shipping solution through one or a combination of carriers. The bottom line is that managing shipping costs can protect your profits. Contact us today for a free consultation.