Pricing: How FedEx, UPS, and USPS Calculate Shipping Costs

May 22

This article is part 3 in our ongoing series of shipping articles for US-focused eCommerce and physical product brands. Our goal in this series is to help you become proficient in everything related to shipping via small parcel carriers like FedEx, UPS, and USPS in the United States.

Previous installments in this series include:

Future installments will continue to dive into the nuances of shipping in the US, including more detail on hidden surcharges, international shipping, packaging optimization, systems integrations, and much more.

Introduction to Shipping Costs

Understanding shipping carrier pricing structures is essential for businesses aiming to optimize costs and improve customer satisfaction. FedEx, UPS, and the United States Postal Service (USPS) have unique methods for calculating shipping costs, influenced by factors such as package size, weight, destination, and service level. This guide dives deeper into these shipping cost calculations, highlighting the impact of volumetric and billable weight, shipping zones, surcharges, and effective negotiation strategies.

Understanding Volumetric and Billable Weight

When determining shipping costs, FedEx and UPS take into account not just the actual weight of a package, but also its size (i.e. dimensions). This method, known as volumetric or dimensional weight pricing, prevents the underpricing of large, lightweight items that occupy significant space in a vehicle.

The calculation for volumetric weight is as follows:

1. Measure the package's dimensions (length, width, height) in inches in the US. The concept is roughly the same for the metric world as well.

2. Multiply these dimensions to obtain the volume in cubic inches (length x width x height).

3. Divide the volume by a dimensional weight divisor. As of this writing in mid 2023, both FedEx and UPS use 139 as their default divisor. This divisor value will be different for the metric equivalent calculation, and this divisor value is negotiable as your business scales (or if you use a 3PL like Rush Order).

The resulting figure is the volumetric weight. It's important to note that the carrier will use the higher of the actual or volumetric weight when determining the billable weight, which directly impacts shipping costs.

Let's walk through two examples to illustrate the difference between actual and dimensional (volumetric) weight, and how the billable weight is determined.

Example 1: Billable Weight = Actual Weight

Imagine you're shipping a box of books, with the dimensions 12" x 12" x 12" (Length x Width x Height), and the actual weight is 30 pounds.

First, let's calculate the dimensional weight using the formula mentioned earlier: (Length x Width x Height) / dimensional weight divisor. Using the divisor of 139, which is standard for FedEx and UPS:

(12" x 12" x 12") / 139 = 12.4 pounds (rounded to 13 pounds because we always round up to the nearest whole pound)

In this case, because the actual weight (30 pounds) is greater than the dimensional weight (13 pounds), the actual weight is used as the billable weight. So, you'd be charged for a 30-pound shipment.

Example 2: Billable Weight = Dimensional Weight is

Now, let's imagine you're shipping a large but light item, like a lampshade, in a box with dimensions 20" x 20" x 20", and the actual weight is 10 pounds.

Calculate the dimensional weight like we did before:

(20" x 20" x 20") / 139 = 57.6 pounds (rounded up to 58 pounds)

In this instance, the dimensional weight (58 pounds) is greater than the actual weight (10 pounds). Thus, the carrier would use the dimensional weight as the billable weight. You'd be charged for a 58-pound shipment, despite the actual weight being only 10 pounds.

These examples illustrate why it's essential to understand both actual and dimensional weight when estimating shipping costs. Packaging efficiency—using the smallest box that can safely and securely accommodate your product—can lead to significant savings in shipping costs.

Understanding Shipping Zones

Shipping zones are a fundamental concept in the pricing structures of FedEx, UPS, and USPS. These zones are numerical representations of the distance a package must travel from its point of origin to its destination. Zones are numbered from 1 (local zones, indicating shorter distances) to 8 (representing longer distances). The farther the package has to travel (i.e., the higher the zone), the higher the shipping cost.

As a side note, in the US, FedEx and UPS label their zones 2 - 8. There is no zone 1, but the concept is the same. Zone 2 is closest and zone 8 is the furthest when it comes to shipping across the continental US. As you dive into the details, you’ll also see less common zones such as zone 9, 14, 17, 22, etc. These higher zones are typically reserved for outlaying states and territories (e.g. Alaska, Hawaii, Puerto Rico, Guam, US Virgin Islands, etc., etc.).

Using FedEx as our example, you can navigate to this FedEx transit time mapping page to generate a zone map from your origin zip code. Just enter the zip code you are shipping from and submit. Here are Rush Order’s maps from our three primary US warehouse locations. This footprint gives Rush Order clients a 2-day shipment transit time to over 90% of the US population.

Shipping Carrier Service Levels

Different service levels further impact the cost of shipping. Each carrier offers a range of services from overnight express deliveries to more cost-effective but slower options. We’ll hit on the basics of all the options here but, for a deeper dive, check out Part 2 of this series for a detailed overview of service levels.

For instance, commonly used FedEx services include FedEx Overnight, FedEx 2Day, and FedEx Ground (1 - 6 days in transit, depending on destination zone), among others.

UPS offers comparable options like UPS Next Day Air, UPS 2nd Day Air, and UPS Ground (1 - 6 days in transit).

USPS, on the other hand, provides services such as USPS Priority Mail Express (1 - 2 days in transit), USPS Priority Mail (1 - 3 days), USPS First Class Parcel (1 - 6 days, only available for shipments under 1 pound, or under 16 ounces), and USPS Retail Ground (1 - 6 days).

Deep Dive into Surcharges

Surcharges are additional fees applied to shipments based on specific criteria. Understanding when and where these surcharges occur can help manage your shipping costs more effectively. Here are the most common surcharges across FedEx, UPS, and USPS:

Fuel Surcharge: To compensate for fluctuations in fuel costs, FedEx and UPS apply this surcharge, adjusted monthly. USPS does not charge a fuel surcharge.
Residential Delivery Surcharge: Delivering to residential addresses often requires extra effort and resources, leading FedEx and UPS to charge this additional fee. USPS does not impose a residential delivery surcharge.
Delivery Area Surcharge (DAS): Both FedEx and UPS apply a Delivery Area Surcharge (DAS) for shipments delivered to certain ZIP codes within the United States that are deemed to be less accessible or more remote. These ZIP codes could include certain rural or residential areas where delivery may require additional time, resources, or costs for the carriers. This surcharge ensures that the carriers can cover the additional costs associated with delivering to these areas. The USPS, however, does not apply a DAS.
For example, if a business in New York City sends a package via FedEx Ground to a remote residential area in Wyoming, a DAS may apply due to the extra effort and resources required to deliver the package.
Extended Delivery Area Surcharge (EDAS): Similar to the Delivery Area Surcharge, FedEx and UPS apply an Extended Delivery Area Surcharge (EDAS) to packages delivered to certain U.S. ZIP codes that are particularly remote or difficult to access. This surcharge is typically higher than the DAS and applies to a more specific set of ZIP codes. As with the DAS, the USPS does not apply an EDAS.
So, if that same New York City business sends a package to an even more remote area—say, a residential address on a secluded island in Alaska—an EDAS may apply due to the additional effort required for delivery.
These two surcharges (DAS & EDAS) highlight the importance of understanding the complete delivery journey of your shipments. Knowing the destination ZIP codes that could trigger a DAS or EDAS allows for more accurate cost predictions and better-informed decisions about which carrier and service level to use.
Additional Handling Surcharge: All three carriers apply this fee for shipments requiring special care due to size, weight, or packaging.
Oversize Package Surcharge: FedEx and UPS apply this fee for exceptionally large or heavy packages, while USPS uses dimensional weight pricing for oversized items.
Address Correction Fee: Inaccurate or incomplete addresses result in delays and extra work. Thus, all three carriers charge this fee when an address correction is necessary.
For instance, consider a scenario where a business sends a 10-pound package via FedEx Standard Overnight from New York to San Francisco, and the package's dimensions result in a volumetric weight of 12 pounds. The business would be billed based on the 12-pound volumetric weight. If the address provided was incorrect and had to be corrected by FedEx, the business would also incur an Address Correction fee.

Understanding Payment Terms: FedEx, UPS, and USPS

Understanding payment terms is a critical part of managing your shipping operations. Different carriers have different terms, which can impact your cash flow and how you manage your finances. Here's a breakdown of what you can expect from FedEx, UPS, and USPS.

FedEx Payment Terms

FedEx typically issues invoices weekly, detailing charges for all shipments sent during the previous week. In terms of payment terms, FedEx generally offers net 15 terms, meaning the payment is due 15 days from the invoice date. It's important to note that these terms can vary depending on your specific agreement with FedEx, your payment history, and other factors.

For customers who prefer to pay as they go, FedEx also offers the option to pay for shipping labels at the time of creation using a credit card or a FedEx account.

UPS Payment Terms

Like FedEx, UPS generally sends invoices on a weekly basis and offers net 15 payment terms to their customers. However, similar to FedEx, these terms can vary depending on your specific agreement with UPS and other factors such as your payment history.

UPS also offers a prepayment option, allowing customers to pay for individual shipments at the time the shipping label is created. This can be done via a credit card or a UPS account.

USPS Payment Terms

Unlike FedEx and UPS, the United States Postal Service requires postage to be paid at the time the shipping label is created. This can be done using a credit card, debit card, or through online postage providers like Stamps.com or the USPS Click-N-Ship service. USPS does not offer invoicing or net payment terms, making it a pay-as-you-go service.

While USPS's upfront payment model might seem less flexible than FedEx's or UPS's, it does offer simplicity and can help businesses manage their cash flow by avoiding unexpected shipping invoices.

It's crucial to remember that payment terms can sometimes be negotiated, especially with FedEx and UPS. If you're a high-volume shipper or have a long-standing relationship with a carrier, you may be able to negotiate more favorable terms. Always make sure to fully understand your payment obligations with each carrier before sending shipments.

If you are working with a 3PL, it’s helpful to understand how any pass though shipping charges to you will be handled. Does the 3PL also pass through shipping charges weekly? Monthly (a nice benefit for your cashflow)? Or, is a prepayment or deposit required?

As always, staying informed and understanding the financial aspects of shipping can help you choose the best carriers and services for your specific business needs, potentially leading to cost savings and improved operational efficiency.

Negotiation Strategies with FedEx and UPS

Shipping costs can significantly impact a business's bottom line, making negotiation with carriers a valuable skill. FedEx and UPS both offer opportunities for high-volume shippers to negotiate discounts. Here are some helpful tips:

Know Your Shipping Profile: Understanding your shipping needs, including package size and weight, shipping volume, and destination distribution, can provide leverage during negotiations. It’s helpful to focus your asks for better pricing on your most common use cases, thus saving you the most money possible.
Explore Minimum Commitments: Some discounts may be tied to a minimum shipping volume. If you can commit to this volume, a significant discount may be within reach.
Understand Your Negotiating Power: The more business you bring to a carrier, the more bargaining power you have. Leverage your shipping volume and forecasted growth prospects to secure better rates.
Consider Multi-Year Agreements: Longer-term agreements can sometimes lead to better rates.
Work with a Shipping Consultant: Shipping consultants understand the ins and outs of carrier pricing and can provide valuable assistance during negotiations. They often know what items are negotiable and what are not.
Use a 3PL like Rush Order: We leverage the aggregation of millions of shipments, years of experience, and continued growth to negotiate better rates with carriers, and pass those savings through to our clients.

Parting Thoughts

Understanding the pricing structures of FedEx, UPS, and USPS, including how they calculate volumetric and billable weight, how shipping zones work, and the potential impact of surcharges, is crucial for businesses looking to optimize their shipping costs. Furthermore, being prepared and informed can aid significantly in negotiating better rates with carriers. By taking a strategic, knowledgeable approach, businesses can navigate the complex world of shipping pricing, leading to potential cost savings and improved customer satisfaction.

For additional questions or to explore a fit with Rush Order’s services, please reach out or to schedule a free consultation with a Rush Order shipping expert.