Peak and Demand Surcharge Considerations for Your Holiday Shipping Matrix

The United States Postal Service (USPS) will not raise pricing by applying a peak season surcharge this holiday season. Wait, what?

2023 will be the fourth peak season since COVID temporarily forced volume surges on the package carriers, and the carriers forced “peak” surcharges on the shipping public. This year, however, the USPS is making a big, albeit late, play by not following FedEx, UPS, OnTrac and other carriers in instituting peak surcharges. (Amazon Delivery Services, which is being relaunched in 15 major cities, also announced it won’t implement peak surcharges this year. However, very few shippers have access to this new service due to the limited rollout.)

UPS and FedEx have followed a common political success strategy, turning temporary surcharges into permanent ones by reclassifying Peak Surcharges into year-round “Demand Surcharges.” My dad told me 50 years ago, “There's no such thing as a temporary tax.” He was right then, and he's still right today. The difference is that while you can’t shop for a better deal on taxes, you can on small parcel freight.

The biggest challenge facing shipping managers will be incorporating these seasonal charges into their least cost routing (LCR) business rules, as many businesses don't have robust LCR software. In general, shipping solutions universally struggle to provide accurate routing logic for several reasons. If you have LCR automated in your system, test it. Determine if it takes into consideration package dimensions and reflects your applicable minimum charge discount, DIM factor, base rate discounts, bonus tier discounts, and net accessorial costs, including Residential, Delivery Area, and Fuel Surcharges. How does the routing logic hold up to scrutiny? This exercise often yields additional savings opportunities.

While USPS’s announcement is welcome and good news for some shippers, it possibly comes too late for others. Ideally, the USPS would have made the announcement weeks ago before peak season shipping plans were finalized for many shippers. However, for those shippers still able to adjust their shipping strategies, it might make sense to reevaluate those plans to leverage USPS’s lower pricing when compared to the national carriers. This comparison should include the major consolidators that leverage the USPS Parcel Select service for final mile delivery. Note: Some consolidators match the USPS on actual incurred increase, while others align with UPS/FedEx.

When evaluating your carrier mix and shipping profile, it's helpful to group your outbound strategies into service groupings based on time-in-transit (TNT) and service-level agreements (SLAs). The most common groupings are:

1. Economy Ground 3-8 days: Includes deferred services like UPS Mail Innovations, UPS SurePost, and FedEx Ground Economy
2. Expedited Economy 2-5 day: Includes UPS and FedEx Ground/Residential/Home Delivery, USPS Ground Advantage, and Expedited consolidator services
3. Two- and 3-Day Premium Economy: Includes UPS and FedEx 2-Day services, USPS Priority Mail, consolidator Expedited extreme service (note, there’s only one that offers this level at ounce-based prices!)
4. Domestic Express – Overnight
5. International Express – less than 5 day: FedEx, UPS, and DHL Express are the only carriers in this space. Other carriers like the USPS can rebrand this service (Global Express Guaranteed).
6. International Economy – greater than 5 days (typical is closer to 10 days): Includes international consolidators, USPS, and most domestic carriers offer some form of this service.

Peak and “Demand,” Residential, DAS, and fuel surcharges can impact these groupings differently. The national carriers turned the temporary peak surcharge into a year-round “Demand” surcharge. They continue to include higher-cost triggers that impact the largest-volume seasonal shippers if their peak volume exceeds their normal weekly volume.

You might be tempted to simply change your routing rules during peak to avoid the steep surcharges only to discover six months later that your 52-week rolling average (calculated on transportation published rate charges without accessorials) spend has dropped two levels below your targeted tier. You’ll find your bonus discounts completely gone, you're paying the list price on Express, and you’ve lost your tiered discounts on Ground services. Don’t be “penny wise, pound foolish”; rather, understand the total picture.

Best Practices for Optimizing Your Holiday Shipping Strategy

1. Conduct a comprehensive evaluation of your entire carrier mix usage and spend. Determine where you are in your bonus tiers, what carrier alternatives are supported in your tech stack (shipping software and associated integrations), how your contracts are structured, and what your options are. Understand alternatives in the market, and model cost impact in partial or total conversions.
2. Look into Cubic pricing. USPS offers very competitive flat rate pricing based on the size of the package. Priority Mail Cubic offers five tiers and Ground Advantage offers 10 tiers up to a full cubic foot. FedEx competes against this with its “One Rate” program, and UPS has “Simple Rate” based on package size, not weight.
3. How are your carrier relationships? Keeping close to your reps is a great best practice. The good reps will work to help you achieve your cost and service objectives while protecting their volume from being poached by other carriers.
4. Want to press the easy button? Reach out to professional consultants. Premier firms will analyze your situation at no cost to you and will share quite a bit of actionable information — both what's on the table in terms of cost mitigation as well as how your shipping operations compare to others in your space. Often, both short- and long-term strategies are discussed along with an implementation timeline.

What makes this peak season different from the past three is that negotiation leverage has finally shifted back to shippers. Carriers overbuilt capacity. UPS lost 1 million parcels per day to other carriers due to strike concerns, and since has become much more competitive. More than 20 new alternative carriers have been launched over the last four years. Many may not survive, but we expect to see more consolidation of providers as the supply chain returns to the new normal. Carrier volume will be crucial, and we expect strong, competitive pricing between carriers to continue through the end of the year with no hard stops to new client onboarding.

On a national perspective, we may not see significant parcel volume growth this year, although a recent study by Mastercard Pulse is forecasting a 6 percent spending increase this holiday season. Most of this will be in higher product costs and the increased cost of shipping. The key will be market share movement. The USPS may see a 5 percent to 10 percent bump in volume due to this change. It will be offset by declining overall volume, but potentially propped up by new volume due to a recently announced round of U.S. Government-paid shipping for COVID tests that will skew year-over-year results.

In addition to negotiating your own Peak and Demand surcharge discounts, there are also options for going onto a Group Purchasing Organization (GPO) carrier pricing program available through online shipping platforms. These are often the perfect solution for smaller shippers (less than $500K/year net shipping charges) and a great way to get good discounts and accessorial concessions without long-term commitments. The downside is that they're one size fits all, with no ability to customize for specific client needs, and the shipper gives up the carrier relationship.

Last year, USPS quietly left out the peak surcharges in its Merchant Rate Card programs that are available on over 100 online shipping platforms. Not wanting to be outmaneuvered, UPS quickly removed peak charges on its Digital Access Program (DAP) the very next day. We will very likely see the same dance this year, so keep aware to take advantage.

There's a lot going on right now as pricing for peak and 2024 comes into focus. Savvy shippers will take this time to dig deep into their parcel spend and forecasts, looking for ways to save. They know their company’s success is tied to having reasonable and predictable shipping costs and is earned one cart at a time. Consultants can help point you in the right direction.

Wishing you great shipping success! If you have any questions, feel free to reach out to me.

Gordon Glazer, CMDSM, CMDSS, MDP, MDC is a senior consultant, USPS specialist at Shipware, an innovative parcel audit and consulting firm that helps volume parcel shippers reduce shipping costs 10 percent to 30 percent.