Jan. 31 2007 04:19 PM

Deliveries of products to residences were, at one time, limited to catalog orders. At the time, volumes were relatively low, and the recipient typically paid shipping and handling charges. Today, residential deliveries are surging, largely fueled by an explosion in Internet-based sales with many shippers offering free delivery.


Merchants and carriers alike understand the potential to create new avenues of opportunity through the Internet. Companies such as LL Bean now receive more than 50% of their orders through Internet sales. Carriers such as FedEx realized the opportunity and as early as 1995 began offering online services to catalogers. The result is a shipper/carrier symbiotic marketplace that dwarfs any other in recent memory. According to The Wall Street Journal, November 2006 online sales were more than $11 billion, growing 24% year over year. But opportunity also creates challenges. 


The Shippers Perspective

The Internet offered the promise of lower product pricing, since products sold via the Internet were seen as not being hamstrung by high administrative and warehousing costs. The problem, it turns out, was that retailers and catalogers were not going to sit idly by and let Internet-only stores capture their customer bases. They, too, started selling on the Internet, but found that to compete with the new breed of online store, they had to reduce pricing. Their answer was often to offer free or heavily discounted delivery. 


Exclusive online sellers, in an attempt to capture additional business, matched the strategy of retail stores and likewise offered free delivery. The result? About 75% of Internet buyers now say that free shipping is an important factor in deciding where to buy, according to The Wall Street Journal. The expense of acquiring new customers now includes shipper-paid delivery costs that continue to escalate.


The Carriers Perspective

Carriers faced a compound problem: an explosive surge in residential deliveries the least profitable portion of the delivery cycle and rapidly climbing fuel costs. Their solution has morphed into continual price increases for residential delivery.


Residential delivery charges are primarily driven by delivery density. The accessorial charge for a residential delivery is generally the additional approximate cost for the carrier to deliver in the less dense delivery area (your neighborhood), which equates into higher fuel and labor costs.


In the 1980s, UPS had a virtual monopoly on residential delivery. In the 1990s, FedEx offered residential delivery on an express only basis. After 2000, it instituted ground delivery for residential addresses. Simultaneously, the USPS began offering work share programs and strengthened its own capabilities. DHL continues to strive to become more competitive in the market, and regional carriers have entered with a flexibility that offers further improvements.


Carriers are faced with the need to capture broad swaths of the Internet shipping business in order to lower their residential delivery costs.  The logical method to attract additional shippers is to decrease residential pricing, but they have no desire to lose money in order to gain share.


Simultaneously, shippers wonder why prices continue to rise when increased competition and shipper volume have likewise increased. The answer is that demand is literally exceeding supply, and package carriers are not experiencing the pushback that passenger airlines felt when they tried to increase ticket prices for years (this has, of course, changed in their favor recently).


Like merchants, carriers want to gain as many profitable customers as possible. They are attempting to do so by competing across the board in all aspects of service: residential and commercial, urban and rural deliveries, domestic and international, small packages and heavier shipments. Their greatest emphasis is on service, as they have found that gaining a customer on price lasts only until their competitor offers an even lower rate.


Outside the Box Thinking

I have a partner, Bob Ferri, whose experience is somewhat unique and demonstrates the importance of negotiating the changing consumer landscape to which shippers are forced to adapt. For 20 years, he worked with commercial and retail sellers at FedEx and has been heavily involved in the Internet for the last decade. Recently he started Timestrip Online, marketing a unique product that monitors food quality, shelf life and safety for consumer, commercial and industrial applications. He likewise was confronted with the problem of residential deliveries.


Selling the idea of incorporating Timestrip into a commercial product is time-consuming, many times taking more than a year, says Ferri, so we decided to target online consumers first. But we faced a very perplexing problem. We have a unique and fantastic product, but with high delivery costs, our fear was that the product might prove to be too costly for consumers. To further complicate the issue, those costs continually changed. We didnt want our customers to wonder how much it was going to cost this month versus last month. Commercial accounts understand that delivery charges are added to each shipment, but the Internet created a no cost for shipping mentality. The cost of gaining a new customer now includes those delivery costs, and ironically, shippers created the very problem which we now face.


Ferris focus was to find a new method to get orders to customers as quickly as possible at a predefined price. His solution was to share the shipping and handling costs with his customers. We found unusual allies in the Post Office and FedEx. Most shippers arent aware that FedEx currently provides the air transport for Priority Mail with the USPS providing pickup and delivery, he explains. With the FedEx/USPS system, we could receive 2-3 day delivery to virtually the entire US, and with FedEx International Mail Service, we saw 4-7 day delivery to non-US locations with the Postal Service for the recipient making the final delivery. The added benefit is that rates rarely change, we can likewise deliver to APO and FPO locations and, of course, postal services can deliver to the customers mailbox. We absorb a significant amount of the cost, but its a fair system for everyone.


Timestrip Online also charges a single amount regardless of the size of the order. That way the customers per unit shipping cost is reduced when they buy more than a single item, which is typical for what we sell, Ferri states. We do not want to make money on shipping as some companies do. We want the best service at the lowest cost and want to pass those savings on to our customers. 


What to Expect

In January, rates for the three big global package carriers increased again across the board. You can expect residential delivery charges to continue escalating until carriers see their volumes leveling off in various business segments or until their capacity exceeds shipper demand. If, and more likely when, fuel prices increase, expect to have additional fuel surcharges added to these costs. If you like your current carrier and rates, negotiate for an extension to weather this one out.  


Rob Shirley is President of ExpresShip, Inc., a firm providing consulting services for carriers and shippers worldwide. Robs business experience provides a unique perspective of the transportation industry, and he is a frequent speaker at logistics events. He can be reached at Rob@XPship.com or www.XPship.com