When it comes to your ground game, a carrier’s business unit selection shouldn’t be determined by a coin toss. If you’re using FedEx for residential deliveries, Home Delivery typically has the home field advantage.
When discussing the merits of FedEx’s Home Delivery service versus residential delivery via FedEx Ground, Saturday delivery is oft mentioned – and for good reason. Being the weekend, more addressees will be home from work which presumably prevents problems posed by perpetually pesky porch pirates (I’m saying this 3 times fast as I’m writing this). But there’s a commonly unrecognized economic advantage. I’ll elaborate in a moment, but first I need to address the elephant in the room - When I separately referenced “residential FedEx Ground” and “FedEx Home Delivery”, a percentage of you thought, “Wait, there’s a difference?”
Home Delivery vs. FedEx Ground
FedEx Home Delivery, as the name implies, is the ground business unit dedicated to residential deliveries. FedEx Ground, on the other hand, is the business unit intended for commercial deliveries while also servicing residential addresses for packages tendered to it instead of Home Delivery. Both use the same rate chart (weight & zone matrix) to determine the shipping cost, and for the most part, the accessorial charges are identical…except for the surcharges uniquely associated with a residential delivery (e.g. residential surcharge, delivery area surcharge).
To illustrate, the published Residential Surcharge for Home Delivery shipments (as of Sept. 18, 2018) is $3.60, but it’s $4.15 for FedEx Ground. Similarly, the Delivery Area Surcharge for Home Delivery is $3.45, whereas the residential Delivery Area Surcharge for FedEx Ground is $4.00. The Extended Delivery Area Surcharge for both is $4.40, but there is still a difference as you will see shortly. Let’s use the example of a 5-pound residential shipment destined to Zone 6. It also happens that the recipient’s zip code is subject to a Delivery Area Surcharge. The below reflect published (non-discounted) rates.
The Home Delivery rate is $1.10 lower than its Ground counterpart (5.5%). The lower rate will also be subject to a lower fuel surcharge which isn’t reflected above.
Why The Difference?
Simple - commercial deliveries are more profitable than residential. Residential deliveries have a lower delivery density (average number of packages per delivery) and more mileage between deliveries which increases labor costs, and by extension, the cost per package. FedEx Ground is priced and marketed as a primarily commercial delivery solution. When a FedEx Ground driver has to “break route” from a commercial territory to service a residential, this disrupts the pricing model for this service as well as its operational efficiency. By pricing the residential-related surcharges for FedEx Ground at a premium, FedEx hopes to push more volume into the Home Delivery network.
But the aforementioned example doesn’t illustrate the full magnitude of the difference. Let’s add some realism to the picture by including discounts into the equation. Using the same package as before (Zone 6, 5 pounds), we’ll discount the transport charge for Home Delivery by 20%. For added realism (although not always the case), we’ll place the FedEx Ground discount slightly higher at 25%. Residential Surcharge and Delivery Area Surcharge discounts are also 25%. To change things slightly, the destination zip is subject to the Extended Delivery Area Surcharge ($4.40 for both Ground and Home Delivery as previously noted).
Time out, Matthews! You forgot to apply the surcharge discounts to the FedEx Ground package!
You’re right. I didn’t. That’s because the discounts only apply to packages shipped as Home Delivery.
Way. Go check your FedEx agreement. It’s cool. I’ll wait…
Aside from the 1% of you who can call me a liar (there’s always exceptions), you’ll observe that adjacent to ‘Name of Surcharge’ column in the ground discount section of your FedEx agreement, there’s a column that reads ‘Application’ (or ‘Applies To’ in some versions). Next to Residential Charge (and corresponding residential Delivery Area Surcharges), you’ll see ‘Home Delivery US’. Unless you’re one of the exceptions, you won’t find ‘Ground US’ next to these surcharges. And if you shipped the above package, you paid almost $2.00 (11.2%) more to ship it via FedEx Ground. In a recent case study on which we consulted, the shipper’s total spend was inflated by almost 7% as a result of how the surcharge discounts are applied. For a company with spend measured in millions, this adds up to a several hundred-thousand-dollar penalty.
As is often the case, the answer is simple, but the solution might not be. Manifesting FedEx residential shipments as Home Delivery will result in a lower shipping cost, but this requires foreknowledge of the recipient’s residential status. This isn’t always obvious with so many home businesses nowadays (home businesses are treated as residential deliveries). For those using FedEx’s shipping system, turning on the address validation function will identify the vast majority of any that are residential. This can add a step depending on your set-up, but may be cost-justified. If this isn’t an option, a study can determine if defaulting to Home Delivery instead of Ground makes sense. Not a perfect solution, but in the absence of perfect information…
What About UPS?
Residential discount application is unlikely to be the deciding factor in a carrier decision, but ought to be a considered and quantified before making a switch. For those currently using UPS for such shipments and considering a change to FedEx, it’s worth noting that UPS doesn’t have an "offside" penalty. UPS uses a single delivery network for commercial and residential, and they don’t charge a premium based on how the shipment was manifested. Incorrectly manifested residential shipments simply appear as a correction on the invoice and are rerated with their respective discounts applied. No penalty is assessed, but with UPS’s recent implementation of a Shipping Charge Correction Audit Fee resulting from incorrect bill weight, it might only be a matter of time before one is.
Home Delivery isn't going to be the most cost effective option in every situation. A full evaluation of your shipping characteristics and carrier agreements will help in that determination. Due to the number of service level available and surcharges imposed, carrier agreements can be understandably complex. I have come crossed paths with a scary number of carrier reps who failed to grasp the nuances of their own agreements. You’d be forgiven for missing some of them as well. Residential surcharge application is one that is commonly overlooked or misunderstood. Hopefully by shining those Friday Night Lights on the subject, we’ve prevented a few fumbles.
For a complementary assessment of how such surcharges and discounts are being applied to your company’s shipping, please feel free to reach out to us on our Contact page.