[Updated post from September 30, 2020]
With the holiday season now right around the corner, merchants are gearing up for the busiest period of the year. One of your biggest considerations? Understanding how shipping costs may cut into your profit margins.
eCommerce sales have skyrocketed as a result of the COVID-19 pandemic, and 2021 has been a continuation of the dominance of online shopping. However, this is both a blessing and a curse for merchants and retailers. While healthy sales are reassuring, it means that peak season surcharges are more likely to hit your bottom line this holiday season.
In this guide, we’re going to give the full rundown on peak season surcharges so you’re aware of the impact they may have on your profits this holiday season.
Peak Season Surcharges (PSS) refer to temporary surcharges that major shipping carriers will apply to their base rate to cover increased operational costs during periods of high demand. Most surcharges take the form of a flat fee applied per package and can differ widely between carriers.
The demand for shipping and freight isn’t uniform throughout the year. Instead, major retail events such as Black Friday and Cyber Monday create huge spikes in consumer spending. This creates a corresponding increase in demand for shipping services, which means a space constraint on trucks and aircraft.
When carriers working at or near full capacity, they require additional resources in the form of seasonal labor or automation to prevent delivery delays. Peak season surcharges allow carriers and postal services to offset these increased costs and attempt to maintain the service standards that consumers expect.
Why do shipping carriers apply surcharges?
The demand for shipping and freight isn’t uniform, but cyclical. Rather, major holiday events such as Black Friday and Cyber Monday create huge spikes in consumer demand – and a corresponding increase in the need for shipping services.
Because carriers are constantly working at or over full capacity during the holiday season, this leads to increased costs in the form of seasonal employees or automation to meet demand, which is then passed onto the customer.
There are a variety of factors that shipping providers will use to determine whether a parcel is eligible for peak season surcharges. The most common parcels to be affected are those that require additional handling from carriers, such as:
Peak season surcharges will also respond to how broader marketplace trends are affecting parcel services. Last year, for example, ecommerce saw a surge in sales as a result of the COVID-19 pandemic.
Online retail grew by an eye-watering 44% in 2020 – triple the growth experienced in 2019. The result was a massive uptick in small parcel volumes bound for residential delivery. This is a more costly, inefficient delivery method for carriers. Residential surcharges were a popular tool during the 2020 holiday season to enable providers to continue making a profit on B2C deliveries – and we’re set to see more of the same this year.
Peak season surcharges should not be confused with a General Rate Increase (GRI) which recognizes a general rise in operational costs. Traditionally, GRIs could be applied at the beginning of every year and would stay in place until the following year. Meanwhile, peak surcharges only relate to variable increases applied specifically to various peak seasons.
However, it’s safe to say that the COVID-19 pandemic has blurred the lines between GRI and PSS. With parcel carriers and supply chains under sustained pressure throughout the year due to the growing popularity of home delivery services, it’s much less clear what qualifies as the ‘peak’ – if it even exists at all.
Due to the widespread supply chain disruption caused by the pandemic, the question of ‘what is peak season?’ is no longer an easy one to answer.
Traditionally, peak shipping season would begin in the Fall shortly after kids return to school, ramping up through October and November with Black Friday and Cyber Monday before ‘peaking’ in December. In recent years Chinese New Year, which occurs from late January to early February, has also joined the peak due to the reliance on Chinese ports.
However, COVID-19 has totally upended this dynamic. With consumers stuck at home due to lockdown restrictions, parcel carriers have been forced to pivot from commercial accounts to the high-volume residential deliveries we would typically see during the holiday season.
UPS and FedEx caused a stir when they made the decision to add surcharges to U.S. domestic packages in June 2020 due to experiencing peak holiday volumes in the middle of the year. At the time, FedEx referred to these changes as the ‘new normal’ to manage increased demand and higher shipping costs.
So, what does this mean?
It means that parcel carriers are now implementing surcharges much earlier in the year than in the past – and leaving them in place for longer. As a result, peak season surcharges are set once again to be one of the biggest challenges for retailers in peak season 2021.
With the ongoing difficulties with ocean freight and supply disruption, industry insiders have been predicting some pretty hefty surcharges for shippers for the 2021 holiday season – and they’re right.
In a sense, 2021 peak surcharges are picking up right from where things left off in 2020. This is because the year so far has already seen carriers implement a variety of surcharges to manage demand – with some kicking in almost as soon as another comes to an end.
Here is a broad overview of the themes underpinning peak season surcharges for the upcoming holiday season:
High volumes are the biggest target. Once again, merchants with high parcel volumes are going to be hit the hardest by peak season surcharges. The higher over the cap set by the carrier, the more shippers will have to pay per package. If combined with other surcharges such as additional handling, this could easily erode the profit margins of that sale.
Residential deliveries will continue to feel the sting. Due to the high delivery costs associated with the final mile, it’s not surprising that residential delivery is firmly on the surcharge list for nearly all major carriers. With ecommerce set for another record-breaking year, carriers are not relying on the reopening of physical retail to ease pressure on their networks.
USPS is joining the fray. With the agency set to implement peak season surcharges for the second year running, it seems likely that this signals a long-term approach designed to minimize the huge losses incurred by their business model.
Even regional carriers turning to surcharges. Amid complaints that ongoing peak season surcharges have morphed into a dynamic pricing model, many businesses have opted to split parcel volumes across regional carriers to avoid surcharges. However, not even regional carriers are immune in 2021. Lone Star Overnight recently announced a customizable surcharge program for peak season, while others look set to follow suit.
UPS has implemented an array of different package surcharges over the past year. This means several of their ‘peak’ season surcharges are a continuation of additional fees that shippers have already been paying during 2021.
Surcharges such as additional handling and large packages apply to all service levels, while high-volume surcharges will affect only those using UPS SurePost, UPS Ground Residential, UPS Next Day Air Residential, or All Other UPS Air Residential:
You can find more information in UPS’ Peak Season Surcharges Guide.
Like UPS, FedEx is targeting residential delivery and high-volume shippers particularly hard, in addition to packages over maximum limits:
The size of Peak Residential Delivery Charges will depend on the peaking factor by which your residential shipping volume exceeds a weekly volume of 25,000 packages, as expressed on the chart below:
For more information on how Peak Residential Delivery Charges are calculated, check FedEx’s website.
The United States Postal Service implemented peak season surcharges for the first time for the 2020 holiday season, so it’s not surprising that the carrier has chosen to do so again. According to a statement by the agency, “These temporary rates will keep the Postal Service competitive while providing the agency with the revenue to cover extra costs in anticipation of peak-season volume surges similar to levels experienced in 2020.”
But unlike last year, surcharges aren’t only going to apply to large commercial customers such as Amazon and Walmart. Small volume shippers and individual consumers shipping holiday gifts are also going to be caught up in efforts to shore up the network and prevent a repeat of the delays seen last year.
In particular, USPS peak season surcharges are targeting oversize parcels which take up valuable freight space. The longer the route and the heavier the package, the more surcharges will sting. These changes will affect Priority Mail, Priority Mail Express, Parcel Select Ground, and USPS Retail Ground. Additionally, all USPS First Class packages will be assessed a $0.50 price increase and, intentionally at a slower transit time. International services are unaffected.
The following peak season surcharges for USPS Priority Mail are in effect from October 3rd, 2021 to December. 26, 2021:
With peak season surcharges now a year-round feature for carriers, it’s never been more important for merchants to manage them effectively. Although it’s hard to avoid surcharges completely, here are some steps you can take to minimize their impact:
Carriers will publish their surcharges on their websites, which allows you to compare rates between different providers in advance of the holiday season. The difficulties faced by Amazon’s same-day delivery partner LaserShip is a classic example of why the cheapest rate doesn’t necessarily mean the best service; keeping this in mind will help you to choose the best value carrier for your needs.
Express delivery options will typically bear the higher surcharges during peak season. So, while customer expectations for rapid (and free) delivery are getting higher with each passing year, remember that you may be forced to pass higher shipping costs onto your customers.
A recent Shopkick study found that 94% of customers said that free shipping was the perk they wanted most when shopping online this holiday season, followed closely by fast shipping (60%). One of the easiest ways to minimize peak season surcharges is to opt for slower shipping speeds that also come at a lower flat rate.
However, merchants should be aware that while the peak season surcharges for Ground services are less than for Express services, they’re more likely to face extended transit delays and late deliveries. Express services are generally more reliable in terms of delivery timeframe, which is an important consideration when consumers are expecting deliveries ahead of Christmas Day.
It’s important to appreciate that carriers can introduce new surcharges at any time with little warning, and the uncertainty presented by COVID-19 means that surcharges outlasting the holiday season are likely to become the new normal. It’s important to keep a close eye on carrier websites for surcharge extensions to avoid getting a nasty surprise.
This year’s peak season surcharges are proving to be even more complex than 2020, with complex calculations, differing volume thresholds, and plenty of fine print. At such a challenging time for the shipping sector, it’s highly advantageous to partner with an experienced fulfillment provider like Whiplash who can help you to build a successful and flexible shipping strategy that manages peak season charges effectively.
Whiplash is available to help our customers understand the surcharges between major and regional carriers in real-time to find the optimal shipping method that works for your needs. Give yourself the ultimate control over your shipping strategy so you can capitalize on the revenue opportunities of the holiday season – without losing profitability.
Contact Whiplash today to find out how we can help alleviate the impact of peak season surcharges.