What are Shipping Surcharges and How Can Ecommerce Companies Avoid Them?

Every ecommerce business is affected by shipping surcharges, additional fees charged by the carrier after the delivery of a package. Unfortunately, it's not always clear what these fees are and how they’re calculated. We wanted to find out how surcharges are impacting ecommerce brands. To do so, we found the most common surcharges, what they mean, how to avoid them, and even dispute them.

What are surcharges?

When a shipping label is created, the postage cost isn’t final — it’s a quote. That quote is based on the size, weight and destination of the package. If any of those factors are incorrect or change in transit, the carrier adds the difference to the total shipping cost after a parcel is delivered — thus, surcharges.

With the growth of ecommerce, carriers use surcharges as tools to manage delivery volumes by anticipating and steering demand. It’s a constant eb and flow of predicting demand so they can avoid parcel congestion. This is why surcharges vary from carrier to carrier and they’re changing all the time. 

At the beginning of 2018, UPS and FedEx raised many of their most common surcharges, some by more than 20%, as a strategy to manage demand. Last year, UPS raised their residential surcharge to manage peak holiday season demand, but they still couldn’t keep up, and unpredicted volumes made for a 5.5% dip in profits through last quarter, despite raising the cost of ground shipping by 4.9%.

Are all surcharges legitimate?

Galleon is a shipping auditor that works with ecommerce brands to contest surcharges. According to Charles Cushing, co-founder of Galleon, surcharges can make up 10-30% of overall shipping costs, with 1-1.5% of Ground shipments eligible for service failure refunds. Charles says that surcharges have less to do with the size of a business or how much it’s shipping, and more to do with what’s being shipped and where it’s going.

What’s the biggest source of extraneous surcharges? According to Galleon, it’s expedited delivery. On a tighter deadline, even minor delays are increasingly detrimental, and often carriers miss the mark. That’s why expedited shipping is such a common source for ecommerce companies to get refunds from service guarantees.

In his experience, Charles says that late deliveries account for about 90% of the refunds that they get for customers. He said, "UPS and FedEx guarantee on-time delivery, but don't automatically refund you if they miss their window — someone has to request the refund.”

The good news is, when a business contests a late delivery and wins, the full shipping cost is refunded along with all other associated surcharges. Unfortunately, tracking late delivery isn’t always as easy as looking at a shipping invoice. Shipping auditors are building complex systems based on trends and historical data to predict and anticipate faulty surcharges. Auditing invoices and tracking shipments at scale can be challenging without the help of a third party.

After late deliveries, the most common surcharges are misapplied residential and delivery area surcharges (applied to parcels going outside a designated delivery area). According to EasyPost, 4.7% of addresses entered on ecommerce forms are incorrect. To avoid incorrect address surcharges, some businesses use address verification software.

Reducing and contesting surcharges

Carriers calculate rates based on factors like a business’s growth projections and the percentage of profit they’ll get from the account. When a business is negotiating rates with a carrier, nearly any line item on an invoice is up for grabs, from DIM weight divisors to (you guessed it) surcharges. 

Since carriers update many rates and surcharges annually, these are also ideal times to audit shipping invoices and consider renegotiating carrier contracts. For example, if a business predominantly ship to residential addresses or ships oversized parcels, those are surcharges that they can have lessened or removed.

Auditing services

Understanding the impact of surcharges and the potential for refunds starts with an audit. By combing through a shipping invoice, businesses can start to see a pattern of common and uncommon surcharges. If any surcharges are unclear, businesses can call carrier reps directly to contest or question the charges. There are also auditing services like Galleon or Lojistic that do these audits and contest surcharges with carriers on businesses’ behalf. 

3PLs

Third party logistic centers (3PLs) ship high parcel volumes on behalf of other businesses, so their carrier contracts are competitive and often minimize the impact of surcharges. But 3PLs do not cover the cost of surcharges on behalf of businesses. 

Businesses may be able to ship under their own carrier contract while using a 3PL, but it’s not easy. 3PLs typically aggregate the volume of shipments and earn money on the difference between their negotiated rates and the rate they charge their customers. As a result 3PLs often do not allow businesses to ship under their own accounts. It’s worth noting that businesses using a 3PL and shipping under the 3PL’s carrier account, can not contest shipping surcharges directly because the carrier account is in the 3PL’s name.

All in all, the surcharge savings from using a 3PL may not offset the cost of using one in the first place, so it’s all about finding the right balance for shipping as efficiently and predictably as possible. 

Shipping APIs

Shipping APIs like Shippo or Easypost are platforms to calculate shipping rates and print shipping labels. Most shipping APIs have address verification built into the service, which helps reduce deliverability surcharges. Businesses can use their own carrier rates, or the rates of the API, so contesting surcharges is a bit of a grey area. However, in almost all cases you will have to contest surcharges directly with the carrier.

Surcharges are always in flux

Surcharges will continue to fluctuate as ecommerce volumes grow. As businesses scale, there are always opportunities to improve deliverability of packages, negotiate with carriers, and use shipping audits for transparency into the surcharges that could be avoided. 

Header image by Maarten van den Heuvel via Unsplash. Icons via Noun Project by Atif Arshad, Ralf Schmitzer, and LAFS.