Aug. 28 2007 04:20 PM

As I travel throughout our beautiful country and meet with management of all shapes and sizes, I am very frequently asked, Are the surcharges I pay to package carriers justified? I answer that the carriers can charge whatever they like, with no justification. The standard reason given by carrier account reps is, Yes, the surcharge reflects the additional cost to service the package! But is that always true?


Lets take the residential surcharge, for example. Its now a whopping $1.85 and $2.20 over commercial rates for Ground and Air services, respectively. Needless to say, carriers arent bashful about what they charge residential shippers. For many years now, the ever growing disparity between commercial and residential rates has been a great concern for the non-store retail industry and e-commerce both sellers and consumers. Typically, there is a single package delivered to a residence, while multiple packages are routinely delivered to a commercial consignee. So the per package cost for delivery is much higher to residences. However, that isnt always the case. Carrier costs vary greatly from customer to customer because each customers package characteristics are different. Shippers would be better served by having their discounts reflect their residential characteristics rather than automatically paying a surcharge. But that makes too much sense to actually happen!


I cant think of a single justification for a residential surcharge differing between Ground and Air service. Once packages are on a delivery van, there is no cost difference to deliver Ground versus Air. Plus, many Next Day Air packages must be delivered by 10:30 am. That service requirement is already built into the base rate. Furthermore, Ground and Air packages are delivered together to the same stops millions of times every day, yet the surcharge differs. Why? Because carriers can charge whatever they like, with no justification.


How about Delivery Area Surcharges? You pay $1.40 and $2.20 over base rates for Commercial and Residential services, respectively. The carrier says there are significant operating cost differences between commercial and residential deliveries as it relates to delivering to rural ZIP Codes. There is an underlying assumption that commercial deliveries are in areas with higher delivery density. While there is no doubt this assumption holds true for many packages, the question remains: Is the surcharge appropriate for all packages? Well, lets see.  


Lets assume it costs a carrier $30 an hour, including wages and vehicle operating expenses, to have a delivery driver out on the street. Assume that a driver delivers a commercial stop every six minutes in a rural area and it takes six minutes to service the average residential stop. Thats 10 stops per hour in the metro area and only five stops per hour for rural deliveries. For commercial deliveries, the carriers cost per stop is $3.00 ($30 per hour/10 stops per hour) versus $6 per stop in the rural area. But what is the carriers cost per package? That depends upon the number of packages per shipment.


Lets consider Companies A & B. Both ship 10 pound packages. The average zone is 5. Company A ships an average of two packages per shipment to rural areas, while Company B sends only one. What are the carriers allocated per package costs for delivery in our example? Its very simple! For Company A, its $1.50 ($3.00 per delivery stop/two packages per stop); while for Company B, its $6.00 ($6.00 per delivery stop/one packages per stop). Thats quite a difference! In the case of Company A, the residential surcharge is not warranted. However, for Company B it is justified.


Its clearly more costly for a carrier to deliver in the foothills of Dakota compared to the typical suburban community simply because of the differences in stop density. There are a lot fewer miles between stops in suburban America than in our nations rural lands. And driver windshield time is unproductive and costly, and shippers should expect to pay for it. Under the current pricing structure, the winners are those companies that ship to rural addresses with one package per shipment; while companies sending multiple package shipments to major metropolitan areas are clearly overpaying for service. Who said life is fair?


The price you pay for shipping services depends on your knowledge of carrier operations and your ability to present the value of your package characteristics during rate negotiations. If your shipping characteristics do not warrant a surcharge, pursue greater discounts off of your base rates. The more you understand the small package business, the more you will get out of your transportation dollar.


Joe Loughran is President of SmartTran, Inc. and an expert in small package pricing and carrier rate analysis. Joe can be reached at 724-934-0626 or