E-Commerce vs. The Fuel Surcharge: What’s Really Happening?

By Tad Miller | Jun 23, 2008
More Articles by Tad


I recently had a very revealing trip to my local Mail Boxes, Etc. I had heard that shipper’s were imposing a “Fuel Surcharge” on top of “normal” shipping charges. But I had no idea that the rise in fuel surcharges had risen so much so fast.

FedEx adds a 28% fuel surcharge for domestic express packages, up from 18.5% in March. The surcharge will increase to 32.5% on July 7.

The guy behind the counter told me that UPS and even the Postal Service were doing very similar things with Fuel Surcharges. He then proceeded to tell me that his whole day at work is spent talking to customers with sticker shock. The worst ones are people who sell something on E-bay for $30.00 and come to find out that the shipping costs are actually $40.00.

The first thing I thought, after I swallowed hard and paid to ship a box, was what does this mean for e-Commerce, especially at Christmas time. What will be the price threshold retailers will offer free shipping with – or will there even be free shipping offers.

The next weeks worth of news kept giving me contradicting opinions on whats happening in the shipping industry and the e-Commerce industry.

FedEx, UPS and DHL all reported bad numbers:

  • FedEx said earnings for the next year wouldn’t meet Wall Street’s expectations because eye-popping fuel prices inflated the company’s costs and a sputtering economy reduced demand.
  • The post office ended its most recent quarter with a $707-million net loss and a 3.3% drop in mail volume
  • DHL, which lost more than $900 million in 2007, last month said it would ground its aging fleet of bright yellow jets and contract with UPS as its U.S. flight arm. “DHL said they made their decision based on the overall downturn in the U.S. economy and the record prices of jet fuel
  • “UPS lowered its full-year profit forecast in April after reporting only its eighth drop in domestic deliveries in its 101-year history.

Then I started hearing conflicting opinions from e-Commerce vendors. Business Week said:

According to estimates by Forrester, online sales are expected to reach $204 billion this year, up 17 percent from last year, and are projected to exceed $300 billion in the next five years. Soaring oil prices should only fuel their momentum as shoppers turn more to online buying than shopping at the local mall to save on gas…

Then The New York Times said: The High Price of Gasoline Sends Shoppers to the Web.

THERE’S nothing like an energy squeeze to buoy the spirits of Internet merchants.

Online shopping sites, already on a roll, are getting help from the high price of gasoline, which is prompting untold numbers of consumers to boot up their PC’s instead of driving their S.U.V.’s to the mall…

…merchants can easily swallow the extra expense, either by raising prices in categories like apparel and home furnishings where consumers will not notice or by increasing volume for products like electronics and music where buyers can use shopping-comparison engines to resist price increases.

The New York Times also reported that “Shopzilla and Shop.org, an industry group, said last week that 79 percent of Internet retailers would offer some form of free shipping this year.”

So what should we believe? I honestly don’t know. I do believe that many online shoppers won’t bother to “do the math” to figure out if they are really saving after shipping costs are factored in, and I do believe in the convenience of online shopping being a factor in buying decisions, especially with the painful experiences at the gas pump that shoppers are having with their own cars. But, these are extreme times where the fates of many companies are going to be decided very quickly on the issue of fuel prices and profitability. No retailer wants to take a loss on shipping.

Perhaps, it all just imaginary perceived value that online shoppers think they are getting. Michael S. Rosenwald wrote this weekend in The Washington Post:

I asked some behavioral economists, and the answer seems to be that we have no easy way to judge the value of the things we buy, and we especially have no fast and sure way to value the utility we would get from the purchase. So what our brains do is look for easy comparisons to give us answers. In the case of the iPhone, the initial price of the device when it was released last year was $599. Then it dropped to $399. The initial price (and even the first discount) of the phone anchored consumers to the idea that to own this device, you would have to pay a lot of money, substantially more than a typical cellphone.

and also:

Not only are we getting a perceived deal on the product, but we are also getting a deal on the deal. “You get the iPhone, and you get the deal,” said Richard Thaler, a University of Chicago economist who came up with the notion of transaction utility, which he has described as “the difference between the amount paid and the ‘reference price’ for the good, that is, the regular price that the consumer expects to pay for this product.”

So then the deal, at its extreme, looks like this: I’ll pay $199 for the iPhone, but I will get a psychological return of $400 from the deal. I’m rich! Of course, it will cost me an extra $10 a month in AT&T service fees, thus wiping out any gains, real or psychological, over the two-year contract period. Thaler said we tend to “underweight” these costs because they are off in the future. “There will be people who crunch the numbers, but the people who fall in love with the phone right away won’t,” he said.

So in other words the reference price in the store is high, but the perceived value of the price on the same product online looks great – ignoring that the shipping cost actually doesn’t make it a bargain at all.

Now if you’ll excuse me, I’m trying to figure out why the flight I just booked has $200 of taxes and fees. Hmm, well what do you know – Fuel Surcharges

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