Whether you know it or not, you’re already familiar with the concept of dynamic pricing.
If you plan to fly home for Thanksgiving, you can find a reasonably-priced ticket by searching weeks or months in advance. But if you wait until the week of Thanksgiving to decide, the sticker shock might leave you calculating how much your family means to you. If you need to tack on a last-minute hotel booking, the answer might be “not enough.” You can save a lot by planning a few months and buying flights and rooms before filling up.
Dynamic pricing is the real-time application of supply and demand. Airlines and hotels were both early adopters. With the United Parcel Service (UPS) and FedEx Express (FedEx) announcing plans to ramp up their concept usage, shippers need to know what it means for them.
As with airlines and hotels, UPS and FedEx want to charge more as demand for their services increases. Peak surcharges are a logical application of this (and they’re here to stay). But shippers might also pay less when a carrier has excess capacity…right?
It’s common for a plane or truck to travel full of boxes from one city to another but be practically empty on the way back. The FedEx Great Rates program, which has been around for years, addresses this issue for international express shipping rates using dynamic pricing. Even the smallest shippers get the most significant discounts when there’s a lot of unused space on a plane.
However, the traditional tiered pricing in most UPS and FedEx contracts threatens a different outcome.
The contracts they sign with their customers tie savings directly to how much a shipper spends. Falling short of those commitments can raise shipping rates or even trigger significant monetary penalties.
By denying the shipper the flexibility to use another postal service or parcel carrier when shipping costs are high, UPS and FedEx may not find it necessary to offer savings. If prices are high enough during the busiest days of the week, package volume will shift to lighter days without any deeper discounts being offered. This shift balances the demand on the carrier’s network and improves efficiency, enabling them to spend less and charge more simultaneously.
Flexibility – the ability to choose freely between multiple vendors – is an essential difference between dynamic pricing in the hospitality industry and this version of the small parcel shipping industry.
While UPS and FedEx may position dynamic pricing as an incentive for shippers to find ways to hold packages until slower shipping days, shippers may pay more on busy days.
Worse still, in a dynamic pricing environment, the busiest days of the week may shift without notice. If this happens, setting an annual shipping budget – already challenging since the carriers began implementing mid-year rate increases – will become even more of a fool’s errand.
However, if shippers have the flexibility to choose between carriers, dynamic pricing can deliver a win for the carrier, the shipper, and the consumer.
Josh Fredman, Senior Vice President of Operations at Better Trucks – a regional, last-mile parcel carrier specializing in rapid-residential deliveries – sees a better way to do it. “Dynamic pricing is transparent on both sides, creating trust and mutual benefit. Clients get top service at lower rates, and we create efficiency to fill trucks. Better yet, consumers reap the benefit,” he said.
Overly full networks are less reliable, and he sees dynamic pricing as a way to give shippers more transparency as they route their packages. A higher rate from one carrier indicates the shipper might get better service at lower rates from a different carrier at that time. This is a win for the shipper and the end consumer. It also helps balance the delivery load across the carrier’s network, creating efficiencies that save them money, keep service levels high, and enhance their reputation—a clear win for the carrier.
UPS and FedEx shippers must understand which version of dynamic pricing they’re offering. Without the flexibility to choose other carriers, their clients may be forced to pay more, wait longer, or even both. Offsetting slow transit times and higher average prices will require creative marketing or very flexible operations.
Clever marketing campaigns might encourage consumers to fill up their digital carts on slower days for the carrier. Still, there’s a limit to how effective this can be, even for retailers with access to sophisticated customer and logistics data.
On the operations side, if a shipper can hold orders until one of the carrier’s slower days (either by staging fulfilled orders in the warehouse or electronically delaying the order until the day of shipping) they can lower the additional cost burden of dynamic pricing.
However, this creates new challenges such as odd hours for warehouse staff, inefficient use of warehouse space, and additional IT costs. It also begs an important question: if a shipper delays orders by a day or two to accommodate the demands of UPS or FedEx, why use them? Instead, save money and reach customers faster by using practically any other carrier to ship orders on the day they’re placed.
UPS and FedEx should notice how other companies, like Better Trucks, are applying dynamic pricing principles to benefit everyone.
Shipware can help you understand exactly how new pricing structures will affect you before you sign a new contract. If you want expert support in this process, our knowledgeable consultants will help you decode your contract and ensure the pricing structure is truly dynamic.
