Dimensional pricing could add $550 million annually for UPS, FedEx

If one analyst is right, moves by UPS Inc. and FedEx Corp. to begin pricing some ground packages based on their dimensions rather than on their weight will yield more than half a billion dollars in additional annual revenue for the two companies.

Within the past two months, both carriers said they would impose "dimensional weight" pricing on all packages measuring less than 3 cubic feet. That represents a big chunk of both their ground delivery mix and e-commerce traffic. The moves, which will take effect at UPS on Dec. 29 and at FedEx on Jan. 1, will effectively make prices for shipping lightweight, often-bulky shipments much higher than they are now. The additional revenue will be generated without much, if any, increase in capital investment.

Rob Martinez, president and CEO of the consultancy Shipware LLC, said that, when fully implemented, the changes will generate an estimated $380 million in additional annual revenue for UPS and $170 million a year for FedEx, which has a smaller ground parcel footprint. Martinez said the programs are likely to be phased in over time, and full implementation may take three or four years. The additional revenue stream is a fraction of the companies' combined revenue, which is on pace to exceed $102 billion a year by the end of their next annual reporting period. Still, the pricing changes could be pure gravy for the big two.

To calculate dimensional pricing, the companies use what is known as a "volumetric divisor." A parcel's cube is first calculated by multiplying its length, width, and height. The cube is then divided by the divisor, currently set at 166, to arrive at the dimensional weight. For example, a 3-cubic-foot package measures 5,184 inches; dividing 5,184 by 166 yields a rate equivalent to that of a 31-pound box, although the box's actual weight is likely much less. Shippers generally pay the greater of either the dimensional or the actual weight. Both companies already apply dimensional pricing on ground shipments measuring more than 3 cubic feet as well as on all of their air express shipments.

UPS and FedEx made their announcements months ahead of time to give customers an opportunity to change packaging practices. Larger customers may also use the window to negotiate contractual modifications in an effort to mitigate the potential damage to their bottom lines, Martinez said.

The pricing change was driven in part by the explosion of e-commerce transactions, which has resulted in what the carriers could consider an unwelcome increase in business-to-consumer (B2C) shipments. B2C packages are lighter and are usually delivered one residence at a time. By contrast, business-to-business (B2B) parcels are heavier and are delivered to each stop in larger quantities, thus maximizing a carrier's revenue per stop. FedEx and UPS have a virtual duopoly in the B2B segment; however, growth there has been relatively flat.