Hello, I’m Keith Myers and today we’re going to talk about Minimum Charges and what they mean to shippers. I’m a Senior Consultant here at Shipware and looking forward reviewing this.
As far as what we’re going to talk about, we’ll start with what Minimum Charges are and then we’ll discuss how they work and, really, why you should be concerned about them. Because, they do matter, and they matter a lot.
The best way to define a Minimum Charge is that it’s the lowest rate that a shipper will pay to ship a product. Every single service for UPS and FedEx has a Minimum Charge and how those are defined varies by Service. Typically, it’s going to be based off of the least expensive current list rate for that service.
So, for example, if you’re looking at Ground or UPS SurePost or FedEx SmartPost, the starting point for that will be the Zone 2, 1 lb. rate. Then, typically, there are further adjustments from there. If you’re looking at UPS Next Day Air or the matching service for FedEx, Priority Overnight, and it’s the Zone 102 for UPS or the zone 2 FedEx 1 lb. rate — letters and envelopes, it’s the same ideas in 102 or Zone 2, but its weight is irrelevant, of course. The weights for letters and envelopes aren’t factored into that.
For import and export, it’s going to be the 1 lb. rates. So, it’s going to vary; for every individual Zone there will be a different Minimum Charge. The Zone definitions are slightly different between UPS and FedEx. Again, this is where you start, and there will be reductions off of those as you’ll see when we discuss what the minimum looks like on your actual agreement.
FedEx and UPS have set up their agreements differently. FedEx groups their Minimum Charges with the corresponding service.
So, as you see on the left, this top section is from the Ground services. You have Ground Domestic Single Piece, Home Delivery Domestic Single Piece, Applicable Zones and the Minimum Charge associated with that zone. Down below we have the Domestic Express and a subset of services from there – Priority Overnight Envelope, Pack Overnight, etc. You have the Minimum Charge Zone 2 Envelopes, Zone 2, 1 lb., and then the reduction off of that Minimum. Keep in mind this says “Reduction,” so for Priority Overnight Envelope, the Minimum Charge is not $10.50, it is $10.50 less than whatever the Zone 2 Envelope rate is.
UPS, over on the right, group their Minimums by Domestic and International. This is a domestic minimum section that you would see on your agreement. You can see you’ve got the Express services listed first and then Ground Commercial and Residential down at the bottom. Same kind of idea – you can see the Ground rate for the Ground Minimum is Zone 2, 1 lb. for Commercial and Residential. For the Express Services, it’s the same thing — the 102, 1 lb. rate and then there’s an adjustment off of that. That adjustment is 55%. Same logic applies as FedEx. so that’s the minimum charge you would pay would be 55% less than the Zone 102, 1 lb. rate.
How this works – there’s a lot of numbers thrown at you there – but really, I think the best way to do this is to show a simple example how the Minimum Charge really comes into play. What we’re going to talk about is a 10 lb. Ground shipment that’s going to Zone 4 with a 50% discount on FedEx. If you look in your service guide, you would see that the FedEx Zone 4, 10 lb. rate is $13.27, and you have a 50% discount on that, then you would pay $6.64 for that shipment.
However, the Zone 2, 1 lb. rate, which is the Minimum Charge that we looked at previously, is $8.23. So, the shipper in this example would pay $8.23. They would not pay that $6.64. Effectively, they’re only getting a 38% discount instead of that contracted 50% discount. Essentially, they’re paying about 24% higher than what they would if the Minimum was not in place.
Something to think about, if that customer went to FedEx and said, “Hey, I want to improve my rates,” FedEx came back and said, “Great, we’re going to give you a 65% discount on this shipment.” How much would they save? They’d save absolutely nothing if they don’t do anything about that Minimum Charge. They would still pay $8.23. That’s really how the Minimums can impact what a customer is paying. It prevents you from getting the full benefit of that discount.
Another way to illustrate this is looking at some net rates.
If you’re a near-Zone shipper and a lot of your products are going 150, 200, 300 miles away where your customer base is, or if you’re shipping a lot of lightweight products, that Minimum Charge is really going to be important. This example lists the net rates if you have a 40% Ground discount with FedEx. You can see that in all these rates that are shaded in red, $8.23, you’re not getting the full benefit of your discounts in this example. You’re not getting that full 40%, you’re getting less than that. If you’re a Zone 2/Zone 3 shipper and your products are up to 14 lbs., you’re not getting that full discount, even all the way up to 20 lbs. for Zone 2. If you’re shipping lightweight packages, 3 lbs. or less, you’re not getting the full 40%. You’re going to pay $8.23 no matter where you’re going in the country. So, it’s important to really be aware of what those Minimums can do to your rates.
If you’re trying to find out, “Did I pay a minimum on an invoice?” – it’s not the easiest thing to figure out. FedEx is a little more transparent than UPS is. Here are examples for both.
You can see on the left; FedEx has a very simple sentence. It says, “Net charge represents minimum package charge for this parcel.” That’s FedEx saying you did not get your full discount, the Minimum Charge came up, and that’s what we’re reflecting here.
UPS has their invoices structured a little bit differently. They have these invoice message codes that they use to show what changes were made or what rating logic was applied to each individual shipment. For UPS, they have this message code called “ag” which means Minimum Rate Applied. So, if you see that message code at the bottom of your shipment, then you’ll know you did not get the full benefit of that discount, that you had to pay the Minimum Charge. You can see from this example, of the $8.23, they only got about a 6% discount instead of the 35% or 40% that would be on their contract.
Now that you understand what they are and how to find them, what do you do about Minimum Charges? The first thing you want to do is understand how many of your shipments are getting impacted by those Minimum Charges. If you’re a heavy Ground shipper, or you do a lot of SurePost or SmartPost shipments, then those Minimum Charges are really going to come into play. Express shippers, it can happen as well, but it’s not quite as common. You still want to go through and work them out, particularly if you’re sending a lot of light packages Express.
Once you get all that quantified, it’s important to know these Minimum Charges are negotiable, just like everything else on an agreement. Put that information together and go to your carrier and say, “Look, I’ve learned that 30% of my shipments aren’t getting the full discount. I need to get a concession on my Minimum Charge.”
Thank you for learning about Minimum Charges. If you have any questions or comments, please email us at firstname.lastname@example.org. Thank you and have a great day.