FedEx Announces Price Changes For Its Ground and Freight Offerings

Late last week, FedEx announced pricing changes for its FedEx Ground and FedEx Freight offerings.

For FedEx Ground, the company said that effective January 1, 2015, it will apply dimensional weight pricing to all shipments moved via FedEx Ground, as opposed to its current method of applying dimensional weight pricing to packages that measure three cubic feet or more. FedEx defines dimensional weight pricing as “a common industry practice that sets the transportation price based on package volume–the amount of space a package occupies in relation to its actual weight.” 

Company officials said that this change will align the FedEx Ground dimensional weight pricing with FedEx Express by applying it to all packages.

Dimensional weight pricing has seen its share of changes from FedEx and its main competitor, UPS, in recent years.

When FedEx and UPS announced rate changes for 2011 in late 2010, they both announced they would be implementing a change to the dimensional weight volumetric divisor, which is used to tally the amount of space allocated to a specific shipment. It is derived by multiplying a shipments length, width, and height, and then dividing that figure by its weight and then dividing it by 166, with the shipper being charged the greater of the result of the actual weight or the dimensional weight as determined by the aforementioned formula

In 2010, FedEx implemented a change to the dimensional weight volumetric divisor from 194 to 166 for U.S. domestic services. And like FedEx, UPS made changes to its dimensional weight volumetric divisor, with U.S. Domestic UPS Air Services and U.S. Domestic UPS Ground Services (for packages 3 cubic feet or larger) changing from 194 to 166, among others.

Parcel industry experts told LM at this time that when these changes were made they would be a major hit to shippers, explaining it is strictly margin improvement as the carriers do not provide additional work or additional capacity investments while receiving more incremental revenue on the same shipments handled.

Jerry Hempstead, president of Orlando, Florida-based parcel consultancy Hempstead Consulting, said that last week’s announcement regarding changes in FedEx Ground’s pricing is a huge change, which he has been predicting for several years.

Until this change, he said shippers essentially benefitted from transactions of 3 cubic feet or less.

“Say you put 5 pounds in a box that is 3 cubic feet,” he said. “Today you get charged for 5 pounds, and January 1 you get charged for 32 pounds. Now it’s May of 2014 and the change is effective January 1, 2015. [There is] plenty of time to telegraph to their competitors that they, too, need to implement this change…because if it’s not adopted by, say, UPS then most every major shipper needs to start working on a switch of their ground carrier. My take is that this change results in such massive incremental revenue and is pure profit, ad FedEx is doing no additional work or adding any additional service to justify this enormous cost increase. This is horrible news for shippers. Hopefully they have language in their contracts to mitigate or postpone this pain.”

Taking that example a step further Hempstead explained that a 12”x”12”x12” box is one cubic foot or 1,728 cubic inches, and one cubic foot or its equivalent of 1,728 cubic inches would result in a dimensional weight determined by dividing 166 per the current FedEx formula (the divisor for international shipments is 139).

Based on the new rule a one cubic foot box or a box of 1,728 cubic inches will be charged the greater of the actual weight or the dimensional weight, which in this case is 11 pounds, Hempstead said, adding that FedEx always charges you for the next highest pound once you go over a particular weight, with inches having some nuances in calculating size.

Stifel Nicolaus analyst David Ross wrote in a research note that the dimensional pricing change for FedEx Grouund is a result of the faster-growing B2C (business-to-consumer) segment that typically involves lighter-weight/smaller shipments than B2B (business-to-business).

“We believe space, not weight, is the best measure of capacity and cost in parcel networks, so this shift should allow the company to better match revenues and expenses,” wrote Ross.

Related: How New Dimensional Weight Pricing Will Impact Ecommerce Shippers?