Low Cost Residential Delivery Options for Online Retailers

Consumers and carriers are squeezing etailers. Customers expect free shipping. Carriers keep raising prices.

Consider on the one hand that UPS and FedEx pricing has risen approximately 20% over the past three years. Many surcharges like Residential add-on fees and Delivery Area Surcharges are up 20-30% since 2009. Fuel surcharges alone have doubled since this time last year!

On the other hand, online shoppers insist on free shipping. According to a recent National Retail Federation study, the number one purchase incentive is free shipping.

When asked to choose amongst the five most popular promotions when shopping online, 85% chose free standard shipping without conditions. In fact, “free shipping” was chosen 166% more than the next best promotion!

Some online retailers offer free shipping and are forced to dilute margins or artificially inflate product costs to make up costs. Unfortunately, competition within many markets is too fierce to mark up product pricing. Shipping is a loss leader for many.

Compounding the financial problem is the fact that a growing number of online orders are delivered to residences. In fact, residential deliveries have doubled from 20% of the overall parcel market to 40% in less than a decade.

Challenges of Residential Deliveries

Delivering packages to a residence is more costly than to a business address. Driver and fuel costs are higher outside of high density commercial routes. Carriers are forced to recover costs through residential surcharges ($2.45-2.75), delivery area surcharges ($1.85-3.00) and other “accessorial” charges that often account for more of the total cost than the freight charges (Figure 1).

Figure 1: 1 Lbs. Ground Residential shipment to Zone 2

Moreover, residential discounts in most carrier agreements are not as aggressive as commercial incentives. For example, it’s typical to see a 36% incentive off published list rates for Ground Commercial packages, but only 20% or so for Ground Residential shipments.

Other challenges. The parcel carriers are not required to obtain a signature for residential deliveries. Package tracking is somewhat limited. Final package disposition is often “left at door”, which can lead to higher costs through “where’s my order” calls to customer service, loss/damage claims, returns and reships.

More importantly, all delivery problems can lead to a poor customer experience, negative publicity, customer attrition and revenue loss. Not to mention reships, restocking and other operational costs.

It’s also challenging to maintain current address information for residential customers. Consider the fact that 40 million people move annually in the U.S., and nearly three quarters of the population moves an average of once every 5 years (source: USPS Annual Report).

To recap, residential deliveries are more challenging and costly than shipping to businesses. Shipping costs are skyrocketing out of control. And online shoppers want free shipping.

What’s a shipper to do…?!

Residential Shipping Choices

Fortunately, residential shippers have several delivery options outside of the private parcel carriers including the US Postal Service, parcel consolidators and regional carriers.

For lightweight, low value, non-urgent, residential shipments, the US Postal Service and parcel consolidators are hard to beat in price, service and value.

Let’s start with the Postal Service. The Postal Service has worked hard to improve delivery transit, reliability, tracking systems and many other areas. The results are paying off. In a recent Multichannel Merchant survey, 59% of shippers view the USPS as a competitive alternative to UPS and FedEx. (Figure 2)

Figure 2: Multichannel Merchant Outlook Research on Operations & Fulfillment 2011 Survey

No longer a “one price fits all” shop, the USPS offers a variety of pricing formats including retail, online, volume based, weight/distance based, flat and regional rate products. Moreover, if you spend at least $2 million annually, you can negotiate custom pricing.

First Class Mail Parcels weighing 1-13 ounces are a bargain even at the Retail rates of $1.71 to $3.41.

With private carriers FedEx and UPS, the residential surcharge alone costs $2.45-2.75.

The Postal Service now enjoys 44% of the less than one pound market. (Figure 3)

Figure 3: Under one pound parcel market

Moreover, the Postal Service does not charge for “accessorial” charges like fuel surcharge, residential delivery, area surcharges, pickup service, Saturday delivery, etc.

The Postal Service also offers a variety of unlimited weight envelopes and boxes. As its national advertising campaign summaries, “If it fits, it ships.” USPS recently added regional boxes to flat rate options, adding yet another low cost alternative to the convenience and cost advantages of prepaid, unlimited weight products.

Parcel Consolidators

Parcel consolidators market their services as providing delivery times at or near First-Class Mail Parcel service standards, but at lower pricing. Other benefits include improved shipment visibility and less handling and damage.

According to the USPS, the major ground consolidators are FedEx SmartPost, UPS Mail Innovations, Streamlite, Blue Package Delivery, Newgistics, DHL Global Mail, Fairrington Transportation, Kaleidoscope Services, OSM Worldwide, ParcelPool, and SP Express.

Each leverages USPS Parcel Select services and workshare discounts. Consolidators handle pickup, sortation, transportation and induction to the USPS hub. USPS handles the “final mile” delivery. The deeper the induction to the USPS, the greater the workshare discounts enjoyed by the consolidator, and in turn, the greater the cost savings available to shippers.

Regional Carriers

As detailed in last month’s article (“The Benefits of Regional Parcel Carriers”), regional carriers such as Eastern Connection, Lone Star Overnight, OnTrac, Spee-Dee Delivery, US Cargo and others offer reliable parcel delivery services at rates as much as 40% less than national carriers.

Many shippers will cite overall value proposition, including cost savings, consistent service performance and innovations that make it easier to ship with regionals. What’s more, regional carriers offer multiple delivery options that offer many benefits—including lower cost, flexibility and, in many cases, better service.

In summary, online retailers are wise to measure current shipping & handling policies and costs, and evaluate alternative residential delivery options. US Postal Service, parcel consolidators, regional carriers and other options could significantly reduce your shipping costs.

Maybe you can offer free shipping after all?