Hidden Fees Exposed: How Retailers Can Save Money on Shipping

If you operate an e-commerce business, chances are good that you’re losing money on parcel shipping. Parcel pricing contracts are complex, typically filled with hidden fees that can dramatically inflate costs and cut into your bottom line.

While focusing on negotiating discounts might seem to make sense, in some cases an improved discount won’t reduce overall costs if it brings the net charge below the minimum charge that the carrier designates, thus negating the improved discount.

Fortunately, you can take steps to minimize the impact these terms have on your costs. Evaluate the three critical factors below to reduce shipping costs and stay competitive.

1. General Rate Increase (GRI): The GRI is an annual increase that’s often misrepresented by parcel carriers. For instance, the average increase this year was to be 4.9 percent for both UPS and FedEx ground services.

The operative word here is “average,” as the carriers are averaging increases from one to 150 pounds. With the vast majority of e-commerce companies shipping in the less-than-10-pound category, this is the very category that incurs the highest rate increases.

However, the GRI is negotiable. To help mitigate annual increases, negotiate a rate cap — i.e., a percentage that will limit subsequent years’ increases. This could pay off significantly over a long-term contract.

2. Upper and Lower Thresholds: The carriers will enhance your base discounts with volume-based discounts, which are predicated upon the total amount you spend with them. The carriers will provide a discount that falls within an upper and lower threshold, and should you subsequently overlook this bandwidth metric, your pricing might accidentally fall into a step-down tier with far inferior discounts. Consequently, you could actually end up being charged more even though you’re technically shipping less.

Many shippers try to push more shipping volume to their carriers just to remain above the lower threshold. Conversely, should you surpass the upper threshold, it might represent a significant increase in new business to your carrier, but the next level of pricing is all too often only marginally better.

The good news? These volume-based thresholds can also be negotiated. Prior to initiating the process, evaluate your parcel invoice data to identify weekly and/or annual gross spend for the optimal thresholds.

3. Dimensional Billing: Years ago, the carriers figured out how to charge more for lighter shipments that take up more space in their trucks and airplanes. The formula goes like this: length × width × height = total cubic inches.

That number is then divided by a dimensional factor (DIM factor), and if the resulting number is higher than the actual weight of the parcel, the carrier will invoice you at the weight of the dimensional number. A higher DIM factor equals a smaller number derived from the dimensional billing equation. A smaller number will either net a decreased dimensional charge or cause the shipment to be invoiced at its actual weight.

Since 2014, the standard DIM factor has been 166 for domestic shipments, but you can ask for an improved DIM factor. Your shipping profile and the business case you build around your request will heavily affect the carrier’s decision, so make sure to deliver sound justification for why it should be approved.

Likewise, consider your current packaging options. For example, customized boxes are more expensive, but could lower the DIM weight.

As an e-commerce leader, consider how to best balance these three elements within your overall strategy to keep shipping costs down. Doing so will not only save you money, but also give you a distinct advantage in a highly competitive space.

Trevor Outman, MBA, is co-founder and principal partner of Shipware, a parcel consulting and auditing firm.