The Price, Peril, Promise and Cost of Free Shipping

4/23/2013
For consumers, the online shopping cart is a blessing. Its wheels never squeak, its handle is never subject to foreign substances and, it will not sail headlong into your car door if left unattended in a windy parking lot. Moreover, if the online customer becomes dissatisfied or finds a better deal, the virtual cart may simply disappear with a single click or tap.

Consequently, the competition among apparel e-retailers to attract and hold onto online shoppers grows fiercer by the day. Online product pricing and loss-leader promotions are revised 24/7. Parcel shipping incentives are reaching unprecedented levels — and for good reason.

According to a study published by Forrester Research, Inc., the global research and advisory firm, nearly 60 percent of adults who shopped online in the U.S. gravitated towards retailers that offered free shipping. Twenty-seven percent added additional, unplanned items to their carts in order to meet free shipping thresholds. In 2011, 25 of the top 50 online retailers advertised holiday shipping promotions, presumably due to customers' growing price considerations and sensitivities during tough economic times.

Consumers are not the only ones taking advantage of the incentive-laced competition. Parcel carriers, recognizing they have a virtual stranglehold on the ecommerce industry, are piling on the fees. FedEx and UPS profits have soared in recent years despite a sour economy and an overall drop in volume. Be assured, there is no such thing as free shipping in their world.

Whether it's a dress, sweater, handbag or the trendiest new pair of designer shoes, when sold online, merchandise must be shipped via carrier to the customer. Caught in the middle, the e-retailer is saddled with the quandary of where to draw the line on shipping incentives, protect profit margins and provide the consumer with an attractive, competitive bargain.

Every year the two parcel mega-shippers, FedEx and UPS, announce annual average domestic ground rate increases. For 2013, the announced increases for both carriers were 4.9 percent. Analysts quickly labeled the announcement as misleading. One parcel shipping expert denounced it as a "smoke-and-mirrors tactic."

The average rate increase that the carriers announce annually is derived by averaging package weights on a per-pound basis, up to 150 pounds, with the cost to ship to seven predetermined delivery zones that vary based on a shipper's location. The carrier's cost to operate in densely populated zones is less because the driver will likely deliver numerous other shipments within the same general radius. When a driver travels longer distances to deliver fewer parcels to outlying less populated zones, the carrier's cost to deliver naturally increases.

Using reverse logic to their advantage, carrier ground-rate increases in high-volume. densely populated delivery zones rose approximately 8.9 percent while ground-rate increases in less frequented rural delivery zones were significantly lower. Carriers skewed the calculated average annual increases by giving equal weight to all zones and package weights.

That's only part of the story. The biggest single factor driving up parcel delivery costs today is the increasing number and complexity of carrier surcharges. These fees or accessorials are typically tacked on after a package leaves the warehouse or distribution center. UPS is credited with having no less than 45 separate add-ons in its pricing arsenal. Surcharges are commonly billed for residential delivery, extended area delivery, address correction, additional handling, fuel and a host of other items. Surcharge price increases generally range from 7 to 9 percent annually.

Furthermore, carriers are also still cashing in on a January 2011 restructuring of the dimension (DIM) factors used to calculate the billed weight of a package versus the actual measured weight. The carrier always charges for the greater of the two. By lowering the dimensional weight volumetric, carriers exponentially add huge profits to their bottom line at the shipper's expense.

The good news for online apparel retailers caught up in this quandary of never-ending price hikes is that sophisticated data mining software and advanced analytical technology exist to identify and display every surcharge and cost driver. Theoretically speaking, every identifiable surcharge and cost driver, no matter how deftly obscured in a single-spaced small-print 20-page carrier agreement, presents a negotiable cost-saving opportunity.

E-commerce by its very nature thrives in the digital world. Electronic invoice auditing enables shippers to uncover billing inaccuracies and collect refunds for late deliveries, unauthorized account use, non-proof of delivery and other common audit points. More important, electronic auditing enables shippers to amass a staggering amount of invaluable real-time shipping data from order entry to final destination. Analyzing and mapping this data enables shippers to pinpoint which of the major cost drivers among the mix of surcharges, accessorials, transportation and special handling fees, is having the biggest impact on their individual parcel shipping spend. Armed with this information, shippers must no longer enter into negotiations with carriers empty handed.

Recognizing the complex nature and variety of specialized skill sets necessary to address all their parcel shipping auditing and contract negotiation needs, many e-retailers are seeking assistance from experienced third-party consultants. A full-service parcel spend consulting firm utilizes proprietary auditing software, an aggressive post-audit recovery system and a dashboard to display and report on the client's shipping profile. Many parcel spending firms are populated with former employees from major carriers.

Business models and fee structures differ from firm to firm. Some charge upfront fees or use transaction-based agreements. Others provide free auditing and ask for no upfront fees. They are paid solely by a predetermined gain share of the generated savings. Regardless, the emergence of small parcel spend reduction firms provides e-retailers with a unique opportunity to realize tangible, quantifiable savings without capital expenditures or a single layoff required.

Apparel e-retailers may never find the secret to free shipping, but gaining a solid competitive edge is well within reach.

Keith Byrd is co-founder of Transportation Impact, a parcel-shipping cost-reduction and third-party negotiation firm based in Emerald Isle, N.C.



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