newsworthy
Days of wine, roses, and free third-party billing come to end as
UPS slaps on new transaction fee
It’s been standard practice in the parcel-shipping world
for decades: A so-called third party, so named because it
is neither a shipper nor a receiver, uses a fulfillment house
to store, pick, pack, and ship inventory. Carriers like UPS
Inc. deliver the package and bill the third party, usually a
merchant, for their services. Each third party has its own
account number and its own set of pricing based on its
unique shipping characteristics.
It’s been a pretty good deal for everyone, except for the
carrier. That’s because large e-tailers with steep discounts
would direct their fulfillment houses and so-called drop-ship vendors to use their third-party billing account numbers when their discounts were higher
than those available to the actual shipper. While the carrier’s cost of service
didn’t change because of the billing
itself, its revenue would shrink because
of the higher discounts the third party
brought to the table.
Parcel carriers eager to win and keep
business would offer third-party billing options knowing that discount
cherry-picking existed, and that the
risk of fraud was greater because a supplier could ship
packages on behalf of its customer and to other consignees
besides those that belonged to its customer. The third party
would then receive its bill with shipping charges levied on
transactions unrelated to it. UPS would be brought in, at its
time and expense, to help resolve the conflicts.
Third-party billing was not a problem for carriers when
it was a small part of the overall business. Today, however,
third-party billing accounts for about 9 percent of UPS’s
and Memphis, Tenn.-based rival FedEx Corp.’s annual
domestic revenues, due largely to the explosive growth
of e-commerce transactions. At UPS alone, 11. 64 percent
of its shipments and 7. 9 percent of its net charges are
third-party billed, according to a source that asked not to
be identified and who has access to much of the company’s
data. UPS moves more than 18 million pieces a day across
its worldwide system.
In mid-October, UPS took action. The Atlanta-based
giant imposed, effective Jan. 4, a 2.5-percent fee on all
third-party billing services—the first time it has ever levied such a charge. FedEx does not have a similar fee, but
given that the two companies frequently act in lockstep
on pricing matters, that they have a virtual monopoly over
business-to-business (B2B) parcel traffic, and that there
would be little visible downside for FedEx, no one would
be surprised if it followed suit.
Susan L. Rosenberg, a UPS spokeswoman, said the
new fee is designed to cover the overhead associated
with managing these types of transactions, especially as
e-commerce activity generates more of them. The current
pricing structure underprices UPS’s services in relation to
the costs associated with providing them, said Rosenberg,
noting that there is an “inappropriate level of volume
discount” applied to a third-party billing transaction and
that UPS “incurs costs for which it may not be properly
compensated.”
Rosenberg said UPS always works to match incentive
programs with a customer’s shipping characteristics. She
added, however, that “we’re also going to get the percent-
age to cover overhead when it’s a third
party with smaller volume, where it
costs us more to serve.”
FEELING THE PAIN
Those who will likely feel the most
pain are small merchants who will
now be forced to absorb a new charge
on top of the carrier’s regular annual
rate increases. But any third party will
likely sit up and take notice. Beyond
trying to eliminate discount “cherry picking,” the new
charge is designed to modify customer behavior, according to Robert Persuit, director of business development
of ShipMatrix, a unit of transportation consultancy SJ
Consulting.
Persuit said UPS wants to migrate transactions away
from third-party billing to a prepaid structure, where the
fulfillment house become the payor and the merchant
pays the house, thus removing UPS from any after-the-fact
involvement. Persuit said prepaid billing is much simpler
and less costly for UPS to understand and makes it easier
for the carrier to quantify the costs of its service.
UPS CEO David P. Abney addressed the issue—albeit
obliquely—during an Oct. 27 analyst call following UPS’s
announcement of its third-quarter results. In response
to an analyst’s query, Abney said the company wants to
expand the third-party billing service in response to rising
customer demand. Users benefit from “inventory handling
and transportation savings associated with the service, as
well as an ability for them to offer a broader line of products to both businesses and household consumers,” he said.
Satish Jindel, head of SJ Consulting, said the charge is a
cost-recovery initiative and not a way to wring more revenue out of UPS’s customers. He said the current structure
results in an “improper allocation of costs” for UPS because
some are subsidizing the savings enjoyed by others.
—M.S.
