E-commerce volume showed a +50% increase since the beginning of the sanitary crisis. With the peak period coming along, networks are saturated with the need to add capacity at higher cost. Major parcel carriers such as UPS and Fedex, announced peak period surcharges, into efforts of restoring profitability.
UPS observed a 23% volume increase in Q2 year over year, which led to a revenue per piece decrease of 4%. Peak surcharges are planned for the holiday season, which will add to already enforced surcharges from November 15, 2020 to January 16, 2021. These increases will range between $1 and $4 per package depending on increase in parcel volume compared to February 2020, for shippers moving a minimum of 25,000 parcels per week. The already implemented large-parcel surcharge of $31.45 will be increased to $50 from October 4 to January 16. As a comparison, UPS applied residential peak surcharges of 28 cents for Ground shipments and 99 cents for Air in 2018.
FedEx on its side, applied peak period surcharges from October 5. The surcharge on oversized parcels increased from $30 to $52.50 per package. Other surcharges will apply from November 2 to January 17 on shippers sending at least 35,000 parcels weekly via FedEx Ground or Express. Domestic residential deliveries will incur a $1 to $5 surcharge depending on how much the shippers’ parcel volume exceeds pre-pandemic levels. Packages sent through FedEx SmartPost will get three different surcharges ranging from $1 to 2$ through the stages of peak season. With these measures, FedEx more than doubles the existing peak surcharge put in place on June 8 due to the pandemic.
A shift in carriers’ pricing
In fact, these observations show that parcel carriers are gradually moving away from fixed prices and averaged costs to more dynamic pricing models to improve profitability. Average pricing approaches are relevant in predictable environments, but prove inappropriate in constantly changing environments. Hence, shifting towards more dynamic prices becomes a necessity in the current context.
What is Dynamic pricing ?
Dynamic pricing is relevant to optimise the utilisation of capacity in situations of variable demand. Its principle is simple: increase prices where/when demand is higher than capacity and use price incentives to stimulate demand where/when capacity utilisation is low. It can be applied in a variety of ways (Learn more about Dynamic Pricing in our article).
For example, if we consider the utilization of linehauls’ capacity, carriers can use “Calendar Pricing” strategies. Contract rates may have variations by season or day of the week. Peak load pricing at Christmas is a good example for parcel networks. On the other side, promotions can be offered to increase demand for lanes with low utilisation (e.g. empty returns). More sophisticated strategies consist in identifying network peaks and valleys using demand forecasting at a thinner level of detail (by lane and calendar date).
Dynamic pricing is also relevant for last mile pricing. On the cost side, the most important factor is delivery density that shows important variations depending on the zone (urban, suburban, countryside) and postal code. If the average delivery cost of one parcel is $2, delivering 10 parcels per stop to a down-town condominium may cost $0.2 per parcel whereas delivering a single parcel to a remote location may cost $20. On the value side, some consumers are willing to pay more to get a frictionless delivery and save time. Carriers can differentiate the price and offer additional value options such as guaranteed delivery time-windows. This way, carriers can capture the value of consumers’ convenience.
Dynamic pricing is applicable to parcel networks and can contribute to improve capacity utilization and profitability. Yet, pricing models used by parcel carriers often rely on averaged data. Measuring costs, capacity utilisation and consumers’ willingness to pay at a detailed level (by date, network point/transportation segment, postal code) is a prerequisite to implement dynamic pricing.
Implementing Dynamic Pricing
Open Pricer can help you to evolve towards dynamic pricing with quick results. Our smart pricing platform encompasses demand forecast, estimation of Willingness to Pay (WTP) and profit simulation. You can implement more flexible tariff structures with dynamic prices, optimised on a continuous basis. By implementing Dynamic Pricing now, prepare your pricing models for the next peak seasons and take the control of your margins.
Learn more about Dynamic Pricing in our article.