Original Publication Date: December 10, 2015
Today we’re going to take a look at the details of annual rate increases. Let’s begin with how rate increases are typically rolled out.
How Are Annual Rate Increases Rolled Out?
Typically, and historically, rate increases come out at the end of the year. Usually, around late October or early November, the carriers will announce that a rate increase is coming. FedEx usually does it in the first week of the new year. UPS usually implements theirs in the last week of the year.
They have also implemented surcharges, especially this year. Imagine just implementing surcharges based on whatever your cost increases are and just passing that onto customers automatically. Because UPS and FedEx are effectively an oligopoly, they can add rate increases whenever they want.
In the last few years, they've implemented more surcharges and increased or changed certain surcharges mid-year, beyond the normal rate increase.
In a sense, the annual rate increase has become a thing of the past. The carriers increase rates when they think they need to, and their explanation to every customer is that “we're doing the best thing for the industry and moving your packages the best way we can.”
It's an... interesting spin.
Who Is Impacted by Annual Rate Increases?
Upstream, the first group impacted by a rate increase is the shippers. Any while direct UPS or FedEx customers are impacted first, those charges will be passed down, and the end-user ultimately pays for them.
The impact may start with shippers, but at the consumer level, for example, sellers may have to increase product costs to recover those shipping rate increases.
Other trends related to rate increases include carriers changing the rules or how they apply to certain surcharges. The big ones right now are really size- and weight-related surcharges.
Changing the rules, like reducing the minimum weight for applying a surcharge or altering DIM factors, is a common trend right now.
How Much Do Rates Typically Increase Each Year?
If you're familiar with the annual rate increase notifications that the carriers put out, you'll see that the annual rate increase is 4.9% on average. It's been that way for the last five, 10, 15 years. Every annual rate increase is an average of 4.9%.
That increase, however, only takes the service level rate change into account. The service level rate for ground, for example, shows an average of 4.9% if you take all the weights and zones into account. And where a lot of customers feel the impact is with the surcharges.
Over the last few years, size-related surcharges have gone up 15-20%. So the service level rate increase, which depends on your usage, average zone, and average weight, might not necessarily be 4.9%. Coupled with surcharges, the average rate increase for a given customer might be anywhere from 10 to 15%, not 4.9%.
So if you're forecasting spending based on that 4.9% average, you could be in for a rude awakening.
Strategies to Mitigate or Offset Rate Increases
Planning is the first step to reduce your rate and surcharge spending.
Start by finding out what the actual impact will be from the rate increase information you get from the carriers. Apply the service level charges and the surcharge increases to your shipping history for an accurate forecast.
Your own characteristics will give you the best idea of the rate increase’s impact. Is it 4.9%, or is it 10? Is it 15? Depending on what your numbers say, you might want to negotiate with the carrier to find areas where you can mitigate the costs or the increases.
Rate Increase Caps
The carriers don’t cap their rate increases often, but it does happen. That's also negotiable -- there's no reason not ask for a rate cap.
That said, rate caps are always customized because the carrier will not offer them proactively.
At any rate, understanding your data and shipping characteristics is crucial for projecting how a mid-year or annual rate increase will impact your business.
Account Manager Accountability
You can also lean on the carrier for help. One option is to challenge your account manager. Ask them to help you make sense of all the charges and what the impact of the rate increase will be.
Brokers also lean on partners like Lojistic to go through all the data and ensure that the rate increase makes sense. Lojistic can also pursue additional strategies to mitigate rate increase and surcharge costs.
For more information on how you can join the thousands of businesses currently using Lojistic to help monitor, manage, and reduce their shipping costs, please click here.