Whether it is booking an airline ticket, a rideshare or even groceries, dynamic pricing frequently intersects with our daily lives. At its most basic (or theoretical), dynamic — or surge — pricing matches prices with real-time supply and demand to endeavor to provide the most transparent discovery of current market conditions.

The less-than-truckload industry has adopted the model. The parcel-delivery industry, normally more of a first mover in pricing trends, has been slow to follow. One reason is that it is difficult to embed transactional pricing in a world dominated by contractual relationships.

Josh Taylor, senior director of professional services at consultancy Shipware LLC, spoke about dynamic pricing at the recent Parcel Forum in Nashville, Tennessee. In the following interview, he dives deeper into an issue that is bound to increase in relevance.

FREIGHTWAVES: Can you explain how the dynamic pricing model works in the parcel industry?

TAYLOR: A dynamic pricing model enables a carrier to charge less when it has excess network capacity and more as that capacity is filled. The FedEx Great Rates program for international shipments has followed this pricing model for years. It is the purest example of dynamic pricing I’ve seen from UPS or FedEx. Other parcel carriers have discussed implementing this model on a larger scale, which is already common among LTL providers. 

Recently, UPS (NYSE: UPS) discussed a day-of-week parcel pricing model that charges more on the days when it is traditionally busiest. It’s not truly dynamic if the days and charges are locked in ahead of time, but it is a step toward a more dynamic pricing model. Peak/“demand” surcharges are another example of UPS, FedEx (NYSE: FDX) and [regional carrier] OnTrac moving toward dynamic pricing — the more packages a shipper sends above a preestablished weekly baseline, the higher surcharge they pay per piece.

FREIGHTWAVES: How significant a development is this?

TAYLOR: The large-scale application of dynamic pricing will be an enormous shift in the parcel market. It will change how shippers make decisions. Carrier networks will become more efficient as they smooth asset utilization and target desirable package characteristics. If done in an equitable way, many shippers will save money as their products arrive at least as quickly and reliably as they do today.

FREIGHTWAVES: Who wins and loses under this model? And can a win-win for shippers and carriers be achieved?

TAYLOR: For dynamic pricing to benefit the shipper and end consumer, shippers need the flexibility to choose between carriers as network capacities rise and fall. This ensures competition between carriers and prevents a single carrier from simply charging more during their busier times without charging less during their slower times. On the downside, even if pricing is desirable, managing too many carriers can be time consuming and take up valuable dock space.

Without the freedom to choose between carriers — specifically, if a shipper has a FedEx or UPS contract with an early termination or minimum commitment clause tied to punitive fees — shippers will be exposed to their carrier’s desire to boost margins. Even if it doesn’t happen immediately, UPS or FedEx will inevitably decide to double-dip on profit improvements through improved network efficiency and by charging higher rates. However, if UPS and FedEx allow shippers to choose the best carrier for each shipment based on their immediate value, the legacy carriers will become more commoditized and less able to demand premium prices.

FREIGHTWAVES: Will dynamic pricing language need to be included in contracts? And can dynamic pricing be negotiated out of a contract?

TAYLOR: The day-of-week pricing offers I’m aware of were purely contractual, and none of them were signed after the shipper read the fine print. However, it won’t be long until other dynamic pricing models are offered which may be based on the same base rates used in static pricing contracts today. The smallest shippers will have a harder time avoiding dynamic pricing if UPS, for example, was to apply it through DAP, their Digital Access Program. Larger shippers, however, will have the opportunity to remain on traditional pricing models or move to something more dynamic.

When given this choice, shippers must ensure they understand every table, chart and sentence of the proposal before making their decision. At least for the foreseeable future, everything remains negotiable.

FREIGHTWAVES: Do you see this becoming a standard practice among all carriers, regionals as well as the national carriers?

TAYLOR: Smaller carriers may have an easier time implementing true dynamic pricing. Most smaller carriers already compete on the merits of their products — the right service, the right quality, for the right price — making it almost a foregone conclusion that their shippers will have the freedom to choose the best-fit carrier for each shipment. Even without charging more, balancing asset utilization across their networks will improve service, reduce cost and expand margins.

At the Parcel Forum, one of the attendees offered an opinion that I agree with: Most shippers that agree to a dynamic pricing model will start small. They will keep most of their shipping on a traditional pricing program with UPS and/or FedEx. Carriers will need to prove the mutual benefit of dynamic pricing models before they become widely accepted. Parcel shipping is simply too large of an expense to get wrong.

FREIGHTWAVES: How does dynamic pricing work if a shipper is exclusive to one carrier?

TAYLOR: Agreeing to a dynamic pricing model with a single carrier is a huge risk. Without the freedom for shippers to choose other carriers when prices are high, there is little incentive for the carrier to offer lower rates on their slower days. The shipper is forced to either pay the higher rates on the busier days or incur the costs to defer shipping until the cheaper days. Shippers that opt for tech enhancements to defer shipping may incur software and implementation costs and will certainly struggle with irregular staffing requirements. Shippers that choose to stage packages on-site until the cheaper day will likely experience increased operations costs and suffer a higher rate of lost or damaged shipments. 

Regardless of how a shipper holds the package, the time between the customer placing the order and receiving the shipment will be extended by a day or more — a catastrophic development for marketplace sellers.

FREIGHTWAVES: Do you foresee shipper resistance to this approach?

TAYLOR: The single-carrier, day-of-week offers I’m aware of have all been rejected by the targeted shippers. To drive acceptance, no carrier should penalize a shipper for choosing freely between multiple carriers. Also, forecasting transportation costs and sticking to a budget are extremely valuable to many businesses, so limiting price changes to within a given range may help address those concerns. Carriers’ margins will already improve through better asset utilization, so charging a higher average cost per shipment is double-dipping at the expense of shippers and end consumers. Without reasonable carrier concessions protecting shippers and incentivizing them to participate, usage will remain limited.

FREIGHTWAVES: Is one of the national carriers pushing this harder than the other?

TAYLOR: UPS has discussed dynamic pricing in more detail than FedEx on their quarterly investor calls. They have also provided the only day-of-week offers I know of. However, regional carriers like Better Trucks and others have been very open about the potential mutual benefits of dynamic pricing done right. As UPS’ and FedEx’s pricing practices push sellers to fulfill closer to the end consumer, those same shippers gain greater access to regional carriers hungry to differentiate themselves from the legacy carriers. The right version of dynamic pricing could easily provide that differentiation.

FREIGHTWAVES: Is this more of an attempt to offset higher costs or to drive profitable revenue?

From UPS and FedEx salespeople, shippers can expect to hear about how dynamic pricing will offset higher network costs and maybe even tamp down future rate increases. This is how the salespeople will have been trained to sell it and most of them will genuinely believe it, even if it is only part of the truth.

The rest of the truth will come during investment calls as carrier executives highlight growing profitable revenue and increasing margins, even as they couch these statements in win-win-win marketing spin. If done right, however, dynamic pricing will help carriers control network costs, improve reliability and reduce lost and damaged packages while passing on some of the savings to shippers. This combination of superior service and reasonable rates will enable them to maintain favorable margins while winning more desirable parcel volume from shippers that share in the benefits of truly dynamic competition.