UPS’ New Surge Pricing About to Shake Up On-line Retailers

— Retailers Left with More Questions than Answers–

UPS, The nation’s largest package delivery carrier is in the beginning stages of implementing a new pricing concept which in our opinion, could be interpreted as penalizing its largest retail customers.  Here’s how the program would work.  If during the peak shipping season, large retail shippers fail to ship as many packages as they had planned, UPS is looking to charge those retailers for the extra workers it had to hire to handle the anticipated volume and for the surplus space it might have on its delivery vehicles due to the mis-calculations.  One news source put it this way, “UPS wants to get paid for packages it never delivered.”

This new Surge Pricing concept would apparently also penalize UPS’ largest retail shipping customers if the shipping characteristics change, such as the physical size of the boxes are significantly different from what the retailer normally ships within their peak shipping period.  Obviously UPS means the cartons would be larger and take up more space in their delivery vehicles than packages the retail customer “normally” ships during peak season.

While this new Surge Pricing sounds punitive to us, according to UPS Chief Executive, David Abney, it’s not meant to be.  He claims that, “if there are variations to the plan, let’s see what we can do, but we should be compensated accordingly.”

FedEx for their part is not currently contemplating a plan to charge their largest retail shipping customers for failing to meet promised package volumes.  According to Carl Asmus, Senior VP for e-commerce, “the last thing I’d ever want to do or say is I’m going to penalize a customer.”  Sounds to us like FedEx’ approach is at least on the surface, a better customer service approach, especially when dealing with some of your largest shipper customers.  FedEx has not yet announced any plans for a similar Surge Pricing concept.

The challenges faced by both UPS and FedEx are obviously attributed to continuing “Growing Pains” based on how consumers shop now-a-days.  There are a lot less consumers going to brick and mortar stores to do their shopping.  They prefer to order their selections on line and have them delivered directly to their homes.  This “millennial” shopping trend is certainly not going to change any time soon, if ever.  Surge Pricing does appear to be a financial solution for UPS to address the peak season surges that greatly affect package capacity and delivery timeliness from major retailers, but also from other smaller shippers as well.

It is clear that UPS, and FedEx for that matter, will have to find solutions to managing package volume increases during peak season spikes, as well as at other times throughout the year as on-line home delivery shopping gains momentum each and every day.  However, selecting specific large retail customers to bear the brunt of the cost does not seem like it would be a very popular approach to us.  Which leads us to a few questions about how UPS would implement these pricing changes with their large retail customers.

1. How would UPS decide which retail customers should be charged for Surge Pricing?
2. What if a retail customer refuses to accept Surge Pricing, would UPS give up the account to a competitor or would UPS simply look to other retail customers to pick up the slack?
3. What would the Surge Pricing look like;  would it be a charge per carton which is not tendered to UPS compared to the retail customer’s usual projections; how would labor costs be charged?
4. What supporting documentation would UPS provide, if any to its retail customers to support the additional Surge Pricing?
5. Would UPS be willing to provide additional incentives to retail customers if their volumes are much greater than they typically ship; but doesn’t that contribute to the problem UPS is trying to solve?
6. If UPS is successful in implementing Surge Pricing with many of its retail customers, wouldn’t these retail customers be subsidizing other shippers who also ship larger quantities of packages in peak season?

These are just a few questions we see as UPS starts discussing Surge Pricing with its large retail shipping customers.  Only time will tell if this new Surge Pricing approach will be the solution UPS is looking for it to be.  We suspect we will be hearing reaction fairly quickly once these Surge Pricing meetings take place.  Fasten your seatbelt!