Residential vs. Commercial Deliveries: What You Need to Know

Jun 23

This installment is part 5 of our ongoing series of parcel shipping guides 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:

Residential vs. Commercial Deliveries: The Basics

Shipping products to your customers involves more than just putting items in a box and sending them on their way. One of the critical factors to consider is the type of delivery address - is it residential or commercial? In this post, we'll dissect the differences between residential and commercial deliveries, the impact of residential surcharges, and the implications this distinction has when negotiating your shipping rates with FedEx and UPS.

First, it sounds straightforward… Residential deliveries are made to home addresses, whereas commercial deliveries are made to business locations (e.g. office buildings, hospitals, schools, etc.). As a point of clarification that trips up many, a business that is run out of a recipient’s home is still a residential delivery.

The distinction between commercial versus residential is critical because most shipping carriers charge more for residential deliveries. This extra cost, known as the residential surcharge, accounts for the additional expenses associated with residential deliveries, such as navigating through neighborhoods, extending delivery routes, and lower delivery density.

Understanding the Residential Surcharge

As of this writing in 2023, the retail rate for residential delivery with FedEx and UPS is just over $5 per shipment! That hurts.

Part 4 of this series dives into greater detail on shipment surcharges, including the residential surcharge and its close cousins, the “delivery area surcharge” (DAS), and the “extended delivery area surcharge” (EDAS).

To simplify the topic for the purposes of this article, both FedEx and UPS impose a residential surcharge on shipments delivered to a home address. The surcharge is applied per package and is added on top of the base shipping rate and other applicable fees. FedEx refers to this service as FedEx Home Delivery. UPS refers to its analogous offering as UPS Ground Residential.

It's essential to factor in these residential surcharges when calculating your shipping costs, especially if a significant portion of your shipments are residential deliveries. Several dollars per package can quickly add up over hundreds or thousands of shipments.

Negotiating with FedEx and UPS

Nearly all shipping rates, including residential surcharges, are negotiable. This is especially true for e-commerce businesses with significant shipping volumes. Here are a few strategies you can use to negotiate better discounts:

Know Your Shipment Profile: Your leverage in negotiation depends heavily on your shipment profile. If you have a high volume of shipments, consistent shipping patterns, or a significant number of commercial deliveries, you may have a stronger negotiating position. Focus your negotiation points on the areas that will have the greatest impact. For example, if you primarily ship to businesses, you may choose to focus your negotiation on base transportation rates and dimensional weight factors, and less so on the residential surcharge.
Compare Carriers: Leverage competition between carriers to your advantage. If you're primarily using FedEx, get a quote from UPS (and vice versa) to see if they can offer a better deal. Don’t forget to look at USPS, especially for lightweight shipments, as well as regional and alternative carriers such as DHL Ecommerce, Pitney Bowes, OnTrac / LaserShip, and others. It’s possible that your shipment profile will fit better with one carrier over others.
For example, if you primarily ship two pound (1 kg) shipments to residential addresses, USP Priority Mail is quite fast and may be cheaper after factoring in residential surcharges from FedEx and UPS. USPS doesn’t charge extra for residential delivery.
Compare Alternative Services: Services like UPS SurePost and FedEx Ground Economy (formerly FedEx SmartPost) can be great alternatives in the right situation.
With UPS SurePost, UPS picks up at your warehouse door, pre-sorts your parcels with other parcels by US zip code, moves the parcels closer to the recipients, then injects many of those parcels into the US Postal Service (USPS) network for last-mile delivery by USPS. As of this writing in 2023, we estimate that UPS is handing over about 60% of SurePost parcels to USPS for last mile delivery. About 40% are being delivered via UPS drivers directly. UPS SurePost shipments are generally delivered a couple days slower than standard UPS Ground (commercial & residential) shipments. Tracking numbers are sometimes a little less accurate or updated in a less timely fashion when SurePost parcels are handed over to USPS.
FedEx Ground Economy moves nearly all parcels through the FedEx Ground network door to door, but it is a couple days slower on average than the “normal” FedEx Ground and FedEx Home Delivery services.
The positive trade-off with UPS SurePost and FedEx Ground Economy is price. UPS does not charge a Residential Surcharge with SurePost, which might make this service a winner for your business. FedEx Ground Economy does have a smaller “delivery surcharge” of $1, but this is significantly cheaper than the $5 residential surcharge. Again, the $1 delivery surcharge with Ground Economy may be negotiable as well.
Consider Your Total Spend: Carriers look at your total spend, including base rates and surcharges, when considering rate negotiations. You should be able to specifically negotiate the residential surcharge itself, if helpful. Significant discounts on this particular surcharge are achievable.
Ask for tools: FedEx and UPS can provide API driven tools to help you determine in real time whether a recipient’s address is residential or commercial. There are also lots of great third party applications and even easy to use plugins for Shopify, WooCommerce, and other e-commerce platforms that can help you determine the address type at the time of order placement. If you’re getting crushed by residential surcharges, you can consider charging a bit more for shipping & handling if your e-commerce platform can calculate accordingly.
Consider Working with a 3PL: Along the lines of point #4 (total spend), 3PLs like Rush Order spend millions of dollars with shipping carriers like FedEx and UPS. Piggybacking your shipments on your 3PL’s aggregate volumes can help you achieve larger discounts than you might obtain on your own.

In Conclusion

Understanding the distinction between residential and commercial deliveries, and the impact of residential surcharges, is crucial for managing your shipping costs effectively. Remember, every aspect of your shipping agreement, including residential surcharges, can potentially be negotiated. By knowing your shipment profile and leveraging that knowledge in negotiations, you can secure a shipping agreement that better aligns with your business needs.

For additional help or to learn more about Rush Order’s order fulfillment services and shipping rates, please feel free to schedule free consultation.

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